Andrew S. Kahr, a child prodigy who earned his Ph.D. in mathematics from MIT by age 20, changed the credit card from a mass-marketed, straightforward loan at 18 percent to a highly complex financial arrangement with ever-shifting terms and prices:
Now a financial industry consultant, Kahr pioneered several ground-breaking consumer banking products and founded a small credit card company in 1984 that would eventually become Providian, one of today’s top 10 issuers.Before many others in the industry, Kahr discovered that it was possible to analyze vast troves of consumer financial data and reliably predict which customers were least likely to pay off their credit card balances each month.
“It didn’t require a lot of investigation to see that the people who paid in full every month were not profitable,” Mr. Kahr said in a rare interview with Frontline. Armed with exotic formulas and scoring systems, Mr. Kahr and his colleagues mined the data in relentless pursuit of the most lucrative “revolvers” — consumers who routinely carried high balances, but were unlikely to default.
“I don’t believe in customer irrationality,” Mr. Kahr said. “I don’t find psychographics useful. I follow financial behavior.”
Prospecting for profitable cardholders became an industry-wide preoccupation as growth slowed after 1990. Soon enough, the major credit card companies were using credit scores and other financial data to develop ever more sophisticated pricing and credit strategies. Instead of extending a generic credit line or charging a uniform rate, they set rates and limits based on computer-driven assessments of each consumer’s risk of default. The higher the risk, the higher the rate.
“There was an opportunity to be more selective, both from the standpoint of credit quality and the standpoint of profitability and therefore to be able to offer attractive terms to the customers who we wanted,” Mr. Kahr said.
One of the most attractive terms to customers and banks alike, according to Mr. Kahr, are higher credit lines. So in another innovation, Mr. Kahr saw that credit lines could be increased by slashing the required minimum payment. This increased revenue in two ways. First, since it would take longer to pay off balances, each dollar of principal would generate more interest income. Second, the principal itself would be increased because cardholders would be able to take on more debt while maintaining the same monthly payments.
With minimum payments cut from five percent to two percent, for example, a credit card company could increase a credit line to $5,000 from $2,000 and yet charge the same $100 minimum payment.
Today, two percent is the standard minimum payment, a practice that critics say obscures the true cost of debt and keeps consumers dangerously leveraged. Average household credit card debt, they point out, has nearly tripled since 1990 — from about $2500 to $7500. Mr. Kahr, though, argued that “it is very consumer friendly” to allow people breathing room if they have a difficult month. “That’s very important,” he said, “because when people get behind on their payments, unfortunately, it becomes harder and harder to catch up.”