The Volokh Conspiracy

One of my longstanding frustrations with regulation of credit cards (and consumer credit generally) is that regulation is enacted without always clearly specifying the market failure to be addressed. Most credit regulation today is disclosure-based rather than substantive. Substantive regulation is something like a usury regulation that caps the interest rate that can be charged. Substantive regulation has been understood to be generally counterproductive in consumer lending markets, so disclosure-based regulation like Truth in Lending has become the way in which regulation is done.

The logic behind disclosure-based regulation is that by creating standardized disclosure of terms thought "important" then it eases consumer shopping. That is true, of course, as far as it goes. But it doesn't work well in situations where consumers have heterogeneous preferences and shop on many margins. So, for instance, credit card solicitations include the "Schumer Box," which requires certain "important" terms to be disclosed prominently in a tabular format. Those terms include things that are obviously important, such as the APR and annual fee, but also things that may have been important 20 years ago such as the "Minimum Finance Charge" which is almost always 50 cents now. Some cards now disclose in the Schumer Box things like the foreign transaction fee--which, of course, is only relevant to a small percentage of credit card holders. So regulation requires prominent disclosure of terms that people do care about, but also require prominent disclosure of terms that people don't care about. Moreover, once certain disclosures are set by law or regulation they are frozen in amber and become very difficult to change.

The problem with this is that by requiring certain terms to be prominently disclosed, it becomes more difficult for consumers to locate the terms that they do care about. One quickly gets into the information overload scenario for the typical consumer. This also leads to the "fine print" problem, as it leaves less space for disclosure and elaboration of other terms.

Moreover, the whole model seems to misunderstand the whole logic of the market for information. If a term is important to consumers (such as the interest rate or annual fee) it is not clear why credit card issuers would not disclose it or why consumers would not demand that information. Do people buy products when they don't know the price? But for information that is trivial for most consumers, such as the minimum finance charge or the foreign transaction fee, most consumers are unlikely to shop on that margin and it is unlikely to relevant for most consumers, so there's no reason to believe that this would part of a standardized disclosure format. Instead, it would be expected to be on a need-to-know basis, in the sense that idiosyncratic consumers would get that information when and if they needed it.

To the extent that regulation is appropriate, therefore, the first question should be to ask whether there is a market failure in the market for information and what kind of regulation will address it. It may be that there are market failures in the information market that require intervention. But current regulation doesn't even really seem to be thinking about the question this way. This is exacerbated by the problem of what I call "back-door substantive regulation" or "normative regulation" where regulators use disclosure regulation not to help consumers shop for and get what they actually want, but rather to try to influence their choices and try to get them to focus on what the regulator wants them to focus on to try to shape their behavior. So, for instance, a regulator might say "I'm worried about consumer overborrowing. And I know it is counterproductive to engage in usury regulation. But if I hit consumers over the head with information about how much credit costs them, then maybe I can get them to borrow less." So certain terms end up getting disclosed more prominently than consumers actually care about them because the regulator is actually trying to advance some other goal. If this is the regulator's goal, then fiddling with disclosure-based regulation seems like a poor way to do this. One example is the requirement that consumers be told how long it will take to payoff their balance if they only make the minimum payments. It appears that this actually affects about 4% of cardholders. In the end normative disclosure ends up being a poor way of helping consumers to shop better while also being a poor way of doing substantive regulation. I've talked about these questions more in my lecture on "The Economics of Consumer Lending" which is available on my website here.

Now the problem gets complicated with heterogeneous consumers. Nowadays about half of consumers use their credit cards for convenience or transactional purposes and never revolve balances. I am in this category. I have no idea what my interest rate is on my credit cards. Nor do I know my minimum finance charge, my interest rate on cash advances, etc. And I don't shop for credit cards on those margins. I shop on the basis of my annual fee and benefits, such as cash back or frequent flyer miles (I canceled my frequent flyer card because the annual fee was too large for my taste relative to the benefits). Yet if I shop for a credit card, the credit card solicitation is filled up with all of this junk that I don't care about. So it becomes much more difficult for me to find the information I do care about. And again, it seems like credit card issuers have an incentive to provide me with the information I need to shop and choose their card.

So I've always thought that it would be great for there to be a website where you could go and essentially get personalized or tailored disclosures to the margins that you care about, rather than the standardized disclosures that are compelled by the regulatory apparatus. Sort of like a Consumer Reports for credit cards.

So, at last, we get to the point of this exegesis. There is a new website called CardHub that directly addresses this issue by enabling you to compare a whole bunch of credit cards according to the terms that you care about. It includes most every price term you could care about, including balance transfer fees, default APR, etc. It also includes not just benefits, but particular benefits (cash back, frequent flyer, etc.).

Maybe there are some glitches with CardHub that aren't obvious to me. But playing around on the web site this seems like a very pro-consumer market innovation that uses technology to directly address the information economics issues that underlies consumer credit markets and to enable consumers to make better choices. And perhaps there are other websites that do the same thing. But I think this is a great innovation to address the desire of consumers to get useful information to compare card offers, one that seems quite superior to traditional horse-and-buggy consumer credit regulation. Of course, this won't address the concerns of those who don't like the choices consumers make, but in terms of simply enabling consumers to better locate the cards they want, this seems like a great idea.