05/25/2012 - If the success of an innovation in a free market is judged by its ubiquity, then the invention of the credit card has been an enormous hit, with the U.S. Census estimating that more than 180 million Americans hold about 610 million of them.
But that popularity is not all good news. Americans carry debt totaling about $780 billion on their cards, according to the Federal Reserve Bank. In addition, the industry has profited from a variety of pricing practices, some of which are not widely understood by users. They include unanticipated interest rate increases and the widespread application of substantial and disproportionate fees.
In 2007, the Pew Health Group launched the Credit Card Standards Project with a goal of developing standards for consumer-friendly credit cards to help increase the financial security of users. The strategy was to create a standards-based certification program that would allow families to identify consumer-friendly credit cards, stimulating a market for banks to offer them. The plan’s linchpin was to enlist a core group of influential issuers and co-branders to market credit cards that met these new standards.
The project could not persuade any major issuer to adopt what came to be called the “clean card” standards. In hindsight, the project might have underestimated some powerful forces at work in the industry. Until the standards became the industry’s regular practice, any early adopters faced the prospect of foregone revenues—revenues competitors would continue to accrue. Moreover, the financial crisis of 2008 had a devastating effect, making lenders even less likely to voluntarily adopt actions that would reduce short-term revenues.
Pew recognized that the project was unlikely to make progress and that the financial crisis was creating a climate amenable to reform. It elected to make an important strategic shift and began seeking legislative and regulatory solutions to unfair practices. The new effort was called the Safe Credit Cards Project, and it sought legislative or regulatory approval for at least five of the eight safe credit card standards created to address the most problematic lending practices.
In spring 2011, the Pew Health Group agreed with Planning and Evaluation that an evaluation of the project was timely, particularly because it was scheduled to conclude in June. The evaluation sought to understand the project’s role in reforming practices in the credit card industry; to ascertain how it shaped regulatory and legislative solutions that protect customers; and to identify lessons that could inform future advocacy efforts.
Fred Galloway, an associate professor in the School of Leadership and Educational Sciences at the University of San Diego who specializes in public policy research and evaluation, led the effort. He was joined by Prentiss Cox, a University of Minnesota law professor who focuses on consumer finance issues and has experience with state and federal policy advocacy.
The evaluators interviewed consumer advocates, industry representatives, funders, members of the media, regulators at the Federal Reserve Board, and congressional staff members. They also analyzed documents related to the project and issue coverage by news outlets.
Government oversight of the credit card industry, which had remained largely unchanged for decades, was substantially restructured by federal regulators and legislators beginning in May 2008. The next year, Congress passed the Credit Card Accountability, Responsibility, and Disclosure Act, known as the CARD Act.
The new consumer protections embodied in the legislation and the accompanying regulations are consistent with Pew’s objectives. And the evaluation’s findings were unambiguous: The project played an important and, at least in one instance, decisive role in their establishment. Principals on both sides of the issue lauded the project for its quality research, ability to convey clear messages through the media to build public support for reform, and credibility of the project team.
It is important to view these achievements in a larger context. First, legislative and agency reform activities were already underway when the project was launched. Second, consumer protection groups were actively engaged in federal reform efforts. Finally, the standards promoted by the project were drawn from ideas previously put forward by advocates for credit card reform. In this light, Pew’s decision to shift from a market-based approach to a strategy focused on policy change recognized that prospects for meaningful change had rarely been more favorable.
Representatives from each of the groups interviewed as part of this evaluation commented on the quality of the project’s research. Policy makers, consumer advocates, and the media had never been informed by such a detailed, empirical analysis of the credit card industry’s practices and their effects on consumers. A member of the media summed it up this way, “With Pew, I didn’t have to worry about the quality and objectivity of the data.” A former staffer at a federal regulatory agency said, “Industry doesn’t share data or chooses to do so only if it suits their purposes. Consumer advocates don’t have any data…. Having access to data without bias is tremendously important.”
In addition, the project’s team, led by director Nick Bourke, garnered an enviable reputation for the quality of its analysis, willingness to bring trustworthy data to inform policy discussions, and professional engagement with all groups involved in the reform debate. An industry veteran remarked, “Pew’s approach to the issue was totally fact-based, which we really appreciated… they took the time to understand the parameters of our products and how they are used.” The exceptional regard in which the Pew team was held was critical to its success.
The project’s third strength—earning media coverage—was closely tied to those accomplishments: It possessed first-rate, informative research that could be presented by a highly credible team. The project’s earned media was extensive. A sample of press coverage of credit card issues from 2009, the year the CARD Act was passed, showed that well over half of the pieces reviewed made reference to Pew. A range of those interviewed agreed that this coverage provided unassailable research that was used to strengthen reform efforts and inform the general public about the unfair and deceptive practices of major credit card issuers.
The evaluation identified several lessons that could inform Pew’s future work in this area. One is that the institution is in an excellent position to influence other policy debates, including providing timely research to inform the work of the newly created Consumer Financial Protection Bureau. Another is that Pew should consider how best to augment existing capacity in the consumer financial protection arena rather than supplant it. In policy advocacy, this could mean playing to an existing organizational strength—producing informative and high quality research, raising public awareness of this work and injecting relevant perspectives into the policy process. Still another lesson is that exiting an area is not the only option when progress is disappointing. Pew saw that its initial market-based approach was failing and correctly changed course rather than leave the field.
The Safe Credit Cards Project made key features of effective advocacy central to its work: Find middle ground where support for solutions can be developed; invest in top-flight, credible talent in the field; use high-quality research; and maintain visibility of the issue through the media. Credit card regulation now better protects users, and the project has a strong legacy as an important contributor to passage of the CARD Act and to the Federal Reserve Board rules that followed.