Arnold Kling  

Capital One vs. CFPB, again

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For background, I recommend Fast Company's article from 1999, which lauds Capital One's creative use of the customer service process for up-selling. Those of you who are curious about the details of what is going on should find this helpful.

Anyway, Don Boudreaux writes,


The fact that a good number of people in fact do choose to spend their own money purchasing these products suggests either that Arnold's imagination isn't sufficiently expansive about this matter, or (as is likely the case) that the people who buy these products reveal themselves (through these very purchases) to be so lacking in reasonableness that the merits of all of their other choices are called into question.

I would be ok with saying that people chose to spend their own money on these products if they picked them out of a catalog or brochure, or if they inquired about these products. Instead, as the article above describes, the typical case is that the person called with a customer service question. The Capital One employee then proceeds to give a highly trained pitch to the customer touting a product that the consumer would never have been interested on his own and, if he were skeptical and calculating, he would turn down.

I realize that I cannot protect the consumer from his or her own stupidity. A fool and his money are soon parted.

What concerns me is that this is how Capital One is spending its resources--developing expert methods for separating fools from their money. Here is a company with tremendous executive talent, sophisticated use of experiments and data (from a Jim Manzi perspective, they are a positive role model), and powerful computer systems. They have a lot more money to spend on training their customer service people to dupe consumers than consumers have to spend training themselves to avoid being duped.

Those are resources that could be used to come up with innovations that increase consumers' surplus. Instead, they use their advantages to target unsophisticated consumers for scams.

I think that markets work well when most people behave ethically, most of the time. Economic activity would shrivel if we had to operate under the assumption that parties with whom we transact are trying to figure out how to sell us worthless merchandise.

Also, note that when Sam Wilson writes,


the thing about regulatory agencies is that they are very much civil law-type organizations. They're all about prior restraint rather than ex post compensation.

that is not a fair criticism of the CFPB's action here. In this case, the CFPB imposed a fine and required Capital One to pay compensation. Of course, you are welcome to question the generic ability of the CFPB to play the role of the deity. You can question where they come off deciding what level of compensation is just. But they were not "all about prior restraint."

I will grant that, often, when it comes to markets and ethics, government is part of the problem rather than part of the solution. If Don wants to suggest that the CFPB consists of imperfect human beings who usually will not make a useful distinction between ethical and unethical behavior, I would not disagree. However, in this case, I think they made the right call.


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CATEGORIES: Political Economy



COMMENTS (14 to date)
Sam Wilson writes:

Dr. Kling, You're right about my comments being inapplicable to the specific actions of the CFPB in this particular instance, but I was speaking more to the ability of a generic regulator to adopt your benevolent-observer rule (if you'll permit me to borrow from Adam Smith and Dan Klein).

I'll grant that my comment might have been a bit hyperbolic, but I maintain that much of the contents of the Federal Register count as closer to ex ante restraint developed by rule-creating bodies than as ex post correction developed by rule-discovering bodies. You might (and probably could) successfully argue that the CFPB acted more as the latter in this case, but the rule you propose seems closer to the former.

Mike W writes:

"One employee then proceeds to give a highly trained pitch to the customer touting a product that the consumer would never have been interested on his own and, if he were skeptical and calculating, he would turn down."

You've described whole life insurance, variable annuities and most mutual funds.

Actually, what the CFPB did was fine Capital One for false and misleading sales practices...a legitimate consumer protection function for government. But give them time. When the CFPB has been around for a little longer...and with an acquiescent political environment...it will begin to expand its role in a righteous crusade to protect the consumer. For example, it will harass payday lenders because...well, it is just immoral to charge those kinds of rates. They must be engaging in predatory lending.

Ted Levy writes:

"The Capital One employee then proceeds to give a highly trained pitch to the customer touting a product that the consumer would never have been interested [in] on his own and, if he were skeptical and calculating, he would turn down."

You mean like, "Do you want fries with that?"

I am immersed with shame and regret for what I retrospectively realize as anti-social actions during my teenage work years...

Steve Z writes:

The problem is that once we prevent Capital One from separating fools from their money, they'll redirect those Jim Manzi empirical smarts to capturing the regulators. Then we're back to square -1.

Mark writes:

Don Boudreaux's point seems to invite a consideration of behavioral economics, esp. Kahneman's System 1 & 2 (with Capital One trying to push System 1 buttons, and CFPB deciding no good System 2 would accept Capital One's pitch). I am not a fan of CFPB, because I don't believe disclosure-based regulation works well in consumer affairs. But this may be an intelligent use of its authority.

Mark writes:

Don Boudreaux's point seems to invite a consideration of behavioral economics, esp. Kahneman's System 1 & 2 (with Capital One trying to push System 1 buttons, and CFPB deciding no good System 2 would accept Capital One's pitch). I am not a fan of CFPB, because I don't believe disclosure-based regulation works well in consumer affairs. But this may be an intelligent use of its authority.

MingoV writes:
... in this case, I think they made the right call.

A broken analog clock is correct twice a day. That doesn't mean it is useful.

Steve Sailer writes:

There's a hidden war always going where smarter people trick dumber people by upping the complexity of transactions. I call it the war of the right half of the bell curve upon the left half. At minimum, we need to shame those who wage it most egregiously, such as Capitol One.

Joe Cushing writes:

Most of the time, if you are duped, you figure it out. Sure you lost some money and it stings a little but you may learn from it. Banks are about building relationships. It's kind of hard to build a relationship with somebody if you dupe them. Banks, as we know them, have not been around long; there is a large distrust of them; and I suspect this distrust is going to backfire on them. It's either that or banks will change. One thing banks have going for them right now is that they are all so bad at how they treat people there are few places for people to go. Not even all the credit unions are good. This is why I do business with a small credit union located several states away. They are a rarity in how they treat their customers. I haven't seen my credit union in 13 years but in this time of electronic banking, I don't really need to.

Mike W writes:

From today's WSJ:

The Obama administration urged Congress to make it easier for people to discharge a portion of certain student debt by filing for bankruptcy protection.

The recommendation, in a report by the Education Department and the Consumer Financial Protection Bureau, wouldn't affect the vast majority of student debt, which is issued by the federal government. It would apply only to the roughly $150 billion, or 15% of total outstanding student debt, issued by private lenders such as SLM Corp.'s Sallie Mae and Wells Fargo & Co.

Consumer bureau chief Richard Cordray said Congress should consider modifying a 2005 law that, except in rare circumstances, prohibits discharging private student loans through bankruptcy.

"It would be prudent to consider whether they wish to modify the code in light of the impact on young borrowers in challenging labor-market conditions," Mr. Cordray said. He added that the law doesn't appear to have met its objectives of bringing down borrowing costs and expanding access to private loans.

Changing the rules retroactively...still think the CFPB is a good idea?

Luther writes:

At all times I am a discriminating consumer, and when I meet a bad service or product more than occasionally I find a new provider. "Buyer beware" should not be a new concept here.

Second, this bank apparently found that convincing the consumer that they needed it cost less than what the consumer was willing to pay. Wouldn't that be considered "demand"?

Lastly, I wonder if, in the face of overwhelming evidence that Mr. Kling erred in praising the CPFB, he will admit that he was wrong? I've read only very little of his writing, but I have limited time and vast sources of other, trusted, information. Wasting my time reading economic fallacies, while occasionally entertaining (sometimes I read Krugman), is not something I will do for long (see my first sentence).

Krishnan writes:

What "concern" is yours about how Capital One spends it's resources? So what if they do not work to maximize consumer surplus? Am I to understand that in a free market (OK, our market is NOT totally free) - businesses are REQUIRED to maximize consumer surplus? Capital One was maximizing it's shareholder surplus (at least they thought it would).

This type of logic, the desire of economists to have businesses maximize consumer surpluses - can lead to all sorts of regulations - all designed to maximize consumer surpluses - since after all, Government knows better than businesses on how to run a business.

Wow. An economist happy that an agency has decided to tell a business how not to maximize it's own surplus.

Economiser writes:

This is a voluntary transaction between two adults. How is it the government's role to stop it, and to make me (and everyone else here) pay for such interference?

If you cannot imagine a set of preferences that lead to an individual rationally purchasing such a product, you need to exercise your imagination more.

Lonely Libertarian writes:

So what if I were to tell you that a store is selling two identical products - made to the same formula - and in fact made in the same plant.

The products differ in three significant ways...
1. The packaging of version A is much more attractive than the packaging of Version B.
2. The "Brand" of version A is very well known and spends well over 3% of it's revenues on creative advertising that does little to inform but is very entertaining.
3. Version A is price 15% higher than version B.

Would not the principles you seem to espouse support a benevolent government banning or taxing or fining the company selling version A - or perhaps requiring the "Brand" to put a disclaimer on the package full acknowledging the above three points.

Alternatively is not the store selling the two versions some responsible for "damaging" those consumers who make the irrational choice of buying version A [BTW - historically version A has outsold version B 4 to 1].

Now take this from consumer products to pharmaceuticals...

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