In what appears to be continuing series in credit card malfeasance, I would like to preface by saying that it applies to one issuing bank/card marketing company and not necessarily to all such entities. However; card marketing companies are like lemmings — where one goes, they all follow, so I wouldn’t be surprised that what I describe here could be happening elsewhere.

The story starts in the typical manner: an offer letter shows up in your mailbox for a credit card. It may have a low teaser rate or may be an affinity card with your favorite sports symbol on it (“The Chief”). You decide that you will send it in. It says your rate may be “as low as” 3%. “As low as” means that if you pay all your bills in gold boullion, pay them before they are due, and add on every enhancement offered, you get the 3%, otherwise you pay the 24% like everyone else. What happens is that to generate a marketing list, card marketers go out to the credit bureaus with a set of criteria (say FICOs between 650 and 680) and get a list of names and addresses—the “pre-pull”. They make the offer and for those who return the business reply envelope, they do a post-pull and then give you the rate that the credit risk model says you deserve, taking into account allowances for things like the current interest rate margin (profit).

Now typically, (here is the cross-sell again), these offers for a credit card come packaged with a lot of enhancements like a) lost and stolen card protection, b) travel rewards, c) extended warranties, or d) discounts. These may be via opt-in/out boxes or actually packaged together. So when the application is sent in, you may be signing up for “enhancement products” on the card if you don’t read VERY carefully.

A recent trend I’ve noticed is for credit cards to be offered at a checkout counter. Now this is actually a good marketing strategy — using your existing relationships with a customer. This shift is occurring as marketing professionals scour for new ways to reach you. Five years ago, the direct mail response rate was 1.3%. The last time I looked it was .04%. Since it costs postage, printing, processing charges, etc. to send an offer, the CPA or cost per booked account is is getting larger and larger. If you are at a checkout counter at a store and the clerk says something like “Do you know you can get a 10% discount if you use The “Store Branded” Master Card —would you like one?” — well, that is pretty enticing.

So you apply for the credit card. This usually takes the form of a “take-one” application in industry parlance. In the particular case in mind, you fill out the application form, including your SSN, and hand it to the checkout or customer service person who enters the data into “The Program”. The application sails away to the issuing bank, who owns The Program, and they run the post-pull and model and presto, you have a credit card, often within minutes. The stores even have a card-not-present payment option to allow you to use it right away. The CPA for this type of offer is much lower than shotgunning direct mail out to the general population, which happens to own an average of five credit cards anyway. And even with the 10% discount giveaway added, the CPA is less than traditional direct mail marketing methods.

What about those enhancement products? On the form I obtained, in order to sign-up for an enhancement, you have to either sign a blank that says you want the product, or sign that you decline the product. This set of required signatures is, however, on another panel of the application tri-fold. I asked what happens if you ignore the blanks and turn in the application without signing either accept or decline? “The Program” won’t accept the application without one or another. [Note the positive reinforcement of the cross-sell opportunity rather than default to a no-sell.]

This, I presume, is meant to be a closed loop control but the customer service people are always busy and are under pressure to complete the application processing as quickly as possible. I asked if they ever just checked a box to get on with it —“No, That would be cheating” was the response. A particular person, of whom I have previously referred to in conjunction with credit cards, applied for a card in this manner, not signing up for the enhancement. She left both signature spaces blank. Strangely, the application, which was returned to her after the data entry procedure, had some handwriting which differed from hers. An accident?

I asked the checkout clerk, a young guy, if they received incentives for pushing credit cards. Yes they did. I asked whether they got cash incentives or the manager-will-beat-you less type. [My daughter , working in a department store as a clerk, was continually subjected to harassment for not meeting her ‘quota’ of store cards. She quit.] He laughed and said more like the second rather than the first.

At this point let me state that this is completely legal. The best marketing builds on existing relationships. The only caveat is that perhaps it’s not that good of an idea to have customer service clerks enter data under pressure and under incentives to meet application quotas. And further; it’s not a good idea to take applications and transfer data to their terminal where the customer really can’t view what is being requested in their name. Card processors do this by optical character recognition at high rates (and with low error rates) and leave out the human component. I also wonder where that application goes, the one with your personal data and SSN on it, after the data is entered into The Program.

That is how instant credit can work. Here is how typical direct mail applications work. The application arrives at card processing entity where the application is scanned, post-pulls are done, analysis run and card is priced (interest rate set). Plastic is generated and shipped to customer with sticky label that says “To activate card, call number 800-613-4395″. So far so good. Now the scam……

Let’s suppose that the customer, in an attack of buyer remorse, upon receiving his plastic decides that he doesn’t need another card, so he just cuts up the card. That is to say, the card is never activated.

20 days later he get a statement with a $29.00 or some such charge against his card. It might be for an extended warranty plan or a card protection plan, but the customer knows that he cut up and never activated the card. He disregards the statement. (Most likely he never opens it because he knows he doesn’t have that card.) After 30 days, the card gets hit with interest (e.g. 24%) plus $29 late fee. Balance is now $58.58. Second month passes — another interest and late fee. Balance is now $88.75. Account is deliquent 60 days, letter is sent. “Why is is this bank bothering me” — into the garbage. Another month, another late fee. Balance now $119.53, and so forth until you get a phone call. “I don’t owe you anything”. Suppose the card holder was sub-prime and they were given a credit line of $500. After a while, the accumulated balance exceeds the credit limit and they get both a late fee and an over-limit fee.

In the particular case I am speaking of, customers had run up balances of $1500 or more having never activated their card. Not to mention royally screwing their credit histories at the bureaus.

A regular merchant could never post a settlement against an unactivated card as this is a principle barrier against merchant fraud. But the issuing bank, who usually also runs either an enhancement business unit, or contracts for one, OWNS the cardholder masterfile. By masking out the activation character position in the master file by means of a COBOL program,they can run the enhancement sales orders against the master file and ‘force post’ the enhancement product sale. The pretense is that this is valid and legal because the customer indicated a desire to purchase the enhancement, even though the product is an enhancement against a non-active account.

Pretty good. Enhancement products can generate the highest profit margins at the bank, and drop right to the bottom line. Now if they could only convince the FTC and the lawyers litigating aginst them in class action suits.