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This is how stupid people break capitalism
2012
unknownj
http://news.bbc.co.uk/2/hi/business/4549514.stm
http://business.guardian.co.uk/story/0,16781,1672112,00.html

Far be it from me to question the decisions of the Competition Commission, but I don't think they've really thought any of this through.. Specifically, I think they're looking at too narrow a market to correctly assess the situation.

"At the time, the Competition Commission said it had provisionally concluded that the market for offering consumer credit through retail store cards was uncompetitive." (BBC)

Now here's a point.. uncompetitive for whom, exactly?

"It also found there was a lack of competitive pressure in the sector with most annual percentage rates (APRs) clustered at around 30%" (Guardian)

Okay, well in that case, it looks like they mean competitiveness for customers, in which case they're wrong. There are two views of what a store card actually is that come into play here, which lead to two definitions of what the store card market is. Depending on which one of those they're using, they're wrong in different ways.

The first view is that a store card comes under the wider consumer finance market. It is in direct competition with credit cards, and other store finance deals. From this point of view, there is plenty of competition in that market, it just happens that store cards represent the worst deal:

"This [rate] compares unfavourably to credit cards which commonly charge between 15% and 20% and the Bank of England base rate, which is currently 4.5%." (BBC)

Well surely if it compares unfavourably, then a comparison can be made. Logically, the consumers can make this comparison as well, and opt for a credit card product. In the event that a customer is declined for a credit card product, but accepted for a store card, this further highlights the risk-based pricing - store cards have to aim for maximum acceptance because it's embarassing for customers to be declined in the store. Therefore, they have to have low standards, and make up for the increased risk by increasing their rates.

In general, the lower the rate, the higher the credit score required to get it. This then leads to risk based pricing at an equilibrium where each customer gets a rate based on their own personal risk. Customers who have no option but to get store cards are the most risky, and therefore the store cards try to increase their interest revenue to counteract the bad debt costs.

And thus, it can be shown that if a store card belongs to the consumer finance market, then there is lots of competition (in the sense of choice), the product is just uncompetitive (in the sense of preference).

The alternative view is the store card belongs to its own market, in which there are only other store cards. This is actually a collective of monopolies, with weak brand-based competition allowing them to interact on a remote scale. An HMV store card, for example, can only be used in HMV. No other store card can be used in that shop. If I'm intending to buy from HMV, then there is no competition within the store card market, but that's the very basis of the market, and the whole point of a store card.

However, that's not a correct definition of a market. In order to find the market involved, you have to look at the situation in one of the following ways:

1. I want to buy digital media from [a shop], and when I do I will use the relevant store card
2. I want to buy digital media from HMV, and when I do I will [pay for it]

In the first instance, the true market is the market of all shops that sell the required merchandise, of which the rate on the store card is only part of their offering. For example, I could buy the CD for £10 from HMV at 21.9% APR, or for £12 from Virgin at 19.9% APR. Competition is between the overall cost, based on the interest rate, duration of debt, initial cost of the CD, and any qualitative bonuses (such as friendly service). And there's plenty of that in the marketplace.

In the second instance, the true market is the market of all payment options, which brings us back to the notion of using a credit card (or even cash, or a debit card). All these payment options are accepted, and have different long term costs and benefits, depending on personal circumstances. And nobody could argue that there's no intra-wallet competition. Unless a store card is your only means of paying, in which case, maybe you should consider whether this is something you need.

In my experience, store cards apply to music shops, clothes shops, that sort of thing.. Not food shops. My point is, store cards are used to buy luxury items, not essentials, and so if your only option is to use a particular store card in a particular shop, you always have the option of saying no. If you can't afford an item with the money you have now, but could get it on your store card and pay it off later, then you have two options:

1. Use the store card, enjoy your merchandise now, and pay more later for the privelege of having the item sooner
2. Save up, use the money that would have paid off the store card and buy the product later, for less money

And therein lies the true competition. If you will ever be able to pay off your store card, then you will be able to pay for the goods without credit at a later date. In which case, store cards are competing with the perceived additional value of having a luxury item sooner rather than later. If consumers opt to use their store cards for this, at 30% APR, then maybe that's the value they associate with getting something earlier than if they'd had to save up.

In any case, I've proved to myself at least that there's sufficient competition within the market to allow store card issuers to continue charging what they charge.. Which brings us on to some of the other points..

"The competition watchdog said providers must alert consumers to the high interest rates the cards charged, as well as the consequences of only making the minimum repayment each month." (BBC)

You what?!

"It is also calling for an APR warning to be displayed on the front page of the statement in large bold lettering if the interest charged is higher than 25%. The warning would state that this may be higher than the rates charged on other sources of credit available, and alert consumers to the fact that it may be "costly" for them to have outstanding debt on their account after the interest-free period has run out." (Guardian)

So now store cards actually have to put notices on their statements telling customers to find better products? What happened to the idea that consumers are able to identify good and bad products themselves? APR is easy enough - the higher it is, the more it costs you, putting it in bold and adding a little note oughtn't actually change that. If a customer doesn't know what APR means, then they really shouldn't be signing credit agreements. And so we come to the rather important point:

"But we are deeply sceptical about the emphasis on APR in the commission's remedies. The commission itself has acknowledged that consumers have low sensitivity to APR. So it is unlikely that remedies focused on APR will have any major impact on this market." (Which?)

Now, I'm in two minds about Which? in general.. Professionally I'm not that big a fan, because they have their own agenda that they want to advance.. They remind me of Watchdog, up to a point, whose general point of view is one where consumers shouldn't take any responsibility for poor choices, and everything should be blamed on the companies that they deal with. But ideologically, I think that Which? plays an important role in the capitalist machine, which is to make consumers more aware of competition. And they hit the nail on the head.

Consumers have low sensitivity to APR. That means that you can tell customers that Product A is more expensive than Product B, but it just doesn't register with them. I don't know what causes this, but it could be the customer delusion that they're not really getting into debt, so it won't cost them anything. The belief that they'll be able to pay off cards sooner than they are realistically able to, coupled with standard avoidance or problems, means that consumers don't tend to think about the cost of credit cards as much as they ought to.

And this is how idiot consumers break capitalism. If they were actually price conscious, if they shopped around and considered the long term cost of all their options, then everything would come to the correct equilibrium. Competition would force store card interest rates down so that they accurately represent the advantage of receiving goods before being in a position to pay. These cards would have to be competitive with other payment options, if not in absolute monetary terms then at least in terms of the tangible benefits.

But it doesn't work, because consumers would rather pay 30% than go through a little inconvenience and find a product that charges only 20%. The industry is hardly to blame for that..

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I don't know if store cards necessarily can be directly compared to credit cards, given that they are essentially different products in the way that they are marketed. After all, one would hardly compare buying pre-pay top up cards on a credit card to owning a phone contract, despite them being essentially the same service from different companies.

I do agree in principal that the major difference is in ease of getting the credit and the various risks involved, but it is common for you to be offered a store card at the till and asked to sign without proper opportunity to read the terms and conditions of use. A credit card advert is usually mailed to you first to read, sign and return within about two weeks, at which point you are credit checked. A store card, on the other hand, is often credit checked at the till, the idea being that you can get the credit whilst in store. In that way, they are fundamentally different and, due to the speed at which one might be required to sign the contract, it might be advisable to have clearer, bold lettering to highlight the key factors, such as the APR.

Now, that still puts the fault at the consumer to an extent, as nobody would force you to sign there and then rather than take it home and read it thoroughly but, as you state, embarassment can often be a factor, as is the comission-paid basis that many stores offer their staff.

So the competition does exist in theory, but in practice it may not. I don't think there should be a cap on APR or anything like that, but as I say, bold words stating the APR and key terms of use should be on the leaflet, or comission payments for new signups to the scheme should be more closely monitored...

Ho hum.

Wow, somebody listened?!! :o)

I agree that consumers should be made aware of the situation before they sign - fundamental to the idea of free competition is the idea that the consumer has access to the information that differentiates products. And I agree that this doesn't happen enough, at least in my own experience, and I can see how people can get caught up in signing up for credit without realising what they're doing.

And I don't tend to think that this comes under the heading of "consumer is stupid", because I can sympathise with this position. However, one might consider the fact that by the time the customer reaches the checkout, they surely have the means on them to purchase their goods. Therefore, if they buy them with the store card, they could theoretically pay that off before interest is charged. One could also argue that in the intervening time between the transaction and the payment date, the customer ought to have enough of a chance to find out what they just signed, and what the implications are (though, again, I can see why they wouldn't).

However, this is all at the point of sale for that product, rather than during its ongoing use. In credit cards, I believe one of the main points about the marketing is that the APR has to be the largest font size used, and that from a legal point of view, the larger the text, the more 'true' it is. For example, you can't directly imply something in 48pt text, and then qualify it and contradict the implication in 12pt text (which is why applications don't have 'Guaranteed*' in big letters on them any more)

The Competition Commission seems to think that customers' ongoing relationship with their store card issuer should be one in which the card issuer reminds customers that they could be getting a better deal elsewhere. I can't imagine any business thinking that it's in their interests to tell customers how bad their offering is, and I don't think it's a fair practice.

Surely the necessary step is rather to regulate and police the store card industry in their acquisitions in a similar way to the credit card industry, and ensure that customers are in full possession of the facts when they opt to take out the card. After they sign up, it's up to them, in their role as consumers, to later decide whether the APR is too high for them, and to shop around (or take advice from consumer organisations like Which?) to ensure that they know what they've got, both absolutely and relative to their alternatives.

I agree with everything except this bit:

However, one might consider the fact that by the time the customer reaches the checkout, they surely have the means on them to purchase their goods. Therefore, if they buy them with the store card, they could theoretically pay that off before interest is charged.

I would suggest (though I don't actually have anything statistical to back this up, so I could be wrong) that a number of people are "persuaded" into using a store card on the spot as a result of a rejected credit or debit card payment. It is often the case, especially around Christmas, that 'essential' goods (and let's be fair, Christmas presents are more or less essential) must be paid for, no matter the reprocussions. If your credit card was full, or your debit account too empty, then it is a quick and easy option to go for the store card.

But ultimately, you're right of course, that regulation in a similar way to credit cards is most likely the best way forward.

Well in that case, I think shops perhaps ought to have a policy not to offer credit to customers whose method of payment has been declined..

Regardless of whether they pass a credit check, that's never going to be a good sign, after all, and encourages irresponsible lending..

I suppose the people who use high interest loan products tend to be the same people who have the least ability to pay their dues. I could be wrong though - I have no statistics at hand. The conclusion that stupid people break capitalism is fairly sound though. I do know someone personally who's always been unable to manage her debts / private economy, and I really can't say I've ever felt lenders (in general, but where high interest lenders (store cards, consumer loans etc.) are very helpful, saying yes when they clearly ought to have said no. She's not "stupid" per se, but in this sense I would say it's fair to call her that. It does seem terribly cruel to me though. Some people have their lives ruined by debt and others life of them.

Recently two hot shot ties opened "Bank2" in Norway - a bank offering high interest loans to refinance heavily indebted people. That really pissed me off. I mean, these guys know what they're doing. I suppose it goes to show that the risk of not getting ones money back in this market segment is perhaps too low, and that it should become easier to declare personal bankruptcy. Or if chipping away at that cornerstone of capitalism is seen as too risky, I'd say it's fair to give better warning to customers.

Not that it'll help.

Merry christmas, by the way.

I believe that a fair decisioning process is required to ensure that lending is responsible.. This is to protect both the consumers and the lenders, since if somebody goes bankrupt then nobody wins, and high levels of indebtedness aren't good for anybody..

I'm reasonably crap with money too, but I reject the idea that I've been tricked by card issuers and lenders into getting more into debt than I wanted to be. Consumer groups seem to overlook the concept of personal responsibility, and put the blame on the companies because they're easier to point the finger at..

And warnings for customers are fine, consumer awareness is an important part of the marketplace. But requiring that a company warns its own customers about itself, that's where I draw the line :o)

God Jul Siggy :o)
(I'm sure that's probably horribly wrong..)

This is how stupid people break capitalism

If only ...

But in any case your final argument is, I believe, flawed. You have confused capitalism with economics. If people decided that easy credit at a much higher interest rate was a bad thing and didn't buy the product, that would affect the elasticity of demand and using a simple supply/demand model fewewr people would demand the product therefore the supplier would either withdraw from the market or reduce their "price" until the demand grew to provide an adequate return. All economics and nowt to do with capitalism. The capitalst pigs (who I work for!) would simply use economics to see how they could profit out of providing the store card. If they couldn't they would just withdraw from that market and make whatever staff savings (redundancies) as necessary.

Ah, Comic Strip is about to start on Channel 4 so I'll leave this and come back later.

Re: This is how stupid people break capitalism

Hmmm, wasn't really worth it. Funny in places.

So, where was I?

Flawed logic.

You also make a fundamental error in using the "save to buy vs buy on credit" argument. Not only are some people incapable of repaying their credit card debts, thus making the save-to-buy option a non-starter but unless the money is put away somewhere safe, like a Christmas Club, there is every chance that some or all of it will be used for other things. It's not really a choice when you don't already have some savings or a reasonable amount of disposable income. That's why credit cards are so widely used and why people do silly things like using store cards or buy cars using Yes finance. They don't have much of a choice. And I agree that it's not the industry's fault that people take up expensive credit. Just like you can't blame the money lenders for charging interest rates of several hundred percent. If people are stupid enough to go for it ...

Remember you speak from a position where you (should) understand the consequences of high interest rates and not paying in full. But there are people who don't. There are people who struggle and need to have it pointed out in words of one syllable that what they are doing is costly and that there might be other ways of doing it. Let's remember that the paper with the largest circulation is The Sun. Sun readers are your Mr & Mrs Average and some of them are stupid. The capitalist just rubs his/her hands and sees easy profit. What the Competition Commission is trying to do is to make sure they know.

And on that note I shall get down of my soapbox and wish you a good night.

Re: This is how stupid people break capitalism

Not only are some people incapable of repaying their credit card debts

These people should not be offered credit. That said, a not insignificant proportion of them probably have paid off the equivalent of their original spending, but interest and charges leave them with a remainder.

unless the money is put away somewhere safe, like a Christmas Club, there is every chance that some or all of it will be used for other things.

So you're saying that people are so weak that they can't save up, unless they're saving up under pressure from lenders to pay off the debt that they already have? I don't disagree, I just think it's a bit sad, that's all.. The idea that I can't put aside £20 for three months to buy something, but that if I buy it now and a credit card company is hounding me, then I can make payments of £21 for three months to pay off that debt..

They don't have much of a choice.

Which comes back to my point about how store cards tend to be used to purchase luxury items, rather than essentials. If no other choice exists, there's still the question of whether one really needs to buy something at all.


I can see that what the competition commission is trying to do is supposed to help consumers. But I think that store card issuers putting warnings about their own product on monthly statements to customers is a barrier to free competition.

Ultimately, the competition commission isn't trying to increase competition within that market, they're just trying to drive store card rates down by de-incentivising charging higher rates, which is outside of their remit.

Re: This is how stupid people break capitalism

Okay, in that case I'm happy to be called an economist and not a capitalist :o)

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