Tuesday, October 27, 2009

Credit Card Fees and Rates: Follow-Up

Yesterday, about the time that I was posting about the "evil" things that credit card companies are still doing, Sen. Christopher J. Dodd (D-CT, and chairman of the Senate Banking Company) proposed a new bill that will "immediately freeze credit card interest rates on existing balances." (click here for Dodd's press release)

The senator said, "..[No] sooner had it [the Credit CARD Act of 2009] been signed into law, but credit card companies were looking for ways to get around the protections this Congress and the American people demanded."

Meanwhile, over at the Financial Service Roundtable, as reported today by Andrew Martin in the New York Times, banking companies continue to assure us that they're not raising fees because of the new legislation, but "because of risks posed by the unsteady economy and by card holders themselves, who are defaulting on their payments or paying late more often."

Good idea, that, blaming the banks' customers, don't you think?

Monday, October 26, 2009

Don't Be Evil: The Memo the Credit Card Companies Haven't Gotten

At least not yet.

Today's CNNMoney.com carries a nice roundup of the problems facing credit-card consumers, under the title "5 evil things credit card companies can (still) do". The top five:

  1. Rate hikes (APRs now run as high as 36%, according to the Center for Responsible Lending (CRL) which sounds more like loan-sharking than banking to me);
  2. New fees (since current legislation addresses only existing fees and practices);
  3. Higher minimum monthly payments (in some cases, a sudden jump from 2% of the monthly balance to 5%);
  4. Fewer rewards (some cash-back cards have gone from 2-3% to 1%); and
  5. Slashed credit limits and canceled accounts (without so much as a call from the bank).
If you thought that the Credit CARD (Card Accountability, Responsibility, and Disclosure) Act of 2009, signed in May, and taking effect, in parts, from August of this year to February 2010 for most of the terms of the act, you were -- like me -- sadly mistaken.

The act was intended to ban unfair rate increases, prevent unfair fee traps, require plain sight / plain language disclosure of terms, provide a new level of accountability, and offer special protections for students and young people. (Click here for the White House press release at the time of the bill's signing) Sounds great, doesn't it?

But banks are taking advantage of this interim period to, for example, raise rates while they still can.

What's a consumer to do? Well, the easy answer is to stop using credit cards entirely (or at least to pay off the total amount owed every month).

Unfortunately, that's not an option for everyone (CRL research shows that a majority of low- and middle-income families depend on credit cards to pay for basic living expenses).

At least you can shop around for cards, and not to remain wedded to one simply because "I've had it for years." That takes time, of course -- something else a lot of us don't have -- but is better than nothing. Note, however, that abruptly canceling a card can negatively affect your credit score....

Banks, of course, will argue that these additional fees are necessary to protect themselves from fraud and non-payment (but -- who started handing out cards to every person with a pulse, not to mention the occasional family dog?). They have responsibilities to shareholders, they note.

But while these moves may add to the banks' bottom lines, the real bottom line is that they only increase the resentment that consumers feel towards the banks. If they think that the only thing that matters is this quarter's returns, then nothing I say or that we as consumers do will make a difference.

But if they believe that the long run matters, then they themselves should be pushing for greater transparency and accountability throughout the industry. Smart banks will get out in front of this parade.

Friday, October 23, 2009

It's a Fine Line Between Love and Hate....

... and between lots of other things too.

Earlier this week, the billionaire head of the Galleon Group, a hedge fund, was arrested and charged with conspiracy and securities fraud, having profited, as the New York Times put it, "not from his trading genius but from his Rolodex" (click here for the initial story, here and here for selected follow-up pieces).

Information is life-blood of smart investing, and most of it is of course obtained legally. But inside information is, by definition, non-public and material to an investor -- whether or not the information ends up making that investor money (although, of course, it usually does, or it wouldn't be "material").

The problem is that the line between aggressive research and insider trading is often a fine one. In a Times DealBook blog, Leslie R. Caldwell, the co-chief of the white-collar crime division at the law firm Morgan, Lewis & Bockius, says that insider trading can be difficult to prove: "The line between buying legitimate research, trading rumors and gossip, and illegally paying for market-moving information can be complicated." (Click here for the complete DealBook post)

So ... we should just throw up our hands and walk away? No.

But this case got me thinking about fine lines and ethical decision-making. Ethical problems are at their thorniest when the choices are less than clear: not between an obvious good and an obvious evil, but between two apparent goods, or two apparent evils. How can we determine the "righter" thing to do?

There are two key questions to ask: one "pre" and one "post".

The "post" question is, What will be the consequences of my choices? You can never be sure of all the possible consequences of a decision (that's why we have that phrase, "unintended consequences"!), but it's worth taking the time to explore as many potential ramifications as possible: the probable and the improbable, the preferable and the less preferable.

Unless, of course, you are a Kantian, and live by "categorical imperatives" -- if one of your categorical imperatives, for example, is "Always tell the truth", then the potential consequences of telling the truth in any particular situation aren't relevant. The proper course of action is to tell the truth.

For the categorical types, the "pre" question is more important: What's my motivation for making this choice? There's no honor in doing the right thing if doing the right thing is what you want to do anyway; there's only honor in it if your inclination is not to do it, but your sense of duty or honor or will compels you.

The problem with both of these approaches, while important, is that we humans are so good at rationalizing: we concentrate on those consequences that are preferable (whether or not they are probable), and we concentrate on those motivations that show us off in the best light.

But that still doesn't mean that you have a free pass to do whatever you like....

Wednesday, October 21, 2009

When Is a "Smart Choice" Really Smart?

According to the Smart Choices program website, to qualify for the "Smart Choice" checkmark, "a product must meet a comprehensive set of nutrition criteria based on the Dietary Guidelines for Americans and other sources of nutrition science and authoritative dietary guidance."

The Smart Choices nutrition labeling campaign was "created by a diverse group of scientists, academicians, health and research organizations, food and beverage manufacturers and retailers. The group worked collaboratively to develop the program's foundation, goals and criteria" and was launched with some fanfare earlier this summer.

Different criteria were established for the 19 different product groups (beverages, soups, dairy products, snacks, etc.). Sounds good doesn't it? Just what consumers need in the grocery aisles: a helping hand to steer them toward "smart" buying and eating habits.

But back in early September, the New York Times reported that high-sugar-content cereals like Froot Loops (41% sugar, by volume) had earned the "Smart Choice" check. How could Froot Loops be a "smart" choice, you ask? Well, according to the nutritionist who heads the program board, it's because it's a smarter choice than doughnuts. Moreover, asserted a Kellogg's senior nutrition executive, "Froot Loops is an excellent source of many essential vitamins and minerals and it is also a good source of fiber..." (Click here for the earlier story.)

Today, William Neuman reported in the Times that the Food and Drug Administration would, early next year, "issue proposed standards that companies must follow in creating nutrition labels that go on the front of food packaging.... [which] could force manufacturers to deliver the bad news with the good, putting an end to a common practice in which manufacturers boast on package fronts about some components, such as vitamins or fiber, while ignoring less appealing ingredients, like added sugar or unhealthy fats."

Dr. Margaret Hamburg, the FDA commissioner, is quoted as "repeatedly" mentioning a British package labeling program "that uses red, yellow or green dots -- like traffic signals -- to indicate the relative amounts of important ingredients" (like saturated fat, salt, or added sugar). This, she said, "could provide a model for the FDA."

What I found particularly interesting, and particularly depressing, about this unfolding story is that Smart Choices itself lists the following principles for developing its goals and criteria: Transparency, Coalition-based, Comprehensive, Applied Voluntarily, and Flexible.

What on earth is "transparent" about presenting a sugary breakfast cereal as a "smart choice"?

Sunday, October 18, 2009

Causes ... and Effects

Cause-related marketing is increasingly popular, both with corporations and with consumers.

For consumers, it's a way to wear their values on their sleeves (perhaps even with a t-shirt!); not surprisingly, most of us like the idea of spending our money with companies that do good. For corporations, it's a way to present a more human face, and to move product, often at a higher profit margin, as reported in Kris Frieswick's article in the Boston Globe Sunday magazine early this month.

There is nothing ethically wrong with higher profit margins per se. There is, however, something ethically wrong with misleading your customers.

I suspect that most consumers buying pink-ribbon-bedecked products this month assume that some portion of the purchase price will be contributed to the Susan G. Komen Foundation for breast cancer research.

Sadly, this is not always the case.

As reported by Kerry Gold at The Atlantic online, and by Aimee Picchi at Daily Finance, a pink package may mean very little. Picchi reports (and Gold quotes) that a "pink Swiffer sweeper, made by consumer-products giant Procter & Gamble, ...sports a pink ribbon accompanied by the phrase 'early detection saves lives.' So how does purchasing a pink Swiffer help the cause? It's unclear from the label, because it contains no information about how its purchase will help breast-cancer causes. And, according to a Procter & Gamble spokeswoman, the company will only make a two-cent donation to the National Breast Cancer Foundation if a consumer uses a coupon from Procter & Gamble's brand saver coupon book, which was distributed in newspapers on Sept. 27. Without the coupon, the limited-edition pink packaging on the Swiffer is simply designed to draw awareness to the cause."

Having now read the fine print, do you get that warm fuzzy feeling? How do you feel about buying pink Swiffer products? How do you feel about P&G?

Such deceptive practices will eventually be revealed for what they are, and could have a hugely negative effect on brand perceptions.

But beyond the fine-print problem that can be found throughout cause-related marketing (I'm not singling out the pink-ribbon folks because they're particularly wrong-minded about this; I'm singling them out because we are awash in pink this month), there are problems that are specific to breast-cancer related marketing.

The Susan G. Komen Foundation has trademarked a pink ribbon symbol; in order to carry the official pink ribbon, a corporate partner must agree to adhere to the Better Business Bureau's Standards for Charity Accountability, among other requirements. A minimum contribution of 10 percent of the product or service is the "recommended donation." If partners cap their donations -- at, say, $500,000 in one year -- they are supposed to inform consumers that the cap has been reached. But research by Frieswick and others shows that Komen doesn't track partner behavior as closely as it should.

Moreover, there are any number of other breast-cancer foundations out there, and any number of other generic pink ribbons. Is anyone watching what they do? How much they give (or don't)?

Breast Cancer Action, an advocacy group, recommends that shoppers "think before you pink": Ask questions like, "How much money from this purchase actually goes to breast cancer research?" and "What is the company doing to assure that actually contributing to the breast cancer epidemic?" (BCA refers to these companies as "pinkwashers")

Moreover, as the number of pink products grows every year (pink packages for chicken sausages?!? pink mobile printers?!?), the connection between cause and supporter becomes more tenuous. I expect two results: first, increasing consumer cause-fatigue, and then, falling profits.

If you think breast-cancer research is a worthy cause, write a check yourself. Don't count on the corporations.

Wednesday, October 14, 2009

Blogging and Word of Mouth: Same or Different?

Different, of course.

A few days ago, I wrote about new FTC rules that will require "full-disclosure blogging", which I think is an excellent idea, and about time, too. Essentially, effective 1 December, bloggers who receive freebies from manufacturers will have to disclose that relationship.

The backlash from many bloggers was swift. As Jennifer Vilaga reported for Fast Company, "the takeaway has been this: Bloggers Must Disclose Every Single Freebie Sent to Them From Companies -- Or Pay an $11,000 Fine. Scary." (Italics are Vilaga's; full article is here.)

Vilaga went on to note, "Pundits quickly bashed the FTC as an old-economy regulator trying to legislate new-media technology. Few considered that the government may actually try to protect consumers from false advertising or bloggers on the take."

She quotes one blogger, Amy Sherman, who writes the food blog, Cooking with Amy: "I'm more concerned that this will cause confusion among people and whether they can think they are free to say what they want. How is a blog different from word of mouth?"

Dear Amy:

If I tell a neighbor that I love my fill-in-the-blank-brand gas range -- and I do -- that's word of mouth. I did the research, and I paid for the range myself. I did not receive it free of charge from fill-in-the-blank-brand-company in exchange for a nice write-up. And my neighbor know that. When you (or any other blogger) write about various products, it's only fair that you be just as transparent. If you love a Brand X product, tell me whether you received it free from the manufacturer, or whether you paid for it yourself. If you didn't pay for it, are you really free to say what you want?


Tuesday, October 13, 2009

Flipping Businesses Is Like Flipping Houses

Except that even more people get hurt.

The New York Times has carried a couple of stories in the past week that really brought this issue to my attention. A week ago, the paper ran an article by Julie Creswell on the flipping of Simmons Mattress Co., and then last Friday, there was an article by Geraldine Fabrikant on the venerable Maine boat-builder Hinckley Yachts.

Simmons will soon file for bankruptcy protection, while Hinckley may yet avoid that fate. But in both cases, there was nothing wrong with the underlying businesses, only with the debt that a series of private equity firms loaded onto them.

In the case of Simmons, Creswell reports that Thomas H. Lee Partners of Boston, which bought the venerable mattress maker in 2003, "has pocketed around $77 million in profit, even as the company's fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise."

Meanwhile, Simmons bondholders are expected to lose more than half a billion dollars, and more than one-quarter of the firm's workforce was laid off last year.

Hinckley, family-owned until 12 years ago, was hit hard by the deep recession that makes buyers less inclined to spend between $400,000 and $4 million for a yacht, but has been nearly crippled by its debt burden. This year, "for the first time since the mid-1990s, it will have a taxable loss of about $4 million." Most devastating to the small town of Southwest Harbor, Me., where Hinckleys have been built since the firm's founding in 1928, it has halved its work force from 625 in mid-2008 to 305.

At the height of the real-estate boom, there were many article decrying the greed of homeowners who flipped houses right and left for the quick cash. Flipping businesses risks devastating whole communities. It's not simply greed -- although that's certainly part of it -- but the economics schools that held that the only score that mattered in evaluating a deal was whether it enhanced shareholder value, and by how much.

Shareholder value is important, but American capitalism is at more risk from such blinkered thinking on the right as it is from any socialist political thought. A company is more than simply its balance sheet, especially in small communities like Mableton, Georgia (where Simmons had one of its factories) and Southwest Harbor, Maine.

Saturday, October 10, 2009

The Bankers Don't Get It ...

... but as long as they continue to run things, do they care?

Probably not.

Today's news brings two columns worth reading side-by-side. Over at the New York Times, Joe Nocera asks whether "banks have no shame"; his answer, sadly, is no. Meanwhile, at Salon, Glenn Greenwald refers to bankers as, de facto, "the government's owners."

Nocera is rightly offended that the banks, which were rescued by the government under terms that were "extremely favorable" to them, are objecting to plans for a new consumer financial protection agency. He's upset at the banks for apparently not appreciating what they've received, and he's upset at Congress for not being tougher on the banks. And Nocera's saddened that Barney Frank (D-Mass.) "abandoned the so-called reasonableness standard, which would have forced bankers to make sure their customers both understood the products they were buying and could afford them. Mr. Frank has said that such a provision would put bankers in an 'untenable position.' Yet that is precisely what brokers are required to do when they sell a stock or a bond to their customers. Why shouldn’t the same standard apply to a banker making a mortgage loan?" (The reason, of course, is that Rep. Frank needs the votes of conservative Democrats.)

Greenwald complains that the banks have become the government's owners. He -- like Nocera -- quotes Simon Johnson, a former chief economist of the International Monetary Fund, whose May 2009 article in The Atlantic refers to a "quiet coup" by bankers. Johnson claimed that the U.S. was well on its way to becoming a "banana republic" and argued,

"Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a 'buck stops somewhere else' sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for 'safety and soundness' were fast asleep at the wheel.

"But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector."

Greenwald agrees, and notes that Sen. Dick Durbin (D-Ill.) has said that the banks "are still the most powerful lobby on Capitol Hill. And they frankly own the place."

It's been a long time since I was so naive as to think that American citizens owned the government, but that banks, despite nearly trashing the economy, could still hold onto the reins of government, is deeply shocking.

Friday, October 9, 2009

First, I Laughed....

... and then I got mad.

This morning, my husband got a phone call from the National Rifle Association. Since we're both registered Democrats who voted for (and contributed small amounts to the campaign of) President Barack Obama, and card-carrying members of the American Civil Liberties Association, your first thought might be, "Gee, the NRA doesn't do as good a job of list-cleaning as I'd have thought."

Which was, honestly, my first thought too. Which is why I laughed.

The call turned out to be a "poll". But first, the woman from the NRA told my husband, he should listen to a message from Wayne LaPierre, the executive vice president of the association. The message, my husband reports (sorry, I know this would be considered "hearsay evidence" and therefore inadmissible in a court of law), was that the United Nations is secretly developing a plan to ban guns worldwide, and will be coercing the United States to approve it too, unless, of course, patriotic Americans take steps now.

Then came the poll: Yes or No, Is it right for Third World dictators and Hillary Clinton to determine what rights Americans have?

I had to laugh again. If only the United Nations had such power!

But then I got mad again.

In a previous life, I worked in marketing research -- for a car company, for several advertising agencies, and for a couple of consultancies and marketing research suppliers. Overwhelmingly, the people in the business are deeply concerned with real research: with understanding the wants and needs of consumers and how marketers can better serve them. All of us were endlessly frustrated by what we called "sugging" (Sales Under the Guise of research) and "frugging" (Fund Raising Under the Guise of research). Both gave marketing research a bad name, and made it harder for us to do our job properly, as consumers became increasingly suspicious of any phone calls that began with "Hi, I'm calling from XYZ Research and I'd just like to ask you three quick questions."

But "push polls" like this one from the NRA are even worse. The NRA presents itself as "America's oldest civil rights organization", whose mission is "to preserve and defend the U. S. Constitution, especially the inalienable right to keep and bear arms guaranteed by the Second Amendment." Its webpages are filled with information for members, candidate ratings and endorsement, and news. Will the results from this "poll" be presented as "news"?

Growing up, as I did, in rural New England, I knew plenty of hunters. Many of them were NRA members, and some of them were right-wing in their politics (I'm old enough that most were members of the now-nearly defunct breed of New England Republicans: fiscally conservative but socially liberal). They would all have been appalled by this sort of fakery.

Push polls don't just have a negative effect on the whole research and polling industry; they have a similar effect, in the end, on the sponsoring organization. Remember that old saw: You can fool all the people some of the time, some of the people all of the time....? While a sermon based on lies can go over just fine with the choir, the congregation eventually gets uncomfortable. And finds a new church.

In the old days -- assuming you cleaned your lists properly! -- you might be able to get away with this. These days, you have to assume that someone who doesn't belong to the choir will hear the sermon ... and will be happy to publicize your, um, exaggerations.

Tuesday, October 6, 2009

Full-Disclosure Blogging

According to news reports out today (click here for New York Times report by Tim Arango; click here for Wall St Journal preview), the Federal Trade Commission will require -- effective 1 December -- that bloggers who review products must disclose the relationship with the products' manufacturers, as in, Did they get the product free?

The Times article references one blogger, Christine Young, of Lincoln CA, who writes the "From Dates to Diapers" blog. Soon after she began, "[the] free products soon started arriving, and now hardly a day goes by without a package from Federal Express or DHL arriving at her door, she said. Mostly they are children’s products, like Nintendo Wii games, but sometimes not. She said she recently received a free pair of women’s shoes from Timberland. Ms. Young said she had always disclosed whether or not she received a free product when writing her reviews. But companies have nothing to lose when sending off goodies: if she doesn’t like a product, she simply won’t write about it."

I have nothing against Ms. Young (I don't know her, and have never read her blog), but that's a long way from what I'd call "full-disclosure blogging", which is the only kind of product-review blogging there should be. I've written about this question before (click here to see the old post), and, to me, "full-disclosure" means just that. If I were to start reviewing products (not that I expect to), I would owe it to my readers to tell them whether I paid for it, received it as a gift from a friend, received it as a gift from the manufacturer, or whatever, because that how will undoubtedly affect my evaluation, no matter how much I try not to let it. This is why Consumer Reports magazine insists on buying the products it reviews off the shelf and why it doesn't accept paid advertising (I've been a Consumer Reports subscriber for many years; that is my only connection with the magazine).

If Ms. Young doesn't write about a product, how are her readers supposed to know whether she's not written about Product X because she hasn't tried it yet or because she didn't like it -- which are rather different critters, and it's more than disingenuous of her not to acknowledge that difference.

The new FTC rules will also apply to, for example, celebrities who Tweet about "favorite" products online. They too will have to disclose any corporate ties. 'Bout time, say I.

Monday, October 5, 2009

The Importance of Being Earnestly Sorry

The current issue of Business Week (12 Oct) carries a short piece in the "BTW" section (online here; second item) on "Why it pays to apologize".

The article is based on a paper by four researchers at the UK's Nottingham School of Economics (available online here), which finds that "apologizing yields much better outcomes for the firm than offering a monetary compensation."

The researchers worked with a large firm selling products on Germany's eBay site. When customers were dissatisfied with their transaction, posting an online comment to that effect, they randomly received one of three responses: an apology, a small amount of money (2.5 Euros), or a larger amount of money (5 Euros); all three groups were then asked to remove their negative online evaluation. None of the respondents were aware that they were participating in an economic experiment.

The result? More than twice as many customers who received an apology withdrew their negative comments compared to customers who received cash (45% vs 21%).

Business Week quotes Johannes Abeler, a Nottingham research fellow and one of the authors of the study, as noting that the emailed apologies were effective "even though they were brief and impersonal -- and asked for something in return."

This doesn't surprise me. I've had a lot of experience in customer satisfaction policy and research, both on the corporate and supplier sides. Here's an important example:

Years ago, I was working late putting together a presentation, when the phone started ringing in the customer relations department, whose offices were right next to mine. Eventually, more because the noise was distracting than anything else, I answered the phone. Relieved that she had finally reached someone, a woman poured out her story of how the product had failed, and what it would cost to repair, and yes it was out of warranty, but what was she supposed to do.

When she finally paused for breath, I said, "I am so sorry. What a terrible thing to happen!"

There was a brief, surprised, pause, and she said, "Thank you. All I really wanted was for someone to acknowledge that I had a real problem."

We worked something out for her -- I don't remember the details -- but her comment stayed with me. She was upset and angry, but she wasn't really looking for an immediate solution; she was looking for affirmation and an apology.