That’s what the Wall Street Journal told us yesterday in its first-page story,”Bank of America Casts Wider Net for Hispanics.” The bank, now the nation’s largest issuer of credit cards thanks to its acquisition of MBNA, is quietly rolling out a program to provide credit cards to illegal immigrants.
I don’t have a problem with the article; it’s decent reporting. But I do have a problem with the product itself. Not only does it exploit an economically and politically marginal population, but independent of the controversy the card will generate, it is likely to be unproductive for the bank.
The card is clearly targeting illegal immigrants. As the article notes,
The new Bank of America program is open to people who lack both a Social Security number and a credit history, as long as they have held a checking account with the bank for three months without an overdraft. Most adults in the U.S. who don’t have a Social Security number are undocumented immigrants….Bank of America defends the program, saying it complies with U.S. banking and antiterrorism laws. Company executives say that the initiative isn’t about politics, but rather about meeting the needs of an untapped group of potential customers.
As the article presents it, there are two reasons for illegal immigrants to want a card. The first, of course, is to borrow. “Illegal immigrants have typically relied on loan sharks and neighborhood finance shops for credit.” So one can argue that this is a legitimate service.
But is it really? By nature, an undocumented immigrant’s relationship with income is tenuous. Even if he has what appears to be steady work, if he loses his job, it may be a while, perhaps a long while, before he finds another employer willing to take an illegal immigrant for the same rate of pay. Even though migrants have legitimate needs for credit, such as out-of-the-ordinary medical expenses, a credit card makes it too easy for someone to overextend themselves by accident, due to an interruption of income. The cards have onerous terms, 21-22% interest rates (and that’s for timely payment, default rates were not disclosed), plus late charges and high annual fees, making it easy for a missed payment to become a chronic and escalating debt. While credit card borrowers escape the risk of grevious bodily harm, they trade it for a financial millstone.
The second reason is to establish a credit record.
Typical of the new card’s customers is Antonio Sanchez, a Mexican immigrant whose only major asset is a white 1996 Ford Thunderbird, which he drives to the two restaurants where he works each day on opposite sides of Los Angeles. Mr. Sanchez, who says he sneaked across the border a decade ago, has been a customer of Bank of America’s East Hollywood branch for nine years. He has no borrowing history and no Social Security number…
“I always wanted to start building credit to buy a home, but I couldn’t,” says Mr. Sanchez, a father of three, who earns about $25,000 a year from his two jobs. “When a señorita at the bank told me about this card, I couldn’t miss the opportunity to get it. You need credit to succeed in this country.”
Now as the article points out, there are a few banks that will give mortgages to undocumented workers. But again, from the customer’s standpoint, buying a house is a foolhardy move. No doubt the banks require a high enough loan to value ratio so that they are adequately collateralized if the borrower defaults. And the contraction of the subprime mortgage market means that loans to weak borrowers will become scarce, and undocumented workers are about as weak as you can get. If the INS finds them, they lose years of savings out of a misguided attempt to pursue the American dream, aided and abetted by their friendly bank.
The one upside of this program, from the immigrants’ standpoint, is that banks will lobby for programs to legitimate their status.
I’m similarly not convinced that this will pan out well for BofA. They are pursuing this market because they are desperate for growth. The bank is using a customer evaluation technique they acquired with MBNA:
To assess an applicant, the bank employs “judgmental lending,” a concept pioneered by MBNA Corp., the credit-card company that Bank of America acquired in January 2006. In essence, the bank bases its evaluation of a potential client’s credit-worthiness on a subjective review by its employees, rather than on standardized financial data crunched by a computer.
It’s amusing to hear subjective assessment depicted as something new. That’s old fashioned, “know your customer” lending. It is effective in small banks where the branch manager and his credit officers know the community and its businesses well. With the integration of MBNA into BofA credit card operations it is probable that some skills, like this one, will suffer. Similarly, the credit decisions will likely be conservative while the program is new. It’s an open question as to whether these standards will be maintained in the face of growth targets.
Mind you, I would feel very differently about this card if it were positioned and sold as a charge card with, say, a monthly fee. Then the message would be “Don’t charge what you can’t pay back by the due date.” But in the credit card world, people who pay their balance in full every month are “deadbeats” because the banks don’t make enough money on them.
There are banks like Shorebank of Chicago that have found ways to do good and do well by operating in low-income communities, to the point that other banks solicit their advice. But if Bank of America has any objectives in serving the disenfranchised besides making a buck, they certainly aren’t evident.