(A version of this blog appeared as a perspectives article in the New Zealand Herald on June 1, 2011 under the title "Banks put vulnerable at risk from predatory lending")
We should not make our bill payments records available to lenders. Doing so has the potential of exposing consumers to predatory lending practices which ultimately will not serve our best interests. I will come back to this shortly.
According to the banking industry this is all about being a responsible consumer. The idea is that paying your bills on time will help you get a better credit rating and better access to loans. Those who are struggling with their bills will not be given any more credit to prevent them from piling up debt.
If you buy that argument, then you should also buy the argument that with all those sub-prime loans that the banks handed out, they just made honest mistakes. They did not realize that they were making loans to people who would not be able to repay. If only they had access to the debtors’ bill payments history they never would have advanced those loans!
Suppose for the moment that banks are really concerned with credit-worthiness and want to figure out who would be diligent about repaying the loans and who not.
They have adequate means at their disposal right now. They can ask you whether you have a steady income or not and how much money you make. They can ask you for your payslips and for your bank statements. And you know what - if they really wanted - they can ask you about your payment history as well!
For most of the transactions we engage in such as telephone and utilities payments our past bills and payment records (usually up to a year’s worth) are available on-line. All you have to do is to log in to your account and print them out. Getting an online account is free and so is printing out the past bills. If you want you are at liberty to provide this information to your bank.
There is absolutely no reason why all of us should be subjected to this massive intrusion on our privacy just to help banks figure out who is credit-worthy and who is not.
So what is it about then? This is, I believe, to a large extent about credit card debt.
A lot of our household debt is carried on credit cards. According to the Reserve Bank, at present the total amount of outstanding credit debt in New Zealand is approximately $5.4 billion and the average interest rate on these is 18.8%. Our banks are raking in a little over $1 billion in interest payments on credit card debt.
According to Dan Ariely, a professor at Duke University and author of the book “Predictably Irrational” “the average American family has six credit cards (in 2005 alone, Americans received 6 billion direct-mail solicitations for credit cards). ...the average debt on these cards is US $9,000; and seven in ten households borrow on credit cards to cover such basic living expenses as food, utilities and clothing.”
And when it comes to credit cards, banks are actually looking for people who are having difficulties paying of their bills; people who will run up debts, carry the balance and keep making the exorbitant interest payments.
But how do you find the consumer that will keep on making the interest payments rather than paying off their balance? This is a little trickier. The bank cannot really say to you: so I hope you are not the type that likes to pay off your card balance at the end of every month; because what we are really looking for are people who will only pay the interest.
But if they can look at your bill payments history and see that you have had some trouble in that area, then they know who is a good mark and who is not. Then they know whose mailbox to stuff (or whose phone to call during dinner-time) with the announcement of an exciting new card offer of a low teaser interest of 5.99% for the first 6 months but then going up to 25.99% after that.
With the bill payment history available, finding desirable targets becomes easier. The lender can even tailor his appeal more specifically. Having trouble with the heat bill? What do you know, we have a credit card with a very low introductory rate that will also give you gift vouchers that you can use to pay for your heat!
Providing detailed records will place the more vulnerable consumers at much greater risk of being subjected to predatory lending practices.
Will our banks do this? Banks in other countries have certainly engaged in such practices. But, at the very least, making our records available makes it possible to exploit such information to the detriment of consumer interest. The downside to making such records public should be obvious.
What is the upside?
Why would the banks wish to promote consumer responsibility, when their profits depend crucially on consumers behaving irresponsibly?