Financial sector ... in trouble again!

Dear Colleagues

Can you believe it ... some of the big financial sector "names" in trouble again. This time as I understand it, the names are American Express, Visa and MasterCard.

The good news is that the government authorities have eventually caught up with some of the abuses that have been going on for a very long time. For a very long time the financial sector has not had to worry that the government regulators and law enforcement would do anything about abuse. All that has mattered for a long time has been profits and doing good for the stockholders ... and the rest of the economy be damned!

In this case, in contention are the business practices associated with the fees being charged to process a credit card transaction. It seems that about $35 billion are paid each year in such fees ... which ultimately increase the cost of doing business and the price of purchases. Apparently Visa and MasterCard, seven state attorneys general, and the Department of Justice have agreed to settle an antitrust lawsuit. It appears that American Express is planning to challenge the charges.

Visa has said that: "as part of the settlement, Visa will allow U.S. merchants to offer discounts or other incentives to steer customers to a particular form of payment including to a specific network brand or to any card product, such as a "non-reward" Visa credit card."

MasterCard indicates that "the terms of the settlement are consistent with the Company's long standing business practices and will require MasterCard only to modify its rules to more specifically conform to its business practices."

American Express intends to fight the case and has said "the antitrust lawsuit filed today against the company is a significant retreat from previous Department of Justice efforts to promote competition in the payment industry ... The new approach would ultimately limit consumer choice, reduce competition and curtail innovation."

Using The Burgess Method (TBM) of value analysis ... the question is about all about cost and profit and value ... and whether there has been positive or negative increment to the quality of life in society.

At a news conference, Attorney General Eric Holder has explained that "every time a consumer uses one of their credit cards to buy something from a merchant, that merchant pays a fee — a fee that is passed on to consumers through higher prices."

Using TBM value analysis it should be argued that every time the card is used there is a convenience to the consumer that has value. Whether or not there is a reasonable positioning of the price being paid by the consumer is complex ... and whether or not the financial institutions are charging excessively high prices depends on the relationship between cost and price, and the investment ... assets employed ... in providing the service. These data are not easily found!

The Attorney General went on to say that "Visa, MasterCard and American Express don’t just impose fees, however — they also prevent merchants from offering consumers any cost saving options such as discounts or rewards for using less expensive forms of payment."

The general behavior of the credit card industry, of which American Express, Visa and Master Card are a part, over a very long time has been disgusting. This is a small part of the obnoxious behavior of the industry ... but it is good that the authorities are looking at the industry and using the law to hold the industry to account.

I am glad that American Express has chosen to stand up to the charges ... I like the argument that there is space for competition and they are different from Visa and Master Card. That does not mean I think they are right or wrong in their arguments ... but at least they seem to think they are behaving correctly.

Visa and Master Card on the other hand have chosen to settle. They know that by settling the costs will be quite modest compared to their profits ... and the news media will soon move on and leave them alone. I am disgusted. The credit card industry has turned itself into a money machine for the benefit of the owners of the credit card industry, and in the process has extracted an enormous amount of interest and fees from many people who are struggling financially. The industry argues that customers choose to use their credit and "agree" to the terms. Yes ... but the process of "agreeing" is one of those processes that I characterize as "gotcha" agreement. I tried to get a copy of a credit card agreement in full size print that was readable from a credit card institution ... and you know, of course, how much success I had. ZERO!

And then there is the matter of running credit card operations from States where credit card and banking rules are lax or non-existent. And the fact that there is a law on the books that allows these operations to do business in other States where there are banking and credit card rules ... but these local rules do not apply! This makes a mockery of rule of law ... and this is the sort of behavior that has made profit for banks, and sucked out wealth from people who should be getting benefit from their use of credit cards.

The financial sector remains a dangerous ... profitable maybe, but totally lacking in value. It will take time for it to reform itself ... in the meantime I welcome the attention of the authorities, and hope there will more attention to come.

Peter Burgess