Consumer Payment Card News

Privacy vs. Rates

A new study suggests that proposed opt-in privacy regulations could drive credit card interest rates higher. The study says the intense rate competition over the past decade was driven, in part, by information-based strategies used by card issuers, particularly non-bank issuers, such as MBNA and Capital One. The study’s authors, Michael Staten of Georgetown University’s McDonough School of Business and Fred Cate of Indiana University School of Law, say the percent of credit card balances being charged an interest rate of 18.0% or more plummeted from 70% to 44% in just 12 months during 1991-1992. This was the time when the national credit card market was first absorbing the impact of competition from MBNA, Capital One, and other information-based credit card issuers. The Staten/Cate study examined the likely consequences of “opt-in” privacy regulations, which have been proposed at the federal and state level. The regulations would require explicit consent before identifying information — such as name, address and household income — could be shared. The professors said each of the three types of proposed opt-in regulations would have the effect of choking off competition, raising costs, and possibly increasing the number of mailings required to achieve the same level of return. The authors also found that privacy regulations would have the unintended effect of restricting the industry’s antifraud protections. The study was sponsored by the Privacy Leadership Initiative.

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