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Bailout

: Macroprudential

When credit cards go social

By Felix Salmon

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There’s a new credit card out there, called Barclaycard Ring, which manages the rare feat of being a good, solid financial product even as it’s also incredibly gimmicky. It’s being branded as “the first ever crowdsourced credit card” — a financial product “built on a community” which, by the looks of the stock photography on the website, is full of incredibly happy, healthy, outdoorsy types who live only in bright sunshine. You don’t just apply for this thing, you “join the conversation”.

Which is not to say you shouldn’t apply. This card has an 8% APR, and no penalty APR. You miss a payment? You default on some other credit card debt? Your APR stays at 8%. For “revolvers” — people carrying a balance — this has got to be one of the cheapest credit cards out there, and certainly one of the least dangerous. The fee schedule is the one place where you don’t find gimmicks: no 0% APR balance transfers (with 3% up-front fee hidden in the small print), no hugely complicated reward program you’re never going to use, no annual membership fee which you have to mentally amortize against the perceived value of all those hypothetical rewards.

I hope and trust that the idea of a card without a penalty APR will catch on. Under new regulations, credit-card companies aren’t allowed to apply a new penalty APR to the entire balance being revolved any more; they have to apply it just to new purchases — and they have to pay that high-rate balance down first. As a result, penalty APRs aren’t nearly as profitable as they used to be. And when you do introduce a card with no penalty APR, it becomes incredibly easy to make apples-to-apples comparisons between cards: you should just go for the one with the lower rate.

Barclaycard is also promising to publish its own P&L statement for the card, showing how much money it’s making from interest payments, from late fees, and from interchange fees. That’s going to be interesting, when it starts being published in the next few months. It says that any profit over and above its own reasonable hurdle-rate expectations will then be rebated back into the “community” somehow, although the exact mechanism here is unclear. The general idea seems to be that if the cardmembers want something like onshore card servicing, then they’ll be given the choice to essentially pay for it, out of the excess profits that the card is rebating back to them.

At the same time, watching a big bank try to be all cool and down with the social kids can be rather like watching your father try to rap. The Twitter feed is embarrassing enough, but the sponsored posts are much worse. For instance: companies who ?get? social media are “are the ones that are leading the fold and have good futures ahead of them”, says BrainFoggles, who seems to have been paid to write that by something called Dweeb Media, which specializes in “creating conversational blog post campaigns”.

And when I spoke to Barclaycard’s Paul Wilmore, I was far from convinced when he tried to sell me on the idea that if people with a Barclaycard Ring feel as though they’re part of a community, they’re going to be less likely to default on that card. That might be true with credit-union credit cards, where people really are part of a pre-existing community. But I doubt that the group of people with this Mastercard rather than that one will ever cohere into something real enough to change collective behavior by 200-300bp, as Wilmore is hoping.

For the representative of an exercise in radical transparency, Wilmore was also surprisingly reticent on some pretty basic issues. For instance, what’s Barclaycard’s profit margin going to be on this card? That number is going to be public, but he wouldn’t even give me a hint. Or, why do you need to become a cardmember before being able to read either the official cardmember agreement or the shorter summary agreement? Why aren’t those documents freely available on the card’s website, for people to read before they apply for the card?

Wilmore did tell me, quite proudly, that Barclaycard has filed no fewer than 14 patents around this card, which scared me a little: I’m not a fan of the idea that financial innovations can or should be patented. Insofar as there are good ideas here, I want to see them broadly adopted, but if anything these patents seem designed to discourage anybody else from trying out interesting products in this space.

In a sense, then, I wish that Barclaycard had just released a simple no-annual-fee, no-rewards, no-penalty-APR card and left it at that. I fear that the gimmicky social side of Barclaycard Ring is going to overshadow the fact that underneath its trendy exterior it’s actually a perfectly good product. Even if, as someone in financial media, I will admit to looking forward to those P&L statements.

Full post as published by Macroprudential on April 24, 2012 (boomark / email).

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