Study: Privacy 'Protections' Could Increase Cost to Consumers; Availability Of Information Led To Decline In Credit Card Rates

5/22/2002

From: Brent Weil of the Privacy Leadership Initiative, 202-887-1140, e-mail: bweil@understandingprivacy.org

WASHINGTON, May 22 -- Credit card interest rates as low as 6.9 percent are the direct result of competition in the financial services industry -- competition that could be in jeopardy if proposed privacy regulations known as "opt-in" took effect, according to an in-depth case study of privacy regulations released today.

The study's authors, Michael E. Staten of Georgetown University's McDonough School of Business and Fred H. Cate of Indiana University School of Law (Bloomington), examined the credit card company MBNA as one example of the explosive potential represented by the information economy. The company's information-based strategy allowed it to achieve rapid growth in the past 20 years by reaching consumers directly with competitive offers for credit, a remarkable success given that MBNA has no retail branches.

National information-based retail credit companies like MBNA have transformed the consumer credit market. "The percent of credit card balances being charged an interest rate of 18.0 percent or more plummeted from 70 percent to 44 percent in just 12 months during 1991-1992," the authors found. This was the time when the national credit card market was first absorbing the impact of competition from MBNA and other information-based credit card issuers. Every percentage point hike in credit card interest rates as a result of less vigorous entry and competition would cost consumers approximately $5 billion in additional finance charges annually.

"In today's economy, information equals competition," said David M. Klaus, executive director of the Privacy Leadership Initiative, an organization dedicated to educating consumers about their privacy choices. "Given the choice, most consumers appreciate the opportunity to lower their monthly credit card payments-and they're saving billions of dollars they used to pay in higher interest charges every month."

MBNA, and other companies that have followed its example, rely on databases to target good credit risks and households who would likely be interested in a credit card. This careful targeting reduces the number of leads -- and consequently the number of mailings to consumers -- by nearly 50 percent. MBNA does not sell its customer information.

The study examines the likely consequences of "opt-in" privacy regulations. These restrictions, which have been proposed at the federal and state level, would require explicit consent before identifying information -- such as name, address and household income-could be shared. Currently, MBNA and many other credit card issuers provide consumers with the right to "opt-out" of such sharing if they prefer.

Professors Cate and Staten examined each of three types of proposed opt-in regulations. Each would have the effect of choking off competition, raising costs and possibly increasing the number of mailings required to achieve the same level of return. The authors also found that privacy regulations would have the unintended effect of restricting the industry's antifraud protections.

Steve Bartlett, president of the Financial Services Roundtable, said, "Using government mandates, supposedly in the name of privacy, would cost consumers dearly where they would feel it most: their pocketbooks. As this study makes clear, opt-in requirements would offer no real privacy protections that consumers don't already have." The Roundtable has also expressed concerns that opt-in privacy restrictions would hinder the ability of law enforcement officials to track financial transactions by potential terrorists and other lawbreakers.

MBNA's strategy focuses on affinity cards, available for hundreds of organizations that include the American Medical Association, the National Audubon Society, the Thurgood Marshall Scholarship Fund and over 600 colleges and universities across the country. These organizations receive funds for their participation that goes to programming and other costs.

For the complete study, send a request to info@understandingprivacy.org.

ABOUT THE PRIVACY LEADERSHIP INITIATIVE (PLI)

The PLI is a partnership of CEOs from major corporations and leading business associations who believe individuals should be able to choose what and how personal their information is used. Through research and education, the PLI is working to help businesses put appropriate privacy practices in place, inform consumers about steps they can take to protect their own privacy, and provide thoughtful research to help give consumers greater confidence in the benefits they can derive from the responsible use of information. For more information, visit our Web site at http://www.understandingprivacy.org.