Two Harvard doctoral students in economics compared how credit unions and banks operated their credit card divisions, and concluded that the recent CARD act “is likely to bring about moderate, and even positive, changes,” as banks begin to emulate parts of the fairer business model of credit unions. Specifically, they say, all the doom and gloom from the banking industry about how consumers will get shafted by the new rules is mostly fearmongering.
We found that credit unions are less likely to charge the fees and penalties that the new act hopes to eliminate – and when they do, they charge less than other issuers.
While virtually all banks and other for-profit issuers increase the interest rate if the borrower fails to make a minimum payment on time, most credit unions do not. Similarly, credit union fees for exceeding the credit limit are on average just half those of other issuers. But contrary to industry assertions, more responsible card users don’t pay the price. Credit union cards actually offer lower annual fees and longer grace periods than regular cards.
The question is, can credit unions and banks use the same model? “Absolutely,” they write:
Banks and credit unions compete for customers in the same market. The primary distinguishing characteristic of credit unions is that they answer to a different group of owners: profits that are not reinvested are paid to the union’s shareholder-customers as a dividend, much as investor-owned banks reinvest or pay dividends to their shareholder-investors.
There’s one area that will be affected, however: reward programs. But as the authors point out, reward programs are subsidized by lower-tier customers who are poor and/or carry high debt loads, so getting rid of that sort of model may be part of the cost of creating a fairer system overall.