Rui Vieira/Press Association via AP Images
While the U.S. leans heavily toward a market economy, it still retains some vestiges of publicly provided goods and services. Virtually every community in America has libraries and public parks and at least some form of public transit. Some have their own broadband services, their own swimming pools, even their own supermarkets. And of course, there are the massive programs like the public school system, public health insurance options like Medicare and Medicaid, and Social Security.
Public options ensure that everyone in society has at least a baseline of support, particularly in areas like health care and education that we see as universal needs. They can also discipline private markets that have succumbed to corruption and greed. An insular market that devolves into monopoly and limits choice can be pried open not only by enforcement, but by a public option that offers something superior.
That’s one of the implications of an extraordinary new announcement from the Consumer Financial Protection Bureau. At first glance, CFPB is working to prevent a standard, scammy practice: how credit card companies pay comparison-shopping websites to move their cards up the rankings, even if they provide worse interest rates and terms. Dig deeper and you realize that this is a competition policy, forbidding the cheap tactics big banks use to limit discovery of alternative credit cards. And then you read the fine print, and realize CFPB is poised to deliver a remedy: its own public comparison-shopping website.
CFPB has been very focused on credit cards lately, and the cost of credit for consumers more broadly. Earlier this month, the agency reported that margins on credit card annual percentage rates (APRs) were at an all-time high. The margin refers to the difference between the average APR and the Federal Reserve’s prime lending rate. While the average APR was 12.9 percent in 2013, it’s 22.8 percent today, as compared to a prime rate that has only gone from 3.25 percent to 8.5 percent over the same period. This higher margin is responsible for an excess $25 billion in revenue for credit card firms.
Growth of APR margins compared with the Fed’s prime lending rate, 2013-2023
Source: Federal Reserve
In other words, while the Fed’s increase is part of the reason for the rise in credit card interest rates, banks are taking greater advantage of that than we’ve ever seen before, increasing their rates well above the federal funds rate.
This partially explains public discontent with the economy, as a recent paper co-authored by Larry Summers, of all people, demonstrates. In “The Cost of Money Is Part of the Cost of Living,” Summers and his colleagues note that consumer interest rate spikes don’t really show up in inflation indexes. Lower consumer sentiment is in fact very correlated with higher costs of borrowing, and if you recalculate inflation by including the cost of money, you better understand why people are mad about the economy.
One of the biggest sources of consumer borrowing, of course, is credit cards. And one of the ways banks get away with jacking up interest rates and margins is through throttling competition. A second CFPB report released in February points out that large banks routinely charge higher interest rates on credit cards than credit unions and smaller banks. The spread was roughly eight to ten percentage points, meaning that consumers with the same credit score and average balance pay $400 to $500 more in interest with a large bank. Nine of the largest issuers offered cards with APRs over 30 percent.
With that kind of discrepancy, you would think that bigger card issuers would lose market share to those who offer better terms. But that brings us to this week’s CFPB action against credit card comparison-shopping websites. Credit Karma, NerdWallet, LendingTree, Bankrate, and others all offer shopping tools that rate credit cards with different features. They are quite popular; industry research shows that around 20 percent of all credit card sign-ups are referred through these third-party websites.
What you have to dig to discover is that these sites are paid by the credit card companies to rate their products. CFPB’s research has shown that the order in which shopping website users see card offers is dictated by this spending. These are not really neutral, Consumer Reports–type sites, but advertising outposts, where how much a company pays dictates how high up their products are on the list, or whether they are listed as a “featured” option.
The companies with the marketing budgets to get in front of audiences are invariably the biggest ones, which as CFPB has shown charge the most for consumer credit. So you have big banks using their size to determine what consumers see when it comes to credit card options, undermining competitors’ ability to gain in the market.
If you think about who would be searching for this kind of product, it’s subprime borrowers with shaky credit who actually need to know how much keeping a balance on a credit card will cost them. They’re not necessarily clicking on the obscure advertising disclosures to know that they are looking at editorial “reviews” that are actually pay-to-play. So they are often unwittingly steered toward inferior and higher-cost credit cards.
CFPB has created an inflation-fighting and pro-competition tool, wrapped around a law enforcement policy.
CFPB’s guidance, known as “Circular 2024-01,” states that comparison-shopping sites that preference products based on financial compensation are breaking the law, specifically the Consumer Financial Protection Act’s prohibition against unfair, deceptive, or abusive acts and practices (UDAAP). These payments are seen as kickbacks that “distort the shopping experience,” the circular states, and take “unreasonable advantage” of a consumer’s expectation that they are getting unbiased advice about the best credit cards. (Technically speaking, the CFPB guidance covers mortgages, bank accounts, and other financial products, but it has seen the most corruption in the credit card space. Previously, CFPB has issued an advisory about mortgage comparison websites.)
“Americans turn to online comparison tools to find the credit card with the lowest interest rates or best rewards,” CFPB Director Rohit Chopra said in a statement accompanying the announcement. “The CFPB is working to ensure that digital advertisements for financial products are not disguised as unbiased and objective advice.”
If CFPB ended with the guidance, it might help to warn the comparison-shopping sites to cool it on offering purely pay-to-play advice. But deep in the CFPB’s advisory on the subject, it casually mentions that it is “developing a consumer-facing tool that, once finished, will bring more price transparency to credit card comparison-shopping.”
In fact, CFPB has been preparing this for months. Twice per year, the agency puts out a Terms of Credit Card Plans survey, fulfilling a mandate by Congress to give consumers detailed disclosure on credit card rates, fees, and other features. In 2022, CFPB began to consider updating its collection process to comprehensively obtain data, force the biggest banks to disclose APRs by credit score tiers, and add to the dataset what regional banks and credit unions offer for their products. The survey includes the top 25 issuers and an additional sample of 125 others, and allows credit unions and smaller banks to add their own data voluntarily.
Last March, the enhanced survey launched, and at the root, it’s a public comparison-shopping website, just without the ad budget of Credit Karma or the others to entice users. But what it lacks in advertising, the public shopping tool should make up for in credibility, especially with increased enforcement on the private market’s pay-to-play features.
At the moment, the Terms of Credit Card Plans survey comes in the form of a report that isn’t entirely user-friendly. But CFPB announced that this spring, it would release a “consumer-facing tool that, once finished, will give people looking for a new credit card an unbiased way to compare credit card terms and interest rates.”
To sum up: CFPB saw a credit card marketplace that is tilted toward the biggest banks offering the most expensive credit, which is having a marked impact on consumer impressions of the economy, as the cost of money grows. It was buttressed by a pay-to-play scheme that locked cheaper options out of the market.
So the consumer agency is taking a two-pronged approach to the problem. First, it is enforcing the law, and banning deceptive and abusive practices that protect the big credit card companies. And second, it’s providing a public option that could spur actual competition. In this sense, CFPB has created an inflation-fighting and pro-competition tool, wrapped around a law enforcement policy. Just as bank regulators decide whether to wave through the giant credit card merger between Capital One and Discover, CFPB is trying to globally bring more competition to a broken market.
Creative approaches to challenges in our economy should not be so novel. Practically every agency has the ability under the law to use the tools at their disposal to improve the industries they regulate to the benefit of consumers and other stakeholders. The credit card industry in particular is a $120 billion market. It’s great that Rohit Chopra and his agency are paying attention to it. The rest of government could learn from this example.
