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The profit model of credit cards, checking accounts, and other types of consumer lending used to look a lot like banks doing what they could to take advantage of information asymmetries. Through various fees and penalties they could charge low rates for well-informed, or sophisticated, borrowers by price discriminating against poorly informed, or naive, borrowers. Another way to look at it is price discriminating against people with high discount rates. In either case, the outcome seems undesirable to many people, since this regime is likely to on average subsidize the economically better off at the expense of the economically worse off. So by popular demand regulators have been pushing the industry away from this model. So what is the new profit model for consumer finance?
One choice is broad and even fees. For example, free checking accounts might go away and be replaced by a fee. This is one way to go, but it may push some low-income people of out checking accounts. It’s desirable for people to have access to credit and banking, and the lower we can make the fixed cost to access these things the better. This is not to say that broad and even fees are worse for low-income people than the previous regime of overdraft fees and other penalties. I’m just saying that, ceterus paribus, it would be preferrable to have lower fixed costs to accessing banking.
So what options does this leave us? Ideally banks could find ways to price discriminate against people with a high willingness to pay who aren’t economically disadvantaged. The Kardashian Kard seems like a step in the right direction. This is a Mastercard prepaid debit card that have pictures of reality TV stars the Kardashians on the front. What makes the cards noteworthy are the fees. Annie Lowery at Slate provides a rundown:
First there are the upfront costs. For a six-month card customers pay $59.95, or $99.95 for a 12-month card. (The median fee for similar, non-Kardashian-festooned products is $10.) After those six or 12 months, there is the $7.95 monthly fee to keep using it. Users pay a $1.50 fee to withdraw cash at an ATM and a $1 fee to check their balance. They pay $1.50 to speak with a customer service representative. If they lose their card, they have to pay $9.95 to replace it. If they want to cancel their card, they have to pay $6.
These fees do seem exorbitant. And Lowery provides an illustrative example of how a teen using the card for a $200 a month allowance could easily pay $80.40 in fees whereas a debit card would have cost them between nothing and $36. But is this a bad thing?
It seems likely to me that parents who are willing pay between $59.95 and $99.95 up-front for a prepaid debit card emblazoned with B-list celebrities for their teen daughters are not going to be predominantely low-income people. Price discriminating against individuals with enough disposable income to pay so much for such frivolous vanities seems both efficient and fair to me.
In addition, I’d wager that a large percent of teenage consumption is just inefficient status signaling like, oh I don’t know, the Kardashian Kard, which seems like desirable consumption to tax in order to subsidize the financial system.
If programs like this allows banks to offer cheaper services like free banking to the rest of us, then I hope they can find more of them.