Decline and decay of nudges

 Here's the latest paper to suggest that small "nudges" can have much less of a lasting effect than was initially thought.

The Semblance of Success in Nudging Consumers to Pay Down Credit Card Debt  by Benedict Guttman-Kenney, Paul D. Adams, Stefan Hunt, David Laibson, Neil Stewart & Jesse Leary, NBER WORKING PAPER 31926 DOI 10.3386/w31926  December 2023

Abstract: We run a field experiment and a survey experiment to study an active choice nudge. Our nudge is designed to reduce the anchoring of credit card payments to the minimum payment. In our field experiment, the nudge reduces enrollment in Autopaying the minimum from 36.9% to 9.6%. However, the nudge does not reduce credit card debt after seven payment cycles. Nudged cardholders tend to choose Autopay amounts that are only slightly higher than the minimum payment. The nudge lowers Autopay enrollment resulting in increasing missed payments. Finally, the nudge reduces manual payments by cardholders enrolled in Autopay.

Junk Fees and Related Pricing Practices

 The White House is taking interest in hidden fees, both  because they interfere with competition on price (e.g. when Ticketmaster reveals fees only as someone tries to complete a purchase), and because they sometimes seem unconscionable.  Here's a White House statement.

The President’s Initiative on Junk Fees and Related Pricing Practices

"The Biden-Harris Administration is taking action on junk fees that hurt Americans’ pocketbooks and the economy."

"Exploitative or predatory fees. Excessive fees that target consumers who have limited alternative options – because they are locked into a product or service, or are otherwise economically vulnerable – can likewise impose a financial burden. As the CFPB explains, a sign of exploitative fees is that they “far exceed the marginal cost of the service they purport to cover.” Bank overdraft fees, which greatly exceed the bank’s cost of credit, and surprise “termination fees” are leading examples."

HT: Susan Athey

********

Regarding bank overdraft fees, my sense is that these drive lots of people away from the formal banking system and into the hands of high-interest-rate check cashing and payday loan services. Since we already regulate some debit card fees, I wonder if banks can't be encouraged to have some kind of debit-card-only "checking" accounts. Those would be able to prevent overdrafts, so they should be very cheap to administer, and would allow people to avoid paying very high fees and interest rates to non-bank financial services.

Blood Money, by John Dooley and Emily Gallagher

 Are paid plasma donors being exploited? Here's a paper that suggests not, but rather that the payments that plasma donors receive can improve their financial well being not merely by providing additional income, but also by helping them avoid going into expensive debt.

 Dooley, John and  Emily Gallagher, Blood Money (October 11, 2021). Available at SSRN: https://ssrn.com/abstract=3940369 or http://dx.doi.org/10.2139/ssrn.3940369

Abstract: "Little is known about the motivations and outcomes of sellers in remunerated markets for human materials. We exploit dramatic growth in the number of commercial blood plasma centers in the U.S. to study the individuals who sell plasma. We find sellers tend to be young and liquidity constrained with low incomes and credit scores; they also report less access to traditional bank credit. Plasma centers absorb demand for non-traditional credit. The opening of a nearby plasma center reduces payday loan inquires and transactions by 13–18% among young borrowers. Meanwhile, foot traffic increases by over 9% at both essential and non-essential goods establishments when a new plasma center opens nearby. Our findings suggest that, at least in the short-term, constrained households use the discretionary income from plasma centers to smooth consumption without appealing to high-cost debt."

HT: Mario Macis

Update: here's the published version

John M Dooley, Emily A Gallagher, Blood Money: Selling Plasma to Avoid High-Interest Loans, The Review of Financial Studies, 2024; https://doi.org/10.1093/rfs/hhae018

Frequent flier miles, infrequent flying, and credit cards

 The WSJ has the story of how frequent flier programs keep airlines afloat even when there is less frequent flying:

American Airlines to Use Frequent-Flier Program to Raise $7.5 Billion. Carrier will use funds to replace a loan from the federal government  By Micah Maidenberg

The airline on Monday said it would issue $5 billion in notes and seek a $2.5 billion term loan backed by AAdvantage, its loyalty initiative for customers, to secure the funds. Both Delta Air Lines Inc. and United Airlines Holdings Inc. also have tapped their respective frequent-flier programs to land financing.

"Carriers have found the relatively stable cash flows that their frequent-flier programs bring in to be a rich source of collateral for financing.

"Airlines mainly earn money from frequent-flier programs by selling miles to banks and retailers that then award them to customers who sign up for credit cards and make purchases. That means airlines stand to benefit from every swipe of a co-branded card, whether customers are buying plane tickets or clothing. Airlines have said this revenue has held up better than ticket sales as travel demand dried up last year."

********

Earlier post:

Thursday, October 15, 2020

Frequent flier programs during the pandemic slowdown in air travel

Frequent flier programs during the pandemic slowdown in air travel

 It turns out that frequent flier programs get a lot of their income from credit cards that reward purchases with miles. So they are one of airlines' big profit centers, that hasn't suffered so much from the slowdown in air travel.

Here's a NY Times story:

Airline Miles Programs Sure Are Profitable. Are You the Loser? United and Delta have been boasting to lenders about fat margins in frequent-flier mile programs. Time for customers to pay a bit more attention.  By Ron Lieber

"Even as the coronavirus pandemic has sapped the ability and desire to travel, miles programs are a winner for the airlines. In the first half of 2020, Delta’s passenger revenue fell 60 percent, but the cash the airline got from American Express’s purchases of miles for its customers fell less than 5 percent. ...

"United puts a different but no less illuminating set of words and numbers to our mile lust. It goes into granular detail in its pitch about its ability to “nimbly” control its mile redemption costs on “peak days.” That explains why it’s so hard to use your miles to get a great deal during school vacations, Mardi Gras or other occasions."

******

Here's Market Watch:

Airlines are using frequent flyer programs to sell debt. Here’s how it works  By Sunny Oh

"In essence, miles are sold to credit card companies who offer them as part of their reward programs to their customers. The revenues earned from selling the miles are much higher than the cost of any flight travel redeemed by passengers,

...

"In a June filing, United Airlines valued their MileagePlus loyalty program at $21.9 billion which is around double the total market capitalization of the company itself."

The unsharing economy: part time gig evicting people from their apartments

 Vice.com has the story:

Gig Economy Company Launches Uber, But for Evicting People--A company called Civvl says evicting people is the "FASTEST GROWING MONEY MAKING GIG DUE TO COVID-19."  By Ashwin Rodrigues

"In its Craigslist ads, posted across the country, Civvl explains the opportunity plainly: "There is plenty of work due to the dismal economy."

"Unemployment is at a record high and many cannot or simply are not paying rent and mortgages," the ads state. "We are being contracted by frustrated property owners and banks to secure foreclosed residential properties."

Civvl aims to marry the gig economy with the devastation of a pandemic, complete with signature gig startup language like "be your own boss," and "flexible hours," and "looking for self-motivated individuals with positive attitudes:" "FASTEST GROWING MONEY MAKING GIG DUE TO COVID-19," its website says. "Literally thousands of process servers are needed in the coming months due courts being backed up in judgements that needs to be served to defendants."

...

"The company, at first glance, appears to be some kind of _Nathan For You-_esque prank: siccing precarious gig jobs onto vulnerable people. But Civvl is connected to a larger—and real—gig economy company called OnQall, which describes itself as an app that provides "on-demand task services to non-urban communities beyond main city areas." OnQall is the developer behind other, more believable TaskRabbit-esque apps, like LawnFixr, CleanQwik, and MoveQwik. Given the fact that Civvl is advertising all over the country and that OnQall, though not popular, does exist, it seems as though Civvl actually is an attempt to simplify the process of evicting people who cannot pay their rent during a pandemic.

...

"There is a federal ban on evictions, declared by the CDC, but landlords are still attempting to press on. There is a penalty for violating the ban, which can include a combination of fines and jail time. Civvl did not respond to a question about how the company ensures evictions are legal, though based on the Terms of Service, it appears to pass all risk onto the companies using its platform, stating that it simply "provides lead generation to independent contractors," and does not actually carry out the work itself.  

HT: Sandro Ambuehl

Debt traps and money lending

Credit for poor borrowers is a subject of importance in both the developing and developed world. Here's a new paper...

Debt Traps? Market Vendors and Moneylender Debt in India and the Philippines

Dean Karlan, Sendhil Mullainathan, Benjamin N. Roth

NBER Working Paper No. 24272
Issued in February 2018
NBER Program(s):Development Economics, Law and Economics, Productivity, Innovation, and Entrepreneurship 

A debt trap occurs when someone takes on a high-interest rate loan and is barely able to pay back the interest, and thus perpetually finds themselves in debt (often by re-financing). Studying such practices is important for understanding financial decision-making of households in dire circumstances, and also for setting appropriate consumer protection policies. We conduct a simple experiment in three sites in which we paid off high-interest moneylender debt of individuals. Most borrowers returned to debt within six weeks. One to two years after intervention, treatment individuals were borrowing at the same rate as control households.

How banks support payday lenders and check cashing services by dissing their low income customers

Here's a story from the WSJ that I found disturbing (and which helps explain why many people choose to be "unbanked" and to patronize high-priced non-bank financial services):

Bank of America: No More Free Checking for Customers With Low Balances
eBanking customers switched into accounts that typically require direct deposit or a minimum balance to avoid $12 monthly fee

"Bank of America Corp. has eliminated a free checking account popular with some lower-income customers, requiring them to keep more money at the bank to avoid a monthly fee.

"This month, all remaining eBanking customers with the Charlotte, N.C., lender were switched into accounts that charge a $12 monthly fee unless the customer has a direct deposit of $250 or more or a minimum daily balance of $1,500. Some eBanking customers were switched over as early as 2015.

"Banks have long grappled with how to charge customers for basic checking services. The accounts are costly for banks to maintain, though they do bring in revenue through overdraft and other fees."
**************

Some previous posts about the other part of this market:

Friday, November 3, 2017

Payday lending and check cashing

Thursday, January 22, 2015

Payday loans

Payday lending and check cashing

In the WSJ:
The Hand-to-Hand Combat to Save Payday Lending
Payday lenders and consumer advocates fuel letter-writing campaigns ahead of the introduction of regulatory oversight

"Florida payday lender Amscot Financial Inc. in the summer of 2016 rounded up about 600,000 letters from customers protesting a regulator’s plan to clamp down on high-interest loans. The letters, many handwritten, were scanned, packed in 131 cartons and shipped to Washington.

The unusual campaign by Amscot was part of a fight between the payday industry and consumer advocates to try to sway the Consumer Financial Protection Bureau, which is expected in the coming days to introduce federal oversight of the $38.5 billion industry.

Payday loans are used by an estimated 10 million to 12 million Americans every year, many of whom live paycheck to paycheck. The loans are typically a few hundred dollars and due in two weeks, or on the borrower’s next payday. Their annualized interest rates, which can rise to nearly 400%, have long troubled regulators.

The CFPB rule would supplement a mishmash of state rules. It would likely require lenders to assess borrowers’ ability to repay and make it harder to roll over loans, a lucrative part of the business. The practice, where customers take out new loans to repay old ones, often leads to snowballing fees. Lenders say such requirements would wipe out the market for short-term payday loans."
...
"The CFPB’s payday rule is among a handful of recent regulations that generated millions of comments. In recent years, the Environmental Protection Agency’s rule to curb carbon emissions from power plants drew 4.3 million comments. The “net neutrality” plan governing internet-service providers attracted more than 22 million comments."

Repugnance watch: Nude photos as collateral for loans

The Guardian has the story: China's 'naked loans' force female students to bare all in return for more cash

"Shady internet lenders in China are reportedly coercing female college students to provide nude pictures of themselves as collateral – a loan-for-porn scheme that has prompted anger on the country’s internet.

Under the arrangement reported by state media this week, some college students have agreed to send photos of themselves naked, holding their identification cards, to potential lenders. In exchange, they became eligible for higher loan amounts – two to five times the normal sum, the state-run Beijing Youth Daily reported.

Lenders tell the students they will publish the photos online if the loans are not repaid on time, often at usurious interest rates.

According to state media, the loan scheme is taking place on JD Capital’s Jiedaibao website. Jiedaibao is a platform where individuals - often friends and acquaintances – can lend or borrow money, striking their own arrangements."

Credit cards in Who Gets What and Why--excerpt in Business Insider

Yesterday's Business Insider published a few-paragraph excerpt from Who Gets What and Why:

The 'cash back' you get from your credit card comes from the guy behind you in line

Payday loans

The NY Times has a discussion of payday loans, and whether and how they might be regulated. (See also my previous posts on payday loans.)

The Allure of Easy Money

INTRODUCTION

Kevin J. Miyazaki/Redux for the New York Times

In his State of the Union address, President Obama presented a series of initiatives aimed at the middle class and the growing income inequality in the United States.

One thing on the minds of many working-class Americans is greater federal regulation of payday loans, the small, short-term high-interest loans that are currently under state jurisdiction. Critics of payday loans say they lead to a cycle of ballooning debt for consumers, who can rarely afford to pay them back and must take out more loans to stay afloat. But payday lenders say that strict rules would eliminate the industry and with it, the only viable lending option for people with bad credit.

Should payday loans be federally regulated?

READ THE DISCUSSION »

DEBATERS

• 

  Help Level the Playing Field for Desperate Borrowers

  VALERIE WILSON, ECONOMIC POLICY INSTITUTE
  Ban predatory interest rates. Make borrowers account for the ability to repay. Limit duration of debt and restrict lenders’ access to bank accounts.
• 

  Don’t Restrict Access to Credit

  DENNIS SHAUL, COMMUNITY FINANCIAL SERVICES ASSOC.
  Regulation already exists for legitimate payday lenders. In more than 30 states, there are already strict limits on loan amounts, fees and rollovers.
• 

  One Size Won’t Fit All

  LISA SERVON, PROFESSOR OF URBAN POLICY
  Research about whether these loans are helpful or harmful is inconclusive, and most of it lumps all borrowers together.
• 

  Regulations Can Help Improve the Market for Borrowers

  RAJ DATE, INVESTOR
  Technological innovations will draw customers who use payday loans to cheaper products, like credit cards and installment loans, that better meet their needs.
• 

  End Predatory Practices

  GARY KALMAN, CENTER FOR RESPONSIBLE LENDING
  New rules must keep predatory lenders from pushing consumers into increased risk of losing bank accounts, their foothold into the mainstream financial system.
• 

  Let Banks and Nonbanks Play by the Same Rules

  JAMIE FULMER, ADVANCE AMERICA
  The Consumer Financial Protection Bureau must establish consistent guidelines for the entire marketplace, creating healthy competition.

New York Prosecutors Charge Payday Lenders With Usury

The New York Times has the story: New York Prosecutors Charge Payday Lenders With Usury

"A trail of money that began with triple-digit loans to troubled New Yorkers and wound through companies owned by a former used-car salesman in Tennessee led New York prosecutors on a yearlong hunt through the shadowy world of payday lending.

On Monday, that investigation culminated with state prosecutors in Manhattan bringing criminal charges against a dozen companies and their owner, Carey Vaughn Brown, accusing them of enabling payday loans that flouted the state’s limits on interest rates in loans to New Yorkers.

Such charges are rare. The case is a harbinger of others that may be brought to rein in payday lenders that offer quick cash, backed by borrowers’ paychecks, to people desperate for money, according to several people with knowledge of the investigations.

“The exploitative practices — including exorbitant interest rates and automatic payments from borrowers’ bank accounts, as charged in the indictment — are sadly typical of this industry as a whole,” Cyrus R. Vance Jr., the Manhattan district attorney, said on Monday.

...

"The indictment offers a detailed look at the mechanics of the multibillion-dollar payday loan industry, which offers short-term loans with interest rates that can soar beyond 500 percent. ...

The payday lending operation began when borrowers applied for loans on websites like MyCashNow.com. From there, borrowers’ information was passed to another company, owned by Mr. Brown, that originated the loans. The information then wound up with another company, owned by Mr. Brown, that collected payments from borrowers."

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Here are some previous posts on payday loans.

Payday loans versus bank overdraft charges

I've blogged before about very-high-interest-rate payday loans to "unbanked" customers, and the repugnance with which they are regarded in many quarters (in England and in Los Angeles).

Interestingly, the first and third of those posts have attracted a lot of comments, a few from serious people, but many from payday loan shops whose style makes it clear that they may verge on the fraudulent.

So it's interesting to note this recent blog post over at The Volokh Conspiracy:

Payday Lending and Overdraft Protection

by Todd Zywicki on January 17, 2014 5:18 pm

"I’ve noted previously, I have a forthcoming paper with former Comptroller of the Currency Robert Clarke that examines competition between payday lending and bank overdraft protection. The central point is easy to grasp–payday lending and overdraft protection are products offered by different providers but which compete for the same customers. And evidence indicates that in choosing between the two products consumers generally choose rationally.

The point came to mind (yet again) reading the Wall Street Journal yesterday, “Hefty Bank Fees Waylay Soldiers.” According to the article, many members of the military are frequent users of bank overdraft protection, which has caused some concern in some quarters. The article provides no hard evidence that usage of overdraft protection has risen in recent years, but implies that the general impression is that it has."

...

"as we note in the article, in many situations payday loans are less expensive than overdraft protection (it appears from the article that the break even point in favor of overdraft protection is lower than for payday loans because overdraft fees on military bases are lower than typical market rates) and consumers understand this and use the products rationally."

Payday loan shops to be taxed to fund cheaper alternatives

The Guardian has the story:

Labour vows to impose new tax on payday lenders

Ed Miliband says his party would double the £13m a year given to fund capacity of credit unions and other low-cost institutions

Payday loans (and other high interest lending) as repugnant transactions

In poor communities there is a profitable business of making very high interest rate loans to employed but "unbanked" workers. High interest rates (between lenders and apparently willing borrowers) have been repugnant transactions for a long time, and payday loans are no exception: here's a story from Pro Publica on the controversy in Missouri. The Payday Playbook: How High Cost Lenders Fight to Stay Legal

Marriage markets and credit markets

 With attitudes about money being an important ingredient of marital compatibility, is it any wonder that a readily available index for one is (apparently) increasingly being used to judge the other? The NY Times is on the story: Even Cupid wants to know your credit score


"The credit score, once a little-known metric derived from a complex formula that incorporates outstanding debt and payment histories, has become an increasingly important number used to bestow credit, determine housing and even distinguish between job candidates.

"It’s so widely used that it has also become a bigger factor in dating decisions, sometimes eclipsing more traditional priorities like a good job, shared interests and physical chemistry. That’s according to interviews with more than 50 daters across the country, all under the age of 40.

“Credit scores are like the dating equivalent of a sexually transmitted disease test,” said Manisha Thakor, the founder and chief executive of MoneyZen Wealth Management, a financial advisory firm. “It’s a shorthand way to get a sense of someone’s financial past the same way an S.T.D. test gives some information about a person’s sexual past.”
...
"A handful of small, online dating Web sites have sprung up to cater specifically to singles looking for a partner with a tiptop credit score. “Good Credit Is Sexy,” says one site,Creditscoredating.com, which allows members to view the credit scores of potential dates who agree to provide the numbers.

"On another site, Datemycreditscore.com, a member posted on the Web site’s home page that others should to “stop kidding” themselves and realize that credit scores do matter."

The Receivables Exchange and the NYSE

I've been following The Receivables Exchange in several prior posts, and now the NYSE is interested too: today's WSJ reports NYSE Euronext Bulks Up In Market for Receivables.

"NYSE Euronext plans to boost its role in helping companies secure short-term funding, hiring a longtime GE Capital executive as part of an initiative that includes buying a stake in an electronic market for corporate receivables.

"The parent of the Big Board aims to use its investment in the New Orleans-based Receivables Exchange as another venue for public companies to borrow money, complementing the long-term funding provided via stock-market listings at a time when businesses face financing difficulties.

"NYSE has taken a minority stake in the four-year-old venture and hired Paul DeDomenico, previously chief executive of GE Capital's working-capital-solutions group, to lead the exchange group's corporate-receivables programs.

"The moves, which come amid a fierce political debate over bank lending to small-and-midsize businesses, could provide an advantage to the NYSE in its battle with competitors over share listings, by allowing the Big Board operator to offer a broader suite of services to companies that choose to list with it. And the moves provide an entry point to a market in receivables estimated by the companies at $17 trillion in size domestically.
...
"The Receivables Exchange formed in 2007 as a platform for companies to auction their accounts receivable to buyers like hedge funds and commercial banks. The eBay-like system lets sellers of receivables generate short-term cash quickly, while buyers can book a profit when debts are paid back.
...
"Upheaval in the corporate lending market has provided an opening for the company, where trading volumes of accounts receivable in its U.S. market for small-and-midsize businesses leapt nearly six-fold from 2009 to 2010.

"This year the value of receivables bought and sold on the platform is on pace to top $1 billion in value, according to Nic Perkin, the Receivables Exchange's president and co-founder.

New Orleans Receivables Exchange

In several earlier posts I've been following the progress of the New Orleans Receivables Exchange.

The State of Louisiana has now passed some legislation that makes it easier for companies to sell their accounts receivable: here's the text of the Louisiana Exchange Sale of Receivables Act.

And here's an article from Inc. Magazine: A New Liquidity Solution

Informal money transfer networks: "hawala"

The informal money transfer system known as Hawala (or hundi) is in the news with the arrest of three Pakistani men in New England who are believed to have provided funds to the Times Square bomber. The Boston Globe reports Possible ties to murky finance system examined
"An informal money-exchange network known as “hawala’’ — a centuries-old system that operates outside conventional banking networks — is at the center of the investigation into three Pakistanis arrested Thursday in Massachusetts and Maine with alleged ties to the suspect in the failed Times Square bomb plot, law enforcement officials said yesterday."
...
"Hawala, which originates from the Arabic word for change or transform, is a practice that predates modern banking systems and has been around for centuries. There are believed to be thousands of hawala brokers operating in the United States, and they are not necessarily operating outside US laws if they register with the US Department of Treasury. Many don’t, however, operating more like black-market, cash-based versions of Western Union.
Relying on an informal network of brokers who use designated couriers, the networks are used to transfer money in relatively small amounts in and out of developing nations where modern financial systems are scarce, such as in South Asia, the Middle East, and Africa. Transactions often can be completed within 24 hours and at a lower cost than a traditional wire transfer or bank draft that could take as long as a week and require official paperwork.
Hawaladars, as the brokers are known, often operate out of cash-intensive businesses such as restaurants, convenience stores, or gas stations, the officials said."

The informal nature of the transfers, which circumvent banks and regulated record keeping, and the fact that the broker on one end doesn't know the customer on the other end, have made the hawala system a concern for law enforcement involving money laundering. Here's a report from Interpol: The hawala alternative remittance system and its role in money laundering