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Mr. LIVELY. That is approximately correct, considering the fact that the conversion was made on September 1, and there has not been a full year's experience.

We have a consistently changing pattern of sales and if we could say, for example, Senator, that everything that occurs this year is precisely the same as last year, then we could throw a figure out. But it is almost impossible to do that in retailing, so all we can say is that from the analysis Professor McAlister made of the Texas accounts, he came up with a percentage differential, and if you just assume that at some static point in the past, all conditions would remain equal, you could apply that percentage and come up with a revenue cost. But we hope that the competitive pressure that we manifest in the marketplace as à result of such a conversion will win us additional sales and those additional sales will help offset some of the revenue deficiency.

Senator PROXMIRE. What was the difference in yield? Mr. LIVELY. In Professor McAlister's study? Senator PROXMIRE. Was this anything that would be a competitive disadvantage to disclose ?

Mr. WOOD. It looks like the maximum in a year would be 6 percent less yield.

Senator PROXMIRE. What I want to know is the yield before and after.

Mr. LIVELY. As to the average daily balance excluding current purchases, or as to

Senator PROXMIRE. Excluding purchases, compared with the previous.

Mr. LIVELY. His figure came out to approximately 6 percent, and that was very close to our forecast.

Senator PROXMIRE. 6 percent of what?
Mr. LIVELY. Revenue, on revolving charge.
Senator PROXMIRE. The revenue on revolving charge.

What I want to know is what your yield was on previous and what your yield was on your average daily balance ?

Senator BENNETT. That gets pretty close to proprietary information.

Mr. LIVELY. It borders right on the edge of proprietary, and all we can say is that if you go back in time and take some published figures and compare Professor McAlister's study to it, you would have as close an estimate as we can give.

Senator PROXMIRE. What was the average revenues earned on the revolving charge account?

Mr. Wood. $249 million, I believe, was the total finance charge. Senator PROXMIRE. We thought it was $246 million, so we were off.

Mr. Wood. No, you are right $246 million is the figure; $549 million was the total counting easy payment.

Senator PROXMIRE. How much did it cost Sears to provide this revolving credit ?

Mr. Wood. We haven't broken it down between revolving and easy payment. But our annual report shows that our total costs were approximately $480 million against the $549 million, and Mr. Lively says he can elaborate on it.

Mr. LIVELY. In our accounting system we do not allocate costs between closed-end credit and open-end credit. We have a single accounting system applicable to our credit receivables.

Therefore, the costs of revolving credit are not easily distinguished.

However, we participated in a number of cost of credit studies that have been made. One which has been published is a study made of Arizona retailers by Touche, Ross and Co., which we would be more than delighted to make available for the record, which shows that we are a little on the deficit side of expense over revenue in the State of Arizona on revolving charge.

Senator PROXMIRE. What do your own figures show in your total, profit or loss?

Mr. Wood. Profit last year of $39 million against a balance outstanding of $4 billion plus.

Senator PROXMIRE. How much finance charge recenue would Sears lose if you converted to the adjusted balance method as required by this bill?

Mr. Wood. I haven't figured that out, Senator.

Mr. LIVELY. We would have to rely on an estimate, and there is no way we can accurately do that, in consideration of the changing circumstances from year to year.

Mr. Wood. You would be interested in one-
Senator PROXMIRE. Can you give a range of estimates for the record ?

Mr. LIVELY. Sir, I think the study of Professor McAlister's work in Texas is about the only thing we can point to as being empirical for the record. Senator PROXMIRE. Well, how do you know you won't lose money

if you can't estimate it?

Mr. LIVELY. We are dealing again on the edge of proprietary information.

Senator PROXMIRE. On page 8 of your statement you state that the committee might draft language that would make it unlawful on the previous balance method to assess a finance charge on the amount in excess of the required monthly payment. Are you suggesting that this system should be an alternative to the average daily balance method ?

Mr. LIVELY. No, sir. It would be a means whereby, if there is felt to be a serious consumer abuse as a result of use of the previous balance method, not giving credit for large payments, then such a means could eliminate that alleged abuse. But it would permit all of the remaining means of assessing finance charge, which are authorized under the various State statutes.

Senator PROXMIRE. Including what?

Mr. LIVELY. There is no limitation in many States. All methods are available. Competition has been the limiting force, or technology has been the limiting force.

Until the age of computers most of the billing systems utilized a previous balance method because it was a method which produced a revenue yield, at 18 persent, which offset the costs of providing the services.

Now, as we got into computers, as Mr. Wood pointed out, we are actually realizing some returns, some beneficial returns, in operating expenses because of economy of scale, faster operations, quicker control of potential delinquencies, and in our judgment we were in a position then to make a move to pass along some of those savings, and that is the move we made.

Senator PROXMIRE. Senator Bennett!

Senator BENNETT. I am very interested in this discussion because it takes me back to one of the basic discussions in the early days of the truth-in-lending bill.

This has to do with the relative attraction to the consumer of the price of the merchandise versus the difference in the cost of the revolving credit. It has always seemed to me, and still does, that when you say people shop for credit, they shop for merchandise, and if they are buying a really big item then credit may come into the picture. But for 99 percent of their purchases they go to Sears to buy what Sears has to sell, or because it is on the corner or for some other reason,

and they go somewhere else for another reason. In almost no instance do they sit down and calculate the difference between the cost of the revolving credit systems and, say, for that reason I will pass up the bargains at Sears in order to buy from somebody else, because I am going to save 15 cents a month on my revolving credit.

It seems to me this is a de minimus situation and we are arguing about a theory and not a fact.

I am interested in the discussion which has gone on because it has gone on with the largest retailer in the world.

I wonder what the added costs would be, if you can still imagine that such a man exists, to a fellow who keeps his books by hand, if he had to go back and calculate the payments made in any month before he could apply the credit charge.

Obviously the previous balance method is the safest and easiest method for the man to use whose billing capacity is limited, who is trying to get the simplest base on which to apply the credit charge, because he doesn't have a computer, and perhaps his calculating machines aren't as sophisticated as those of his largest competitors. To me this is a real reason for trying to leave a variation in the operations open to merchants because there are some small merchants, I am sure, to whom a forced requirement that he use the daily balance method, or the adjusted balance method, would represent a very substantial increase in the cost.

I don't think we are trying to cut out the small merchant.

In focusing on Sears, I think we are forgetting the range of different equipment and different capability that exists across this country, and the smaller merchants' costs are going to be higher than the cost to the man who can have an automatic computer service.

In your statement you mention that complaints dealing with billing practices have declined over the past year. Is there any information available to indicate the rate or the manner in which they have declined.

Mr. Wood. Yes, Senator Bennett. I had a survey made before coming here and I would like to introduce it in the record, if I may. It summarizes what we call at Sears executive complaints.

These are letters that come either to my office or to the president's office which are carefully tabulated. They deal not only with credit matters but with problems of customer service and the like.

This exhibit shows that we had in 1968 3,914 letters from 16,597,000 accounts.

This figure, despite the growth in the accounts from 16,597,000 to the last year, 1972, 18,346,000-odd accounts, and the number of letters declined by 570—we had 3,344 letters of complaint which is eight hundred one-thousandth of 1 percent of our customer accounts who had reason to write us.

We then break down our accounts, or our complaints, by the reason for the complaint, the matter complained of, such as

"No reply to customer's letter from our store or credit center"; "no reply to customer's telephone inquiry."

These, for the fourth quarter of each year, are coded here, and I think you would be interested to know that in 1972, in the fourth quarter, we had 70 letters out of these 18,300,000 accounts, 70 letters complained that they didn't get a reply to their letter, and we had a grand total of two who said they didn't get a reply to their telephone call.

So the figures are infinitesimal, and they back up my statement that business is responding in this area of serving the customer, answering the complaint promptly, and, of course, this is the heart of our business, which we emphasize to every one of our wonderful employees, that the customers' interest is paramount to Sears' success.

You must respond, and you must follow through. Don't get the call and then push it to the side of the desk.

And I think not only Sears, but businessmen generally, with the advent of consumer interests being paramount, are responding very, very well to clearing up customer problems, billing problems and the like.

So if I may introduce this.

Senator PROXMIRE. Yes. Without objection, that will be printed in the record.

Mr. Wood. Thank you.
[The information follows:]

[blocks in formation]

1 Statistics taken from internal company reports for management information purposes.

? Total case count represents all letters, phone calls, or personal contact referred to and handled by general credit department, Sears, Chicago.


[blocks in formation]

Statistics taken from internal company reports for management information purposes. 2 Total represents number of specific points of coded dissatisfaction (1 letter may contain 2 or 3 specific complaints).

Note: Code 1, no reply to customer's letter; code 2, no reply to customer's telephone inquiry; code 10, credit not posted to account at statement closing; code 11, payments not posted to account at statement closing; code 12, miscellaneous account mixup.

Senator BENNETT. You didn't identify any complaints because your method of computing the revolving charge account was either confusing or the customer felt that he was being cheated ?

Mr. Wood. I am sure we have a few of those inquiries. We have kept track of them. And, with all due respect to the two fine professors who were here before, I think most of them come from college professors or instructors who take a very deep interest in different types of charge.

This is true, isn't it, Randy?
Mr. LIVELY. Engineers, particularly, who have sliderules.

Mr. Wood. But we are now in a position to explain certainly all of the details of how the bill is computed, how the finance charge is arrived at, and our people all over the country are trained to do this and now we feel it is so simple that it is not difficult for us to train them in the explanation.

Mr. LIVELY. I wonder, Senator Proxmire, if I might make another observation.

This whole area of communication has been of very deep concern to Sears because about 2 years ago at Mr. Wood's insistence, we launched a very major project to determine just how communicative we really are in dealing with our consumer in these areas and we found much to our chagrin that the line of communication in fact was not getting down.

What we did determine was that our customer was relying on our integrity to be fair and honest, and in relying on our integrity, they tended to overlook the details of the agreement that had been signed with us.

But the overlooking created all kinds of new problems which came out as a result of the Truth-In-Lending Act and our prospective use of, multiplying a periodic rate on open-end credit times 12 to come up, in the case of 1.5 percent, to a finance charge and annual percentage rate of 18 percent.

The American consumer's arithmetic is sometimes a little naive, and they took the 18 percent on a $100 purchase to mean $18 in finance charges.

So we ended up, actually, as a result of these disclosures, by building in a further misconception in the mind of the consumer, totally tied to the dollar and cents cost of credit.

Now, as a result of having found out that this existed in 90 percent of our customers, we set about on a very aggressive program to try to correct it, and the advertisement that Mr. Wood alluded to a little earlier is part of a continuing program that has come out of research where we have spent a great deal of time, money, and effort to try to determine how to communicate these facts to consumers in a manner in which they can retain them.

We are having some success and we have learned that in some of the approaches we take we can change the level of understanding in rather dramatic leaps and we will continue that.

The problems that need to be address in legislation are not so much dealing with the minutia of differences between various balance assessment methods, but really how to educate the American to consumer to make a good judgment in the marketplace.

That is our problem. It is not one of methods. It is one of finding a means through education, through public exposure, through corporate

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