This morning’s Times has an article about the anticipated response of the credit card companies to the bill that was recently passed reining in their more egregious practices. Among other things, the industry would have us believe that the folks who pay off their cards every month are somehow cheating:
“There will be one-size-fits-all pricing, and as a result, you’ll see the industry will be more egalitarian in terms of its revenue base,” said David Robertson, publisher of the Nilson Report, which tracks the credit card business.
People who routinely pay off their credit card balances have been enjoying the equivalent of a free ride, he said, because many have not had to pay an annual fee even as they collect points for air travel and other perks.
“Despite all the terrible things that have been said, you’re making out like a bandit,” he said. “That’s a third of credit card customers, 50 million people who have gotten a great deal.”
Robert Hammer, an industry consultant, said the legislation might have the broad effect of encouraging card issuers to become ever more reliant on fees from marginal customers as well as creditworthy cardholders — “deadbeats” in industry parlance, because they generate scant fee revenue.
“They aren’t charities. They have shareholders to report to,” he said, referring to banks and credit card companies. “Whatever is left in the model to work from, they will start to maneuver.”
So, they would have you believe that those that pay their bills every month are somehow cheating, depriving these companies of their god-given right to totally gouge each one of their customers.
What the Times article doesn’t mention is the indisputable fact that the credit card companies make out like bandits on those folks who pay their bill every month.
Ask any merchant whether the credit card companies make money on such a charge, and they’ll tell you that they most certainly do. For every dollar you charge the merchant gets anywhere from 96.5to 99 cents. The credit card company pockets the difference. Let’s assume an average of a 2% charge to the merchant. That works out to an annual return of 24%. Sure there are processing expenses, etc., but those are miniscule. Remember, right now we are talking about a slice of the credit card market for which the default rate is, by definition, zero. If you could package that piece of the credit card market into a “tranch” and securitize it, you’d be selling something worth real money.
By any definition, these customers provide a reasonable profit to these banks. The problem for the banks is that they aren’t able to realize obscene profits, the type of profits to which they have grown accustomed and to which they feel entitled. Never mind that the customers that generated those obscene profits in the past, the folks who overextended themselves, are now about to do for the credit card industry what subprime mortgages did for the banks.
UPDATE: I meant to mention that there is a broader effect to the fact that the banks take an upfront piece of every credit card transaction. Merchants can’t charge different prices for credit transactions versus cash. It’s not feasible, and in some cases in would run afoul of the Truth in Lending Act. Since so much business is done with credit or debit cards, the charge the banks imposed is, if economic laws hold, reflected in the price to the consumer. The net effect of this practice, therefore, is to push up prices. If the state were doing this, we’d call it a sales tax. But it’s not a tax, because we at least derive some benefit from our tax dollars. It’s more in the nature of tribute.
