Credit Cards and Exploitation

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?

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4 Responses to Credit Cards and Exploitation

  1. Paul Gowder says:

    The second consideration seems to be a non-starter — certainly exploitation can’t be justified by the fact that some third parties benefit from it. Here’s another easy thought experiment: suppose Providian had given some of its ill-gotten gains to charity? Surely that doesn’t wipe out the wrongfulness of the ill-gotten gains in the first place. The real-world case is even worse, because Providian didn’t even intend to do any good to the third parties — if it could have found some way to extract exorbitant interest and fees from them too, it would have done so.

    The first is more difficult, but ultimately I’m still skeptical. One more thought experiment might help. If A encourages B to drink to excess in order to get sexual activity that B wouldn’t consent to otherwise, we don’t relieve A from the moral responsibility for the rape because of B’s immoderate use of alcohol. I can’t see a principled distinction between the two situations.

  2. Paul,
    As regards the second consideration being a non-starter, what you say must be correct if we can make a clear distinction between second and third parties (the exploited and beneficiaries). But that might be difficult in the Providian case. From the way I understand it, there existed a class of high-risk persons none of whom would receive credit under standard terms. Some of those people – perhaps most – would, if given credit under Providian’s terms, use it irresponsibly and wind up paying a lot in fees and interest. Others would wind up using the credit responsibly.
    So, ex post, you have two distinct groups. But ex ante the distinction is not so clear. So perhaps I was mistaken in describing the situation as one in which A exploits B to benefit C. Perhaps it was more like this: A makes an offer to a class of persons Z. Of the Zs who accept, some end up being type Bs whose bad decision-making subsidizes the other group – type Cs. All members of Z are given an opportunity by A’s offer that would not have existed otherwise. A predictably benefits to a great degree from the vulnerability of Zs as a class. But some Zs themselves derive great ex post benefit from the offer, and those that don’t do so because of their own bad decision making. And perhaps all Zs derive a benefit ex ante from the opportunity that the offer confers on them. (In fact, it’s possible that all Z’s benefit ex post. Even those who paid high fees and interest may regard themselves as better off with the package of credit + high fees than they were with no credit)
    As for your response to the first case, I’m not so sure… If we regard the consent of an intoxicated person as invalid, then B’s consent does not make it morally permissible for A to engage in sexual relations with B. But I don’t think there’s anything analogous going on in the Providian case. There might have been issues of invalid consent in that situation if, for example, the terms of the credit offer were not sufficiently clear. But I’ve been bracketing those issues for now. The question is whether the transaction was exploitative even on the assumption that it was entirely and genuinely consensual, and whether the fact that any harm that came to the customers was entirely a product of decisions for which they were morally responsible makes any difference in the truth, force, or weight of the exploitation claim.

  3. Paul Gowder says:

    Hi Matt,

    Very interesting elaborations.

    With respect to the consent/moral responsibility issue, on some more reflection I think you’re right that I was mistaken to draw the date rape analogy. But the basic idea about regarding consent as invalid still applies. It seems to me that an essential feature of the exploitation story is some kind of diminished capacity on behalf of the consumers. Providian’s practices were exploitative just because it took advantage of the myopia and ignorance of its customers, and that myopia and ignorance made them unable to fairly agree to the transactions.

    All of that is (perhaps counterintutively) consistent with the claim that the decisions that directly led to the harm (overspending, disregarding payment deadlines, etc.) are attributable to the consumers (which is not the case in the rape scenario, where the drunken consent is not attributable to the victim — hence my renunciation of the analogy). There’s a two-step process here: first, Providian induces a consumer to take this credit card, and second, the consumer misuses the credit card. The consumer is entirely morally responsible for the second step, but Providian is (ex hypothesi) at least partially morally responsible for the first, and both steps are necessary conditions for the harm. It seems most natural on such an interpretation of the facts to suggest that both are blamable.

    Perhaps a better analogy is the bartender who keeps selling alcohol to a drunk person. Undoubtedly, the customer is responsible for the harm he gets himself into. But the bartender ought to be blamed too, for profiteering from the customer’s (culpable!) vulnerability without giving due regard to the potential harm to the customer.

    Now to turn to the second consideration, w/r/t the fact that some of the targeted class might benefit. I think this calls for still another analogy/thought experiment. Suppose I run a dice game with loaded dice. I let people believe that the odds are even, when, in reality, they are 3-1 in my favor. But even with the loaded dice, some people, thanks to the law of large numbers, happen to win money.

    I think the crooked dice game case is similar in the relevant respects to the Providian situation. In each case, customers are basically offered a gamble: “take this deal, and you’ll profit with some probability.” In the slot machine example, that probability tracks the way the dice are weighted, while in the Providian case it tracks the population distribution of types B and C. And the problem in both cases is that the seller has private information about those probabilities, and knowingly exploits the fact that customers have an incorrectly optimistic estimate. The fact that some people win can’t possibly justify fleecing the losers.

    (Of course, you’re right that it’s possible that all members of the targeted group benefit ex post. If that happens to be the case, I share your skepticism about the exploitation story… but it seems pretty unlikely in the Providian situation, since consumers have raised many, many, laments about the fact that they got into this kind of sucker deal.)

  4. Hi Paul,

    My belated thanks for your response. End-of-the-semester insanity has held me up from responding, but you raise some interesting points.

    First, I think the basic thrust of your first point is undoubtedly right. Providian is taking advantage of a certain kind of weakness on the part of its customers. But I still haven’t made up my mind regarding what follows from this, morally. Surely not every case of taking advantage of weakness is morally wrong – a business person who does exhaustive research and puts himself in a position to out-negotiate her competitor in a contract arrangement, for instance, seems perfectly innocent. So, the question is not just whether advantage has been taken, but whether unfair advantage has been taken.

    Your bartender analogy is, I think, more on-track than the first example you gave. But I’m still not sure it captures all the significant aspects of the Providian situation. After all, one might think that the good that can come from an drunk being served alcohol is minimal, and hence that the only real good that comes out of such an exchange is profit to the bartender. Credit seems different, though. The extension of credit can do real good for a person – even a person with extremely poor credit history – if it is used well. So morally, at least from an ex ante perspective, I think there’s more to be said in favor of the extension of credit than the extension of alcohol, and that the case for calling it an unfair advantage-taking is relatively weaker.

    Moreover, we might question whether being a spendthrift is relevantly like being a drunk. As a conceptual matter, vulnerabilities seem to take different forms. Some B’s are vulnerable in such a way that they are in a position to be made worse off (or unfairly taken advantage of) by A’s choice without any mediating choice or control by B. Maybe being an alcoholic is like this (though I’m not sure). Other B’s are vulnerable, but their vulnerability is such that they cannot be harmed or unfairly taken advantage of without some mediating step over which they have a choice/control. Being a spendthrift seems more like this. And, all else being equal, it seems like taking advantage of the latter kind of vulnerability might be less unfair than taking advantage of the former.

    Finally, I share your intuition on the loaded dice game, but am less sure about how well it applies to the Providian case. I take it that an important force underlying the intuition of unfairness in your case is the differential information. One person knows the dice are loaded, and the other doesn’t. Is this really true of the Providian case? Don’t the bad credit risks know that they are bad credit risks? And aren’t they able to find out by taking reasonable care what the results of missing payments etc. are? [I’m actually not sure what the answer to that second question. My sense is that it is ‘yes,’ but I don’t know enough detail about how Providian disclosed or failed to disclose its penalties] And, again, does it matter that whether a person winds up being a type-B or a type-C depends, in large part, on choices over which they have control?

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