Sure It’s Profitable. But Is It Right?

Don’t look now, but Eliot Spitzer is coming to see you. He’s not on his way just yet, but rumor has it he’s saddling up his white horse, readying a visit to bankers. He’s stopped to see our friends in the insurance business already, and he’s dropped in on the mutual fund folks. So it only seems natural that we’ll have a visit too.

Now there’s a really bad idea, one might say. Yet that’s where we’re headed if bankers themselves don’t pay attention to some abusesu00e2u20ac”and they are abusesu00e2u20ac”in our industry. Spitzer has built a career by homing in on business practices that are widespreadu00e2u20ac””everybody’s doing it” practicesu00e2u20ac”which just don’t pass the smell test. They’re practices that someone, for crying out loud, should have thought about, cocked their head, and said, “Yeah, it’s profitable, but is it right?”

I hate to say it, but we have some of these stinkers in the retail side of our industry. Problem is, they’re little areas of banking that affect the people least able to object to them: customers whose financial situation is so dire they have no choice but to go along with whatever option is out there, regardless of long-term cost, just so it solves their short-term problem. From the bank’s standpoint, the products that have emerged are just so darn profitable that bankers are ignoring the stench.

Item: Payday Loans. Four of the top 10 U.S. banks are still extending lines of credit to “payday lenders,” storefront loan shops that target the working pooru00e2u20ac”those with jobs and bank accounts, but who live payday to payday. If you’re a little stretched, the payday lender advances, say, $300 against your next paycheck, and charges you a fee of about $90. Two weeks later, when you can’t pay, the payday lender will roll it over for you. Bingo, another $90 fee. You’re essentially borrowing money at a 780% annual percentage rate. Members of the military are especially targetedu00e2u20ac”check out the locations of America’s 22,000 payday lenders.

Some large banks, SunTrust most recently, have pondered the “is it right” question, and have quietly exited the business of funding these lenders. Shouldn’t bankers be leading the charge to stamp out this racket? To be fair, it must be said that savvy lobbying has made payday lending legal in 36 states. OK, It’s legal. But is it right?

Item: Credit cards. A handful of banks are giving banking a black eye through shameful practices in marketing their credit cards. I’m talking about a few very big banks who should know better: Citibank, JP Morgan Chase, MBNA, and hybrids like Providian and Capital One, whom some see as direct marketing geniuses because their consumer deception is so cleverly designed and so effective. So egregious are these practices that last month The New York Times, in a hard-hitting Sunday expose, and PBS, in a one-hour “Frontline” special, brought out these beauties:

– Using the universal default provisions, buried in the fine print of many credit card agreements, banks are often doubling the APR paid by credit card holders, even when their payment record on the card is unblemishedu00e2u20ac”no late payments, no overlimit usage, in total compliance with card rules. The rate increase can be triggered by a one-day late payment showing up on, say, an unrelated utility or car payment.

– In eight years, the major credit card companies have increased the fee charged to cardholders for being even an hour late with a payment to $39. Not long ago the fee was $10 or less.

– By dropping required monthly payments on credit cards from 5% of the balance to 2%, cardholders can obviously stretch out their payments and maintain higher levels of debt. But as a result, thousands of barely self-sufficient consumers are carrying thousands of dollars in debt, are incurring late fees and overlimit fees nearly every month, and stand scant chance of ever paying off even one credit card. Add to that the fact that ever-more-aggressive card companies are issuing new cards to such questionable credits; cardholders who would be totally ineligible for an unsecured loan at your bank are now holding five, six, seven and more credit cards. The result? Low-income families, hundreds of thousands of them, are in hock to credit card companies, much the same way that 19th century coal miners “owed their soul to the company store.”

Now those are tough charges for a newspaper with the stature of The New York Times to make. I cringe a bit (this is, after all, my industry) when the Times states that to some cardholders and advocate groups, “credit card companies are acting like modern-day loan sharks, strong-arming their customers to pay more.”

So what exactly was the formal response of the banks and credit card companies cited in the report? Well, none of them would comment. That bears repeating: NONE OF THEM WOULD COMMENT. No explanation of how the credit card business works. No outraged denials or rebuttals of what can only be called very serious charges. Instead, the offending companies hid behind reliable American Bankers Association’s EVP Ed Yingling. The chief lobbyist was asked why the banks and credit card issuers wouldn’t respond themselves. He said the banks told him, and I’m not making this up, “Somebody’s got to do it, and we’re glad it was you and not us.”

So why are we defending these guys? A few banks, one hand’s worth among our thousands of banks in this country, are giving all banks a black eye by issuing pocketfuls of credit cards to people who shouldn’t have even one, and then are eating up their paychecks with $40 late charges, $30 overlimit charges, and interest five or 10 times what you and I pay. They’re praised by the analysts for their highly profitable book of credit card business. And I hasten to again say, it’s legal. But is it right?

Item: Checking fees. Now let’s get a little closer to home: Overdraft charges. Remember when they were $2, and if you had a few of them you might get a call from your banker? If you had more than a few, the bank might just close your account, irresponsible customer that you were.

Well, overdraft charges aren’t $2 anymore. They’re $30 and climbing. And nobody’s calling the heavy O.D.’er to slow down the flow of bounced checksu00e2u20ac”they’re too critical to keeping the bank’s fee revenue line healthy.

But is it right? Look behind the raw service-charge income number, and many banks will find scores of customers paying them $400 or more each and every month in overdraft charges. Look further behind the numbers, and you’ll find faces of customers, some desperate, some merely irresponsible, for whom the bank is a lender of last resort. Under the guise of an overdraft charge, the bank is essentially lending money at a higher-than-the-legal-limit rate. Does putting in an “overdraft protection” product help or hurt the situation? If you have such a program, go back and look at, say, the top 20 users of the product. What are they paying in fees? Who are they? Then again ask yourself, “Is it right?” At some point, in offering services and penalizing deviation from the rules with fees, the line between servicing customers and fleecing them can be crossed.

As a recent U.S. president said about his own moral slip, “I did it because I could, and that’s about the most morally indefensible thing a person can do.” Something is very wrong when banks do things they know to be wrong and recognize to be indefensible, but continue to do them because they can get away with it.

Directors are there to keep the bank’s activities within the lines drawn by legislators and regulators, to be sure. But they are also there to ensure that, in the pursuit of greater profitability, the culture of the bank doesn’t become one in which “I did it because I could,” is acceptable behavior.