The behavioral finance theorist invites us to imagine a bank we can trust.
Topic: “Well-intentioned” capitalism.
Richard Thaler: I think there’s an opportunity here for new kinds of businesses who can sell trust and it’s tricky.
Let’s take the credit card market. Credit cards have been extremely profitable to banks. They’re profitable not from the fees they collect from the retailers that use the credit cards, that pays the bills, but the real profits come from the interest payments and the charges to users that are unexpected.
So I miss my payment by a day. They hit me with a $50 penalty. They increase my interest rate by 5%.
Is there a market for somebody selling a credit card that helps people pay down their balances? I think the question is yes. But it would have to be sold by a bank that’s really willing to invest in being a trusted partner with its consumers, because they will make less money on each consumer. If rather than setting the minimum balance as the lowest possible amount, so we keep people in debt for as long as possible, we raise the minimum payment and encourage people to pay off their credit cards, we’re going to make less money, but we’re going to have costumers that are more solvent.
Here’s a very practical example in the credit card business. One thing credit card companies often do is. They’ll tell you, you have a $2000 credit limit, now you might think that means that if I go over that, the card will be rejected. No that isn’t what it means. The card companies will often, as a courtesy, honor that credit card, but hit you with a penalty. And you keep swiping your card for $3 at Starbucks for your latté, and you’re getting hit with a $25 penalty because it’s over your credit limit.
It would be much more consumer friendly for them to beep you when you swipe your card that says, uh-oh you’re over your limit, are you sure you want to use that? Maybe you’ll take the cash out. So a credit card company or a bank that goes into the business of saying we’re going to be the broker, we’re going to sell you a mortgage that you’re going to be able to pay off, we’re going to help you reduce your credit card debt, we’re going to help you save for retirement, we’re going to put you into mutual funds that have low fees rather than high fees. I think there’s an opportunity for such a bank.
Topic: A practical example of “well-intentioned” capitalism.
Richard Thaler: Suppose I’m a wine lover, suppose that’s my vice, that I can’t walk past a wine shop without walking in and browsing and the next thing I know, there’s some expensive bottle I’m walking out with.
Well I might be interested in a credit card that I tell them, don’t honor this credit card in wine shops. Or I’m not allowed to spend more than $500 a month on wine. If I go over that, stop me. Why should a bank offer that credit card, right? They’re making less money, unless I realize, gee that’s great that they’re offering me that card it’s really helping me out, so when I need a mortgage, I’m going to go to them. When I need IRA, I’m going to go to them, maybe when I get older and I’m thinking about buying an annuity, I’ll go to them.
But it’s only going to work if they really are your trusted friend.
Recorded on: June 19, 2009.