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December 10, 2010

THE BIG BANGA THEORY: Americans Ditch Credit Cards Stick It to Wall Street

By Chaz Valenza

Eight million Americans told Amex, Visa, MasterCard and Discover to Stick It! last year. Some have had enough of too-big-to-fail business as usual on Wall Street and are sending a message. Meanwhile, at least one credit card company is developing the next financial WMD to part you from more and more of your money.

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THE BIG BANGA THEORY is the next battle in People versus Wall Street.

Americans are ditching credit cards and according to a report in this morning's The New York Times holiday shopping with plastic is at a 27 year low.  

Last month, president and chief executive officer of MasterCard Ajay Banga said, "I have declared war on cash.   I believe MasterCard will grow by growing against cash." (Source: The Economic Times.)

Though we may thank Mr. Banga for his recent candor, the most recent battle in the war between the banks and people has been raging since at least September of 2009.  


Big Banga Trio: Banga, Bernanke & Geithner by Chaz Valenza

Banks and credit card companies have made aircraft carriers full of money since creating plastic as a substitute for cash in the 1950's.   Plastic was sold as a "convenience" product/service at price that has always been hidden to the purchasers, but perhaps at a fair value. Prior the economic crash, credit card offers were just business, nothing personal.

Now, it's personal and it's war.   Since the too-big-to-fail financial corporations destroyed the economy, the public has also learned that broad categories of the same companies' consumer products are pernicious.   This has caused a degree of resentment among the American public (perhaps this is the understatement of the decade).

How's the war going?   You won't find reports from the front issued by Brian Williams.   After all, he works for General Electric a most profitable company in large part due to the financial products of GE Capital.   GE Capital also nearly brought its parent company to its knees with its exposure to toxic derivative "assets."

So, here's the body count you won't find anywhere else and it may surprise you:

In 2008 there were 176.8 million American "general use" credit cardholders (Amex, Visa, MasterCard, Discover).  

By the end of 2009, that same category of credit cardholders decreased 7.4% to 164.7 million.

Today, only about 156.7 million people are credit cardholders.

This past year 8 million Americans deserted credit cards.   They are no longer cardholders; that's right they don't have a one!   BTW, having 3.5 pieces of general use plastic is the average.

This is a stunning reversal for the financial services industry as cardholders grew by over 13% from 2000 through 2008.   (U.S. Census Bureau).  

The projections were that cardholder numbers would continue to increase by 8 million through 2009, not drop by 8 million.   (U.S. Census Bureau).  

By January 1, 2010 there were suppose to be 181 million American credit cardholders, now there are only about 156.7 million, a 15.3% decrease.  

Upon hearing this news the collective yelp of "Ouch!" from lower Manhattan was loud enough to be heard in Topeka, KS, but never crossed the transom of the mainstream media.

There's no doubt the public's abandonment of this high cost alternative to cash is causing a great deal of gnashing of teeth, sweaty palms and blazing calculators in the banking sector, not to mention on the desks of Wall Street finance analysts.

TransUnion, the source of the worrisome report put the best spin on it they could: most people are using some other form of credit, and the decrease is due to charge-offs in higher credit risk segments, and consumers are acting to maintain their good credit.   (Source: TransUnion.com)   

This may all be true as far as it goes, but...


Big Banga Trio: Banga, Bernanke & Geithner by Chaz Valenza

Your credit score goes down when you close an active credit card account.  

And, average total debt in 2009 (includes credit cards, mortgage, home equity, student loans and other debt) for U.S. households was $54,000, down a whopping $34,850 from 2008, a decrease of over 42% in one year. (Source: Federal Reserve's G.19 report, March 2010)    

And, credit card advertising campaigns are in full swing; mailings of offers continue unabated.

And, 29% of those recently polled said they do not have a credit card.   (Source: 2009 scientific poll conducted for CreditCards.com)

Personal Finance Expert for Credit.com Gerri Detweiler, an advocate for fair credit since 1987, offered a fourth reason: "We don't know how many, but some credit cardholders I've spoken with are angered by how they were treated before the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 was passed," referring to the drastic cuts in credit limits, over limit fees, late charges and drastic sudden interest rate increases.

Why don't we know how many Americans may be "financial insurgents" giving up plastic to deny money to the banking industry?   The data needed to do such an analysis is not public. The credit card and reporting companies have probably done the math of the backlash, but why tell Americans that voting with their feet is succeeding at the industry's expense?  

Adding to the growing public discontent is the continuing victory of the banks to be profitable while withholding credit.   Yes, banks paying back their TARP bailout loans with interest make big news.   But most Americans would rather have more robust employment.   The fact that the banks have constrained lending is acknowledged as a contributing factor to the continuing high unemployment and de facto recession on Main Street.

Does the public rightly see credit as no longer a banking service but as a political sledgehammer being applied to the underpaid workers of America?

Some Americans are acutely aware of this change.   With the widespread curtailment of business loans and lines of credit, micro business* owners have been forced to finance their enterprises with credit cards at an average interest rate of over 14%.  

Back to Mr. Banga, who so recently declared "war on cash."   According to the New York Times, "Who Needs Cash (or Borders)? by Vikas Bajaj and Andrew Martin, October 16, 2010, from 2000 to 2002, Mr. Banga ran CitiFinancial and it was, "his task to clean up the unit, which became part of Citigroup in an acquisition."

The Times story isn't clear about timeline but it's important.   Banga joined Citicorp in 1996.   Citicorp then merged with Travelers Group in 1998 to form the first financial power house in defiance of the Glass-Steagall Act of 1933.   With that merger came the acquisition of the CitiFinancial sub-prime loan business.

An FTC investigation resulted in a Citigroup settlement for $215 million for predatory lending practices during Mr. Banga's tenure at CitiFinancial.   Then Banga was put in charge of Citigroup's North American retail banking including mortgages, student loans and car loans.   He denies having anything to do with Citigroup's problems with sub-prime financial derivatives, which precipitated the corporation's demise in 2008/9, saved only by the government bailout.

Until Banga's arrival, MasterCard was, according to industry analysts, a staid company and a reliable cash cow owned by a consortium of American banks.    Banga's style is $90 tasting menus, $70 - $300 bottles of wine and an executive directive giving approval to all department requests not acted upon by MasterCard headquarters within two weeks.   Well, that sort of oversight should give all of upper management plausible deniability.  

How familiar does this sound?   What could possibly go wrong?  

Mr. Banga has said, "Cash is expensive. Cash is inefficient."   This is a pitch to governments, like our own, more than anyone else.   To people the cost of cash has already been expensed.   The fees and charges of electronic payments are additional.  

Statistically, cash is safer than any plastic, including debit cards, when identity theft is included.   You're more likely to get caught waiting behind someone paying with a check or having a plastic payment problem than some one paying with cash.   Plastic is convenient in that you don't have to carry cash but at a high price and that price is nearly impossible for users to determine.   One estimate calculated that credit card merchant fees cost an average family $600 a year in costs passed along in the price of the goods and services purchased.

When asked her assessment of the recent credit card reform, Gerri Detweiler said, "While it helped to stop abusive practices going forward, for some it didn't go far enough. It did nothing to help those with interest rates approaching 30%.

Under the new Banga leadership MasterCard's stock has more than doubled in value.  

Only 15% of purchases made worldwide are done with plastic or some other form of electronic payment system that Mr. Banga hopes to make ubiquitous.   His reasoning is simple: about 3.5% revenue on each transaction, plus fees, plus usury interest rates.   But the ads make it look so glamorous, easy and, oh, those rewards!


Big Banga Trio: Banga, Bernanke & Geithner by Chaz Valenza

Why have so many Americans abandoned plastic?   We don't really know.   We also don't know how many people are using cash more often and plastic less, which is just as good a way to deny money to a financial system badly in need of real reform.

If people are starting to look more critically at their financial services purchases, the well heeled still too-big-to-fail corporations have the WMD option.   Don't choose to use our services?   We'll just make that illegal.

Hence the next financial battleground: national ID numbers to make it easier to have a mandatory cashless society.   From Current News India:

"Mumbai - October 18, 2010:  A day after the Indian government started a campaign to give identification numbers to all its 1.2 billion citizens, Ajay Banga, the newly minted chief executive of MasterCard, arrived in town, eager to lend a hand.

"The program will identify people based on fingerprints and retina scans, and could make it easier for the government to route food stamps and other payments to people below the poverty line.

"Mr. Banga says he believes he has a simple way to process the payments: via the MasterCard network."

Are you afraid now?

*"Micro business" is defined as a closely held business with sales revenues under $1 million, which typically would net owners well under $200,000 per year in taxable wages and/or profits, i.e. mom and pop enterprise.   Unfortunately, the term "small business" has been co-opted as a cover for much larger business interests and extremely wealthy individuals that have incorporated, so it is no longer specific enough to be descriptive.



Submitters Bio:

Chaz Valenza is writer and small business owner in New Jersey. He earned his MBA from New York University's Stern School of Business. His current feature film project is "Single Point Failure" an insider's account of how the Reagan Administration caused the greatest tragedy of the space age based on Richard C. Cook's book "Challenger Revealed." He is a former Director of Public Information for Planned Parenthood of NYC. His website is: www.WordsWillNever.com

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