Friday, April 22, 2005

More on Consumer Credit

A while ago I wrote that the consumer credit industry was plenty competitive, so the most likely result of tighter bankrupcy rules would be lower interest rates.

winterspeak reader CD writes in to confirm that the credit card business is competitive:
Without debating the pros and cons of the bankruptcy bill, I just want to add my two cents on competition in credit cards. To your (rhetorical) question, is the market for consumer credit competitive, the answer is a resounding yes. Look no further than the rearview mirror for evidence of this in the form of financial blow-ups in the last recession of Metris, CompuCredit, NextCard, Providian, Household International, and auto lenders Onyx and AmeriCredit, among others, all of whom underpriced and overextended credit to the most marginal of consumers, the subprime market, and paid for it with massive losses eventually. One might say competition was too fierce for their own good, as a company like Metris would willingly lend thousands of dollars to consumers with the worst FICO scores around. Underwriting discipline comes in cycles in this as in all financial products with a loss risk attached to them, and no doubt credit card underwriting is mildly less competitive now if only because lenders aren't writing as much bad business.

The aspect of the card business plagued by a lack of competition is the network/infrastructure side, as the Visa/MasterCard duopoly strangled banks' and retailers' options for partnerships for years through anti-competitive exclusivity agreements. But after the recent court rulings in favor of AmEx, Discover, etc., it will grow even more competitive when the fees that companies pay these businesses per customer charge get partly competed away.

I am sure that your reasoning is correct and that the benefits which will theoretically accrue to the card companies' pockets from the bankruptcy bill will also get competed away at some point, probably even before they are realized


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