Financial Services
Overview
The following document is a report on the topic regarding the Dispute Resolution Technique that may be incorporated within an organization’s conflict management system and its issues in the theoretical foundations for using such system within an organization particularly in financial service institutions. This document will also talk about the extent on the technique applies within a systems approach to organizational conflict management, how each technique will present new challenges, cost benefits or risks to an organization (e.g. financial services institution), how it would convince management to implement some subset of these techniques within the organization’s overall conflict management system and how might the techniques improve or change the existing dispute resolution procedures in an organization.
Introduction
For consumers, credit cards serve as a means of payment and as a source of credit. (1991) Credit cards are frequently used for their convenience, and also because they serve as open-ended, easily available credit source. (2000) People need not bring cash or checks, and plus, there are lots of promotions being offered, such as dispute resolution services and bonuses for frequent users, that enhance credit card usage. (2001) One convenience being offered by credit cards is the freedom from having to spend time and effort borrowing from financial institutions; this is one of the reasons why consumers choose to pay high interests for an outstanding credit card balance rather than apply for a loan that offers a lower interest rate (2000).
In accordance, credit cards play a major role for consumers in the global market. (1995) For consumers involved in cross-border transactions, major credit cards and charge cards are fast becoming the universal means of payment. (1995) Moreover, for as early as 1987, the Commission of the European community had already considered cards as the “payment system of the future”. ( 1995) Meanwhile, for individual consumers, the use of one major card is usually cheaper and much simpler than any other means of cross-border payment. ( 1995) As (1995) elaborated: “Credit cards also may be the key to resolving a vexing question in the global market-place: how to resolve a dispute with a seller located in another country. For some time now several credit-card networks have offered liberal ‘chargeback’ rights (a refund via the credit card) to the consumers in the event of an unresolved dispute. This procedure is voluntary in the United States, and similar rights exist under common law in the United Kingdom. Indeed, that the US development was voluntary is particularly instructive: increasing consumer confidence in distance selling is seen in the United States as crucial to the growth of this form of distribution. Card associations in the United States will drop merchants from their networks if they cause excessive charge-backs, and report that charge-backs as a percentage of sales have fallen dramatically, to a fraction of 1% of sales. The development of widespread chargeback rights in international transactions will play an important role in the new global market.” ()
However, despite these good features, credit cards have also been associated with the rise of indebtedness. (1998) Between 1990 and 1996, debtors in America pay an average of ,000 per annum in the interest and fees alone for their credit card balance, where interest rates are reaching nearly 20 percent. (1998) While in the United Kingdom (U.K.), official figures show that consumers currently owe a total of ₤52.92 billion (or .60 billion) on credit cards, resulting to a growing concern over a possible increase on personal bankruptcies in the country. ()
If this is the scenario, does this imply that consumer spending is being encouraged by credit cards? (1998) said credit companies are encouraging consumers to borrow more. “Using subtle tactics to encourage borrowing, the recent onslaught has led consumers to hold more cards, to borrow more, and to fork over an increasing fraction of their incomes to the companies. If you don’t borrow, the company may cancel your card, since it isn’t making money on you.” (1998) But is this encouragement enough to instigate consumer spending to a point where consumers can not even well afford to do so? Or are there other reasons for an increase in consumer spending with the use of credit cards? Is it right to implicate credit cards as the factor that can make consumers to buy more, even to the extent of spending beyond one’s resources? With these queries and other assumptions, an in-depth study of the roles of credit cards in consumer spending therefore is needed. Understanding of the implications of credit cards in the context of consumer spending will be a good breakthrough in solving problems of debt and bankruptcies of not only individual persons but also of a country or society are as well. Also, understanding of consumer spending will impart a valuable lesson on frugality. As (1991) have commented, “A renewed appreciation of the national value of thrift is essential for the future well-being of our economy. But even if we are unable to restore the old positive definition of frugality, at least the history of thrifty ancestors can be a precious memory to treasure as we struggle to survive with a sharply reduced standard of living.” (ix)
For years, credit cards have been used as a mode of payment and have provided certain benefits to the users, including merchants and consumers. This development has led to the significant growth in the value and number of credit card transactions made. In this report, a general understanding of the credit card network will be discussed by means of describing its operation, pricing and profitability.
With the foregoing impressions of the researcher regarding this dispute, this study hopes to formulate generalizations and recommend quality resolutions.
Discussions
The early twentieth century gave birth to the use of credit cards. However, using credit card as a mean of payment was then limited to some gasoline chains, department stores and hotels. The demand for the provision of credit eventually grew due to the combined forces of mass production, high disposable income and increased mobility of the society. After being lifted from restriction during World War II, trains and airlines began to issue these cards. The further growth of credit cards was particularly stimulated by air travel. Credit cards then serve as secure mean of financing travel. Due to the possibility of loss or theft, credit cards became a good alternative for paying cash. Originally, oil companies issued cards to pay for gas purchases but quickly expanded their use to cover other travel expenses (1972).
Eventually, the universal credit card was distributed by certain vendors with the Diner’s Club in 1949. The card served as a credit reference agency, guaranteeing the credit of customers to those restaurants that joined. The founders of Diners Club introduced no radically new ideas. Rather, they combined a number of well-known and widely used techniques for extending credit and changed the way credit service was delivered to the customer. “The key to their success was their recognition of the need and demand for mobile credit device” ( 1990).
The universal credit card represents the development of a trend that was already developing among issuers of consumer credit. During the 1950s, creditors began relaxing credit terms: repayment schedules were extended, collateral was not needed to purchase many items, and down payments were reduced. The good itself became an inducement to accept debt: “Selling consumer credit is, of course, selling debt–a commodity that would generally be an undesirable one as far as the buyer is concerned. The techniques of selling debt today, however, are such that the nature of the commodity for sale is concealed from the buyer” (1961). Nowhere, however, is “the loan disguised as a sale” more than with regard to credit cards. Banks came late to the credit card game; Franklin Bank issued the first bankcard in 1951. “According to a report of the Federal Reserve System, of the nearly 200 banks which had credit card plans in force in 1967, only 27 had started their plans before 1958″ (1972). In 1958 a number of large banks entered the credit card business, including Bank of America National Trust and Savings Association, The Chase Manhattan, and others. Until 1965, however, all cards were issued locally.
Credit cards including both store cards and bankcards, serve two distinct functions for consumers: a means of payment and a source of credit (1997, 2000;2001; 2000). Based on their main use of credit cards and the benefits sought, credit card users can be segmented into two groups: convenience users and revolvers (1999). Convenience users tend to employ credit cards as an easy mode of payment and to typically pay their balance in full upon receiving the account statement. Revolvers, on the other hand, use the card principally as a mode of financing and elect to pay interest charges on the unpaid balance. According to the consumer behavior literature, consumer usage behavior and the benefits sought from a product or a service are one of the best predictors to explain consumer purchase behavior (1999).
The popularity of using credit cards among consumers was due the convenience it provides of not bringing cash or checks. Moreover, the use of credit leads to a limited liability when cards are stolen or lost. Additional enhancements of dispute resolution services and perks such as frequent-use award programs had also led to credit card growth in popularity (1992). Credit cards are predominantly used for various types of purchases like Internet transaction and telephone bills. These cards also serve as an easily available and open-ended source of credit. (2000) reported that the revolving component of consumer credit most of which is generated by credit cards, has increased relative to income over the past three decades. When consumers use credit card as a mode of financing, credit cards compete with bank loans and other forms of financing (1995). Credit cards allow consumers to borrow within their credit limit without transaction costs, which includes all the time and effort involved with obtaining a loan from a financial institution. This convenience attracts many consumers to pay high interest on outstanding credit card balances, rather than taking the time to apply for a loan with a lower interest rate. As a result, credit cards account for a substantial and growing share of consumers’ debt ( 1992).
Operations of the Credit Card Network
In modern commerce, credit cards serve as a payment device in lieu of cash or checks for millions of routine purchases as well as for many transactions that would otherwise inconvenient, or perhaps impossible (for example, making retail purchases over the internet). Credit cards have also become the primary source of unsecured open-end revolving credit, and they have largely replaced the installment-purchase plans that were important to the sales volume at many retail stores in earlier decades. Consumers use credit cards for two main purposes: as a substitute for cash and checks when making purchases and as a source of revolving credit. In using credit cards as means of payment, one must understand how the credit card network operates. This can be achieved by understanding the various participants involved within the network (2003).
Basically, credit card network participants are composed of the issuers, consumers, acquirers, merchants and network operators. All the network participants are involved in a sequence of interconnected bilateral transactions. The operation of the credit card network may appear complicated at first, with all the complex payment structures and transactions. However, the operation may be understood by a simple example. Typically, a credit card transaction is composed of four participants: the consumer, the issuer or the bank that issued the card to the customer, the merchant and the bank of the merchant (1995). The credit card transaction commences as the customer makes a purchase from the merchant using the credit card. In this case, the merchant receives less than the customer pays to the issuer. For instance, the merchant may only collect out of the 0 purchase. The difference is then called the discount. Hence, there are two ways on how to collect rent: one is by the issuer through the interchange fee and the other is by the merchant bank that collects the difference between the discount and the interchange fee (1995).
Each participant plays a particular role and earns certain benefits out of the operations of the credit card network. For instance the issuers of credit cards gain revenue from the acquirers and consumers. As consumers pay for annual fees, finance charges and other fees like over the limit and cash advance fees, the issuers on the other hand compete for cardholders on different aspects like various fees, finance charges, frequent usage awards and many others. Issuers are paid with interchange fees by acquirer so as to compensate them for maintaining or attracting a cardholder base. These fees are established within the network level. In some areas, such as in the United States, these fees are dependent on the merchant type and other aspects of the transaction, like whether the merchant views the card physically or have it processed electronically (2003). Interchange fees in Australia on the other hand, are the same for all types of merchants. However, they are dependent on whether the payments were made with the cardholder present or not and whether payments were electronically processed.
Pricing
Most literature define credit card price as various prices that make up a credit card transaction. It involves the card fee and charges, the merchant service charge, retail prices for card transaction and the interchange fee (2002). The report of the Board of Governors of the Federal Reserve System (June, 2001) suggested: “Analysis of the trends in credit card pricing in this report focuses on credit card interest rates because they are the most important component of the pricing of credit card services. Credit card pricing, however, involves other elements, including annual fees, fees for cash advances, rebates, minimum finance charges, over-the-limit fees, and late payment charges. In addition, the length of the “interest-free” grace period, if any, can have an important influence on the amount of interest consumers pay when they borrow on their credit cards.”
Credit card pricing has changed from past several years as many card issuers that in the past offered programs with a single price to now offer a broad range of card plans with differing rates depending on credit risk and consumer usage patterns. Moreover, as noted, many issuers have also moved to variable rate pricing that ties movements in their interest rates to a specified index such as the prime rate.
From the beginning, issuers have utilized risk-based pricing methods by initially setting the interest rate to a consumer. Based from credit bureau aspects, issuers evaluate the customer’s default risk and charge the customer a premium for that risk. Typically, the premium is reflected in the annual percentage rate (APR) that is stated in the card solicitation or application (2003). By charging consumers with the same rate, issuers are able to gain high profit from consumers with low default risk. The excess profit may be used to cover the defaults produced by customer with increased risk. Eventually, the nominal APR of the card became a competitive element and driving force towards the massive adoption of risk-based pricing. Later, the use of risk based pricing has widened and used to modify consumers’ APR after using the account. This strategy is called penalty APR, which enable issuers to regulate customers’ nominal APR that are no longer in line with the original APR. In addition risk-related fees have also been introduced in credit card pricing. These fees include bounced-check fees, over-limit fees and late fees. These risk-related fees help recompense issuers for increased default risks of some consumers (2003).
Indeed, credit card pricing has undergone several significant changes for the past years. The simple pricing model of APR that is made up of an annual fee and modest penalty fees has been transformed into a new model with a complex series of APR, new and higher fee structures as well as sophisticated finance charge computation mechanisms. The adoption of a new pricing structure resulted to decreased costs for some consumers and increased costs for others ( 2003).
Profitability
The use of credit cards has been popular among consumers due to several advantages, including security and convenience. On the corporate point of view, credit cards have been popular primarily due to its profitability. Credit enables the consumer to purchase products that would in many cases go unpurchased. Credit augments demand, overcomes the pecuniary effects of overproduction, and enhances corporate profits (Watkins, 2000). Overall, corporations derived several benefits out of using credit cards. For instance, it was noted that credit enable corporations to augment the expenditures of the consumers without increasing the wages ( 1978).
Second, the emergence of corporations along with the use of stocks to finance investment in the late nineteenth century enhanced the importance of consumer credit. The purchase and sale of stocks altered the manner in which businesses are valued, creating new opportunities for amassing wealth. By increasing sales, consumer credit boosts the prospective earnings capacity of corporations, thereby increasing their stock value. Credit becomes the lever through which corporations transform the prospective income of consumers into corporate assets. As Edward V. Donnell, former president of Montgomery Ward observes: “A regular customer buying on credit buys two and a half to three times more in a year than the average cash customer” (1991). Credit in the form of credit cards also provides the holder instant liquidity for an almost infinite number of commodities. Once granted, credit cards eliminate the transactions cost of accessing credit. Unless the user refuses to yield to the advertising onslaught appealing to the emulative impulse, providing instant liquidity fosters spending. Credit limits replace checking account balances in constraining consumer spending, blurring the budget constraint ( 2000).
Finally, and perhaps the most significant factor, is the change in values. Consumers become habituated to using credit, a habituation nourished and fostered by corporations themselves. The message conveyed is deceptive. Credit is sold as removing the need to economize. Current income no longer constrains consumption. The message suppressed is the cost involved. But since the cost lies in the future, it is for many people an abstraction lacking reality. Others rationalize their actions by creating illusions of much higher incomes, winning the lottery, and so on. The reality is that credit imposes an obligation, disciplining consumers who find their future income wanting. For such people, the obligation pressures individuals to work longer or more intensely (1992). As Lendol Calder concludes, “consumers run the risk of being both deceived by consumerism and dragged along by consumer credit. To say there have been worse ways of living is not to say this is a good way to live” (1999, p. 33). All of the cited advantages of credits card usage in the corporate view all lead to one main benefit and that is profit gain. In this corporate view, the credit card system indeed has strong profitability potentials that make it popular and favourable among various corporations.
Recommendations
In financial sector, the methods for resolving disputes can be classified in various ways. One way is in terms of the extent to which the disputants win or lose (Mills and Nagel, 1991). In this regard, solutions to disputes can be classified as follows. First, super-optimum solutions which in all sides come out ahead of their initial best expectation. Second, the Pareto optimum solutions, in which nobody comes out worse off and at least one side comes out better off. However, this is not a very favorable solution compared to a super-optimum solution. Third, is a win-lose solution where what one side wins the other side loses. The net effect is zero when losses are subtracted from gains. This is the typical litigation dispute when one ignores the litigation costs. Fourth, is a lose-lose situation where both sides are worse off than they were before the dispute began. This may often be the typical litigation dispute, or close to it, when one includes litigation costs. These costs are often so high that the so-called winner is also a loser. Fifth, is the so-called win-win solution, which at first glance sounds like a solution where everybody comes out ahead. What it typically refers to, however, is an illusion, since the parties are only coming out ahead relative to their worse expectations. In this sense, the plaintiff is a winner no matter what the settlement because the plaintiff could have won nothing if liability had been established at trial. The parties are only fooling themselves in the same sense that someone who is obviously a loser tells himself he won because he could have done worse.
Thus, for this particular case of credit card issues, the following was recommended:
Conclusion
Regardless of profitability, size, ownership, or industry sector, all businesses share a common problem: conflict and conflict resolution. Internal conflicts in financial institution, as well as external conflicts with customers, deplete valuable resources of time, money, and manpower. Unfortunately the resolution of many conflicts culminates not in smiles, handshakes, and prospects for synergy, but in acrimony, legal fees, and mutual loss.
The business sector is another strong proponent of alternative dispute resolution procedures. Business people need expeditious justice at a reasonable cost. They often need to be able to maintain a business relationship with the opponent while resolving a particular dispute. Most disputes between businesses involve a contractual problem. People in business accept that disputes are inevitable. Even when a written contract is drawn carefully, problems will arise over the interpretation of a clause or a disputed set of facts. Disputes over service quality, contract performance, and so on are bound to arise.
Once a dispute occurs, most business people prefer to resolve it quickly, privately, inexpensively, and informally. Maintaining a business relationship while involved in litigation is difficult, if not impossible. To preserve goodwill, most business people favor alternative dispute resolution procedures that will be fair, inexpensive, and quick, but that also arrive at a just result.
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