Lydian Payments Journal - PYMNTS.com

December 2008. However the majority of these changes have not yet taken effect. In addition, the behavior
of companies prior to implementation of these rules lends insight into issuer behavior and market
structure in general. As previously noted, even if specific practices change because Congress and the
Federal Reserve have determined that many issuer pricing policies are unfair and deceptive, the strategic
philosophy and corporate culture at firms in this market climate may be less easily altered.
Signals No Longer Are Strongly Correlated to Their Underlying Intended Purpose
The most obvious credit card price signal is the low introductory “teaser” rate. Often this price will be
displayed very prominently in large font on the first page of the card offer, as well as several other places,
and sometimes even on the envelope. Sometimes “no annual fee” will also be used as a prominent price
signal.
Both of these prove to be poor signals for overall product price. The presence of a low teaser rate is not a
useful indicator of an overall low cost of credit. In fact, in 2009 there was no significant correlation between
the teaser APR and the regular purchase APR in credit card solicitations. 8 Likewise, “no annual fee” says
little to nothing about the size of other fees or total price paid.
As one should expect in a peacock market, these signals are also distorted towards known biases. There is
an emphasis on short‐term teasers that takes advantage of excessive discounting of future costs and an
overly optimistic view of how much the consumer might borrow in the future. The annual fee, which
consumers cannot avoid, is typically avoided in recent product offerings, while back‐end contingent fees
and APR changes that consumers underestimate in likelihood of occurrence are prevalent. Credit card
terms also take advantage of cognitive limits and limited attention by adding many dimensions to price that
are mathematically complicated (such as payment allocation methods) or simply go unnoticed.
Increasing Disparity Over Time between the Signaled Information and the Underlying Factor
It Is Intended to Represent
8 Results are based on analysis of Mintel Comperemedia credit card solicitations through July 2009. Mintel
Comperemedia is a searchable competitive database tracking direct mail and print advertising in the United States
and Canada, as well as e‐mail in the U.S. Mintel Comperemedia tracks information to analyze eight vertical markets:
Banking, Credit Card, Investments, Insurance, Mortgage and Loan, Telecom, Travel and Leisure, and Automotive. The
regression coefficient between the two variables was slightly negative, suggesting if anything an inverse relationship.
However, the relationship was not statistically significant. It should be noted that the purchase rate is merely another
signal of cost rather than the true cost of credit, which may vary considerably from the purchase rate due to default
APRs, fees, and different APRs for other balances.
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