Tuesday, November 8, 2016

Helping Students Handle Credit Cards Well

Robert Brown has some ideas for how banks can help students learn to handle their credit cards without growing debt and paying interest. To deflect some obvious criticism, he concludes with “I honestly do feel that the big banks and other credit card providers are missing an opportunity to attract new customers – potentially very loyal customers for life – by treating them better while they are students. They will have plenty of time to profit from them once they have graduated.”

Let’s start with a minor problem. Brown thinks he knows how banks should run their business better than they do. This is ridiculous. If his simple ideas for encouraging students to avoid debt and interest were profitable, the banks would already be using them. The truth is that hooking students on credit cards is profitable on multiple levels. For one, students rarely default because their parents usually pay if necessary. For another, setting a pattern of high-interest debt makes people more profitable to banks later in life.

The bigger problem is the presumption that banks care at all what’s in their customers’ best interests. Many of us would like to believe we’re all in this world trying to help each other. But that’s just not true. What keeps any business in line is the threat of unhappy customers either leaving or demanding new laws to control the business’s behaviour.

Brown’s ideas might make some sense if he suggested creating new laws to force banks to help students. But the idea that banks would voluntarily turn away profits makes little sense.

4 comments:

  1. Are you telling me you don't believe that Helping Customers is not a cornerstone of my bank's Mission Statement? (sound of a large balloon deflating)(sarcasm).

    Banks are a service, and publicly held, so bastards like me, most likely are forcing Banks to be this way (given I hold stock in them). Interesting dichotomy there.

    If you assume Banks are out for profits (ONLY), you usually don't go wrong (unfortunately).

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    1. @Big Cajun Man: All true, but I should emphasize that I'm a believer in capitalism. It's in banks' interests to serve us well in many ways. Problems come when people don't understand what they're agreeing to or can't help themselves from making choices that hurt them in the long run. These are the areas where we need laws to curb the worst corporate behaviour.

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  2. The good thing is that parents could quite easily do most of this.

    Unfortunately he probably is right that Canadian bank customers are likely to stick around much longer than they should once they have opened an account.

    Having "good behaviour" for a while might be an effective way to extract even higher profits later on. Banks will already happily pay a few hundred dollars to acquire a customer.

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    1. @Richard: Sadly, with so many parents handling their own finances poorly, it's hard to believe they'd do a good job of training their children.

      It's true that bank customers tend to stick around, but this is true whether the bank treats them well or not, particularly if the customers never figure out they're being treated poorly.

      I think the appearance of good behaviour is more important than actually looking out for customers' long-term interests. So, offering an incentive to a student to take a credit card may make the student feel good about the bank, even if the bank's real goal is to profit from the student's inability to handle credit.

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