Global Strategy - blog

An interesting question to GloStra is how firms can or should adapt their strategies according to the societies in which they operate.

The mortgage lending boom in the US that led to the current financial crisis is one case in point: The lending spree which occurred in the US (and yielded massive profits for financial service firms in the US for many years), would probably not have been possible in most European countries, due to very different institutional (history-dependent) environments .

The financial services industry seems to be a good example also otherwise. Take the credit card business as another example.

The US credit card companies make huge profits -- not from annual fees or "normal" interests that the consumer pays for his/her single credit card -- but from fees such as late-payment fees, transfer fees, membership fees, finance fees, over-limit fees, cash advance fees, stop payment order fees, interchange fees etc. (see e.g. the Hill blog). Also, extra-high "delinquency interest rates",  which consumers are sometimes forced to pay immediately after missing even one payment date, are a great source of revenue.

 To a single US consumer, such fees from a single credit card may seem small (if the consumer happens to be meticulous enough in paying all due payments well in advance) --  but when summed over the multiple credit cards per person and over a few hundred million people (most of whom are not so meticulous in payment scheduling), the fees and "special-situation" interest rates constitute an immense profit stream.

What makes this possible in the US is, simply, the fact that the great majority of consumers do not understand a word of the credit card contracts they sign.

What is more, there seem to be arrangements in place with which consumers' paying of credit card payments is deliberately made more difficult in the US -- so that people would miss payment due dates and be, hence, subject to extra fees. Consider , for instance, why US credit card companies do not seem to be willing to allow payments over  the Internet or phone -- but rather advocate payments through the ancient method of mail-a-check-to-us? (Do you see? The slow and clumsy Postal system ensures the fact that quite a few check payments arrive late to the credit card company.)

In contrast, in most of Europe, e.g. in Finland, the above kind of arrangements and business practices would be impossible to install by credit card companies. The most significant hindrance is the strong, government-reinforced consumer-protection. For instance, in Finland the starting point of the consumer-protection is the idea that a consumer does not need to understand very many words of contracts he/she signs. So, if there is a highly complicated contract which the consumer later finds to be unfavorable to him/herself and, therefore, sues the company, the court usually decides in the consumer's favor.

Consequently, in Finland the credit card companies seem to be concentrating on generating revenues from fairly simple, traditional sources: easily-understandable annual fees and normalized interest rates. Different society, different strategy and business practice! (Yet, some people find also the annual fee practice outrageous, how else. See e.g. the discussion in HS)

P.S. Disclaimer: This story is purely descriptive and does not intend to make value judgments of whether the European business practices are better or fairer than the American -- or vice versa.