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Saturday, February 14, 2009

Learning about Credit Card business models

One of my health care work colleagues came from the credit card business. This is probably indicative of the state of the credit card industry. However, we take great delight in asking him how credit card companies make money, why they send us all that mail, and if things like the Hello Kitty credit card on the left really worked as planned. Well, I haven't asked him about Hello Kitty yet but it's incredible what you find on a google image search.

I recently downgraded my Chase credit card to a no annual fee card with less rewards because I fly less and the $50 annual fee was a money loser for me. When I called to activate the card, I was transferred to a real person who wanted to tell me about my card's benefits with the goal of making the Chase card the primary credit card in my wallet. I told him that I understood the benefits perfectly well in a tone of voice that was in between telling your dog to stop eating the furniture and telling a salesperson that I'm "just looking" and he politely ended the call.

This got me thinking about how credit card companies make money. I've been using that card since 2004, it was my primary card, but I recently switched to another. I always paid on time and my credit rating is good. I didn't think that I was profitable enough customer to warrant a sales call about my habits?

My co-worker explained that the customers who rack up huge late fees, carry a balance, and look at their credit card like a roulette wheel are indeed more profitable. However, they often do not pay their bills in quantities large enough that it doubles the annual net income of the entire company. Customers like me are a steady and safe source of profit.

If anyone has any questions for my colleague about the credit card business (not your credit card in particular) send them to me and I'll harass them. Ever since Peace Corps, where I would receive endless questions about the United States ("Is everything concrete or is there any grass or trees? Do you shake hands there like we shake hands? Do people in the US know how to eat an orange?"), I take great delight in peppering someone with questions about topics where I have just enough knowledge to be dangerous. I think that it's a Peace Corps thing as we did that to an Australian traveler who came to a party with a group of us. He got 30 minutes of, "Name a famous Australian. Beside Mel Gibson. And not Elle McPhearson. And not Midnight Oil or AC/DC. Do you have dingos as pets? What about kangaroos?"

Last topic about Chase credit cards as I would be remiss not to mention how much I hate them for one thing that they did in the late 90's. It's made me hate them enough to fill any postage paid envelope they send me with junk and send it back to them or "mailing a brick". At the time, I had an REI credit card like any good backpacker. REI switched banks and sent us new cards. At the very same time, Chase sent me an Outdoors card that looked suspiciously like my REI visa card. I used it for a few months before REI sent me a letter to clarify. I called Chase to complain about their tactic and was told in the same exact tone of voice that you use when the dog is eating furniture that they did "Nothing unethical".
I grudingly kept the Chase card but whenever I talk with them on the phone, I tell them that I am still pissed about the REI card scam.


Anonymous said...

I could only think that credit card companies anticipate a significant number of cardholders to be delinquent payers and make money out of their surcharges.

Otherwise, why would credit card companies even try to get into offering rewards (ex: http://www.hsbc.com.hk/1/2/hk/cards/rewards/flexi-rewards) if they won't make money out of it.

Deadhedge said...

I learned that the amount of delinquencies is staggering. When I wrote that the dollar amount of delinquencies is double the net income, that was not an exaggeration.

charterone said...

Great post! Thank you for sharing.

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