PBS‘ Frontline this week aired an interesting episode on the credit card industry, which began with a discussion of some of the controversial practices initiated by Providian and soon adopted by the bulk of its competitors. I think the episode raises some interesting philosophical questions about the nature and moral force (to borrow Alan Wertheimer‘s term) of exploitation.
For instance, one of the practices Providian is said to have developed involved substituting what they called “stealth pricing” for explicit annual fees. Instead of charging all its customers a flat fee of, say, $50 per year, Providian offered cards with zero annual fee but with steep penalties for late payments, going over your credit limit, etc. To many customers, Providian’s cards thus appeared to be free. But Providian knew that many of its customers – especially the low-income, high credit-risk customers it was targeting – would wind up paying much more in penalties than they would have with a flat annual fee, even if most customers (wrongly) believed the opposite to be true.
So, at least at first glance, it looks like Providian was exploiting several kinds of vulnerability on the part of these customers. First, the customers were vulnerable insofar as they were likely to do the things that would incur penalties. And secondly, they were vulnerable insofar as they tended to underestimate the extent to which they would do this, and hence underestimate the true cost of the cards Providian was offering. Providian took advantage of these vulnerabilities to enhance its own profit (which, at its peak according to the documentary, were around $1 billion per year).
Is this a case of wrongful exploitation? It might be, but the story raises a few questions in my mind.
First, if we assume that the customers were morally responsible for the vulnerabilities described above, does this lessen the wrongfulness of Providian’s actions? The fact that we can predict that a given individual will act like a shortsighted spendthrift does not entail that she is not responsible for being a shortsighted spendthrift, or for (most of) the consequences of being so. Does an individual’s responsibility for his own vulnerability lessen the wrongness of another’s taking advantage of that vulnerability (thereby altering what Wertheimer calls the ‘moral weight’ of exploitation)? If not, does it diminish or alter the reasons third parties might have for interfering in the exploitative transaction (thereby altering the ‘moral force’ of the exploitation)?
Second, it appears likely that this practice may have been necessary or at least extremely useful in allowing Providian to offer credit cards to a class of individuals who might otherwise have been unable to obtain credit. One of Providian’s great innovations, according to Frontline, was to open the credit card market to people who had previously been deemed unworthy of credit. It was simply not profitable to issue credit cards to poor people with little or bad credit history, but it could be profitable if you charged them a high enough interest rate, or substituted stealth payments for an annual fee. Whatever might have been the case as a general matter, there was thus almost certainly a class of individuals who a) would have been unable to get a credit card under the terms offered prior to Providian’s innovations, b) were able to get a credit card on Providian’s terms, and c) were able to use that credit card responsibly (i.e. without paying excessive interest or penalties). These individuals were made better off, then, in a way that might not have been possible without Providian’s ‘exploitative’ practices. Does this make the exploitation – if exploitation it be – any less objectionable? Especially if we combine this consideration with the first?