This article on MSN Money misses a bit in the title:
Banks punish perfect customers
The article is another one on how credit card companies are hitting otherwise conscientious users with annual fees. The users that are being targeted now are those who pay their bills on time and don't carry a balance.
These are not perfect customers as far as the bank is concerned. They are close to the worst, actually: just one step above those customers that declare bankruptcy and discharge their debts. Convenience users are not very profitable for the credit card companies, and could well cost the companies money.
Who are the best customers? Customers that pay the minimum balance each month for years and years. Even better are ones that do so while going over their credit limit and occasionally are slightly late on a payment, triggering more fees. They're the profitable ones for the banks. If it weren't for the profitable customers, the credit card companies couldn't afford to hold onto the unprofitable ones. But what's happening now is that the CARD Act is clamping down on a number of these very profitable practices, and everyone suffers.
The tone of the article is interesting, in that it suggests that credit card companies exist to make the lives of responsible people easier. That's just not true. They exist to make money. They don't make money by letting people like me get three weeks' use of their money, interest-free, and a rebate to boot. They tolerate people like me because I might fall on hard times, carry a balance, and then they'll make money off of me. They've kept me around only because I'll go elsewhere if they make life too difficult for me. (Perhaps they already want me to go elsewhere. I don't really know.)
If most people are responsible with credit and pay their bills in full, then we'll mostly be convenience users and will have no choice but to pay fees. But the convenience users are starting to pay fees now because banks are needing to look for sources of income, as it's been made clear that credit card users shouldn't have to face the full consequences of their misdeeds.
Thanks to Canadian Finance Blog for including this post in the Carnival of Personal Finance.
Everyone seems to forget transaction revenue. Customers who use their card frequently and pay it off every month are still profitable, because they generate lots of transaction revenue. Typically it’s some percentage of the total purchase. That’s why banks offer rewards programs — it’s basically giving customers back a cut of the transaction profit they make.
(In addition to transaction revenue, customers who do not carry a balance from month to month also pose very little liability to the bank, which is a big deal from a balance sheet perspective.)
Note, I’m not disagreeing with your overall premise. Certainly, customers who carry some kind of balance and pay finance charges over a period of time are more profitable than those who don’t (assuming that those balance-carrying customers don’t eventually default). Just wanted to point out that you can pay off your balance every month and still be considered somewhat profitable by the bank.
MB, I too am wondering when the other shoe will drop, regarding fees on the cards I use. I have a fee card already-Delta/AmEx because the frequent travel benefits have always made sense financially-in my case. But a lot of the businesses here and in Central America, don’t take AMEX-so I have a Visa for “convenience” use. I will have to decide if the “convenience” is worth the fee when the time comes.
I agree,the companies in question are certainly in the business to make a profit, not to be our friend-if you can’t afford to play, don’t get into the game.
You don’t mention the fees the cc companies collect from the vendors (which of course the users pay in the end)
Actually, the credit card companies DO make money from us responsible users. They collect a small percentage from every single transaction in the form of merchant fees. They collected $45 billion last year. As far as I’m concerned, that’s plenty.
What Aryn said. I use my rewards cards to pay for nearly everything. Seems to me that if I dump a card over a fee, the issuer is going to lose several times that amount in merchant fees.
Or perhaps they’re all trying to drive us to debit cards
I worked at a credit card issuer for 7 years in a former career and the same discussions were going on at that time. The interchange fees that you reference are not a huge source of income to the issuer. Visa and MC charge lower fees than Disocver and Amex and part of those fees go straight to Visa, MC, Discover or Amex. There is a definite cost to the issuer in keeping your account open. Statements, plastics, marketing, etc. The way issuers make money is through interest and fees. The issuer’s goal has always been and will always be to get you to carry a balance.
If you have a rewards card, the issuer is probably losing money if you don’t carry a balance from time to time. Most rewards cards carried fees until the late 90s until Cap One (if I remember correctly) tried to up its image and no longer wanted to be a subprime player and started trying to appeal to a broader market. Then other companies had to follow.
I personally use my debit card for everything, but that has more to do with my personal issues with intense financial irresponsibility. I have had discussions with merchants who appreciate the debit usage because it keeps more money in their pockets.
But the credit card market is a business. As soon as one company realizes that there is a group of unhappy consumers, they will create a product that works for you and go after convenience users. And more importantly, they’ll find a way to make it more profitable for themselves.
Issuers make money on nearly all their customers. Those that carry balances only appear more profitable because it doesn’t account for the losses issuers have to take when the economy and their borrowers turn bad. About 30% carry no balances, but these are often the largest chargers providing more in transaction fees.