The past few decades of psychology and consumer research have witnessed a move away from a view that choice is the product of a rational, logical decision making process to one of the individual as a user of heuristics and shortcuts, who makes judgments and decisions based on scant data, which are seemingly haphazardly combined and influenced by preconceptions and expectations. Marketers know this, and exploit consumers’ willingness to use shortcuts when making decisions. In one particular context, this exploitation can have serious consequences.This has become more pertinent as a result of the recent global credit crisis. In Australia, for example, there is currently $44.6 billion worth of outstanding debt on credit cards, with more than $30 billion (over 70 per cent) bearing interest. Further, in 2001, Visa reported that 32 per cent of consumers had not paid their card off in the previous 12 months, which suggests that interest-bearing debt in Australia is held by approximately only one-third of credit card borrowers.
The requirement of credit card resellers, such as banks and finance groups, to sell credit as part of their core business, has resulted in a range of marketing methods being used to encourage consumers to take up more debt. One of these approaches is the use of the unsolicited credit card limit increase offer (the finance industry refers to these as CLIs). Banks and finance groups use the CLI because they know that it works, and while there are no figures available that identify the percentage of outstanding credit card debt that results from CLIs, a 2001 industry report gives some indication. The report, published by Visa, says that if there was a ban on pre-approved increases, “consumption expenditure in the Australian economy could be reduced by around $30 billion per annum.”
A CLI is a letter, pamphlet, or document, where current cardholders are offered an increase on their card limit (e.g., from $2500 to $4000), in circumstances where the cardholder has not sought, or inquired, about an increase. In many cases, these offers claim to be “pre-approved”, and there is little, or no, requirement for the provision of information by the cardholder prior to the increase being granted. Evidence from international studies suggests that these offers are targeted at customers who are at the upper end of their limit, and are unlikely to pay off their debt each month.
From a marketing perspective, the CLI is a combination of a sales tool and a promotional tool, and is what marketers refer to as a “call to action”. Contrary to arguments put forward by industry associations, however, the CLI letter is more than a means of communicating information; it reduces the potential level of engagement with the decision to take on more debt because it requires little cognitive effort beyond a decision to agree or disagree with the offer. In contrast, the process for completing a credit card application requires the consumer to participate in a range of cognitive and physical activities. These include the completion of personal details, such as name, address, phone number and date of birth, the process of calculation of income and expenditure, and the collation and verification of materials such as pay slips and forms of identification.
A range of psychological factors combine to make the CLI an effective way to sell debt to particular target markets. These include well-established psychological manipulations, such as trust in brands (which have the effect of increasing our willingness to take risks); authority (the letters are perceived to be signed by important people in the organisation, again increasing our willingness to take risks); the use of endowment (we take psychological ownership of something as soon as it is given to us); establishment of a status quo (the increased limit is now “your” money); and scarcity (act now, or you will miss out – which has the effect of increasing the perceived value of the offer). All of these factors are part of the marketers’ bag of tricks. These manipulations combined with the normalisation of credit as a means of transacting in the marketplace, work to make it easy for vulnerable consumers to accept these offers.
And, don’t be fooled into thinking that banks – that in recent times, are representing themselves as ethical and socially responsible organisations – are not willing participants in this activity. Put simply, banks are profit-making corporations, and they know exactly what they are doing when it comes to the use of the CLI. As one bank’s CEO commented to Sydney radio host, Bill Crews, recently, “…we’re not a welfare agency.”
Indeed, in the context of a profit-making corporation, it is questionable whether being socially responsible is possible. Nobel Prize winning economist, the late Milton Friedman – whose work has informed much of our libertarian and rationalist economic framework over the past 30 years – argued that it is a contradiction for a corporation to behave in a responsible way, stating that:
“Only people can have responsibilities, but business as a whole cannot be said to have ‘responsibilities’ in that they are artificial persons.”
Friedman points out that there is a conflict of interest between corporations and society that makes it very difficult for business to be socially responsible. He states that:
“A member of a corporation should never act against the interests of the corporation and of his employers.”
In other words, corporations should, obviously, act within the law, but should always further the corporation’s interests, over and above the interests of the citizenry.
I recognise that this may be perceived as a particularly jaundiced assessment, but there should be no doubt that a corporation will act, first and foremost, in its own interests. To put it another way, it is unlikely that a bank will make a decision purely on social grounds, without also considering the economic implications. However, it is highly unlikely that a bank will make a socially responsible decision that has no (long or short-term) business benefit. This is a reasonable approach for a business. To behave otherwise would be in breach of its commitment to shareholders.
Of course, businesses, including banks, are making attempts to behave in a more socially responsible way, some better than others. The main issue to accept, though, is that banks do “marketing”, and they have every right, and are required, to do so.
In light of this, however, there are some important factors to consider. Banks and finance corporations are massively well-resourced organisations, which have access to the latest research about the market and human behaviour, and use this information to influence decision-making. In other words, they know what “buttons” to push, to get different customer segments to purchase their products. To argue against this, would be to deny one of the main premises of the marketing discipline. In addition, corporations are able to act (mostly) rationally, are generally aware of what they are doing.
In contrast, consumers are individuals, who are overwhelmed with psychological and social pressures, use shortcuts, such as trust, inertia, and loyalty, and are rarely able to make clear, rational, unbiased judgments.
Consumer regulation, however, relies on a belief in a rational consumer, who considers the pros and cons of a particular choice, and, after weighing up their options, chooses the product that provides the most utility. Consumer regulation implies, through its focus on the improvement of information disclosure, that, for the most part, this is a process that is carried out in the conscious mind. The notion that increased disclosure will alleviate any issues around psychological manipulations can be argued to be somewhat erroneous if we accept that consumers will, invariably, use shortcuts and heuristics in decision making, particularly when they face large amounts of unfamiliar information.
Of course, people should take responsibility for their actions. Put simply, though, it is not a level-playing field. It is naïve to think that a decision is not influenced by a whole range of other factors, which may be out of the awareness, or control, of the individual. The people who take up these offers are responding, as best they can, to the complicated environment in which they live. Marketers know this, and they exploit this, and they get away with it, because it is easier to blame an individual, than the abstract notion of the banking sector, or more broadly, the market. No-one wants to, or is willing to, admit that we are flawed decision makers. But we are – we make poorly judged decisions every day, but most of the time, we get away with it, and often don’t notice it, because the consequences aren’t too serious. But in some situations, such as getting ourselves further into debt, the consequences are dramatic, and sometimes can be tragic.
The Australian Bankers’ Association asserts that the low levels of default on credit card debt suggest that there isn’t a problem with CLIs (and credit marketing in general) and, therefore, any further regulation of the sector is not required. However, it is not the default levels that are of concern in this context, but the amount of outstanding debt in the economy that should be of concern to policy makers.
In looking at how to deal with this issue, recent discussions at the Council of Australian Governments meeting, as well as the Labor party commitment to addressing this issue at a national level, provides hope that, finally, policy makers are recognising that people aren’t as rational as the economic models would have us believe. As the Federal Government takes on the responsibility for dealing with credit cards and pre-approved credit, it will need to consider regulation that does not just rely on providing more information to consumers, or the provision of more information about consumers to banks, but considers how the market and marketers really behave.
NB. Versions of this article have appeared in the Deakin Business Review, and in Living Ethics. To get a copy of the full report, click here (17mb).