Disaster #8 -The Punitive Temptation
Part 8 in a series: Disastrous Debt Interactions
Did “fuzzy dice” ever signify bad credit risk? Probably not but…
When debit cards came out, it became possible for the first time to rack up over $100 in overdraft fees by making just $4 or $5 in purchases against a momentarily overdrawn account. It happened to me once, and when I appealed to the bank manager that this was unfair, she replied in a scolding tone of voice:
“Perhaps, but you need to understand these fees are there as a deterrent to bad behavior.”
Of course, they’re really there to generate revenue — $17 billion a year, or 9% of pretax revenue for the top 25 regional banks, according to a new report from the Oliver Wyman consultancy.
But the bank manager’s “bad behavior” remark was telling. It’s part of a temptation throughout society to be judgmental and punitive in our business, institutional and community life. Consider, for example:
Our high incarceration rates and lengthy jail terms compared with other countries
Zero tolerance school policies that dole out suspensions and label kids as troublemakers
Bosses harassing workers, and workers maliciously reporting bosses to HR or the union
The tendency for anyone and everyone to sue, even over the smallest injury.
All of these represent an “us vs. them” polarization of society in which we judge others to be more irresponsible or reprobate based on their job, socioeconomic class, identity group, generation, national region or political faction.
Why is a punitive mindset bad in the world of banking and lending?
It hurts people and families. Consider the long-term consequences of suing, foreclosure and ruined credit ratings. Not just for the individual household, but the entire economy when millions more Americans fail to qualify for credit. Isn’t there a less harmful way to solve the problem?
It’s often counter-productive. After the costs of legal or other punitive actions, you’ll likely end up recovering less than if you proactively engaged the debtor in a mutually agreeable workout plan.
It demonstrates a lack of empathy. Even if you had to give up a few basis points of margin, wouldn’t it be worth it to be known as the banker with a heart, vs. the heartless one?
It justifies regressive business models. Remember that $17 billion in overdraft fees? 80% comes from just 10% of account holders who are “frequent overdrafters” – generally low-income consumers. Much fairer to earn that $17 billion by a fee structure spread across 100% of customers.
Payday loans, prepaid debit cards and check cashing stores also saddle the poor with high fees, and their marketers justify it by saying, essentially, “These people are high risk and if we weren’t there to serve them they’d be worse off.” I’m not convinced.
Punitive policies often go hand in hand with bias.
I’ve heard bankers mention a “back in the day” anecdote that they were taught not to lend to customers with “fuzzy dice” hanging from the car rearview mirror. It supposedly signified risky behavior. The story’s likely to be apocryphal but judging people by appearances is real. White bread types saw those fuzzy dice as “ghetto” or “guido.” (And not all bias is anti-minority. I do not recommend going in and applying for a loan at a blue-state bank wearing a “MAGA” hat, for example.)
Finally, there are correlations based on real statistics, not stereotypes, that still unfairly discriminate. 47 states allow the use of credit scores to approve and price car insurance applicants, since there’s a correlation between credit and accident risk. The unfairness: one can be the world’s safest driver and still have bad credit due to plain bad luck: an illness, job loss or divorce.
Back to banking: I remember sitting in on a big bank analytics meeting and learning that credit card charges at certain types of establishments signaled a high-risk borrower, e.g. bars that don’t serve food, bodegas and dollar stores. I don’t know if these criteria were ever used to screen applicants, but if so, it was the retail version of redlining, and morally reprehensible.
In other words, even if a community as a whole is higher risk, it’s unfair to tar each and every member of that community with risky behavior. In a kinder and fairer world, we need to judge people by their actual behavior, not by proxies.
And, even when people do make bad decisions, let’s help them right themselves, rather than succumbing to the temptation to be punitive.