a banks bore writes:
>>This example shows a strange interaction between "private enterprise"
>>(credit card companies), the government ("bankruptcy laws") and
>>the consumer. The way I see credit card blowup, it ought to be
>>purely a problem for the credit card companies. They continue to
>>not deal reasonably with the art & science of risk management and
>>so I think they deserve what they get (or don't get, as it were).
>What they get is a business that's about twice as profitable as other
>lines of banking business, even with the high default and bankruptcy
>rates. Borrow money at 6%, lend it at 16% - and add onto that
>merchant and late payment fees - and you can take a loss now & then.
>Doug
10% is, of course, a teeny tiny Yank margin, in the world's most competitive credit card market -- add on another 5-8% for Brit credit cards (and a bit on top of that for Barclaycard). But even given this, it's still possible to lose a packet in cards business. When you're setting up a cards operation, it's not uncommon to get bad debt rates of up to 20% during the "tuition fees" period, unless you pay up for a credit-scoring service, who will also charge you through the nose for it.
Jordan is quite right to regard the interaction between the card companies and the bankruptcy laws as strange. What this is about is basically strip-mining the social commons -- the social common in this case being the general feeling that people should pay their debts. By far the rational thing to do under US bankruptcy laws would be for more people to declare bankruptcy -- card business can only be profitable if large numbers of people act in a way which is inimical to their own interests. However in the US, it looks like this social institution is breaking down -- in the USA, the correlation between the bankruptcy rate and the unemployment rate has completely broken down at the county level, suggesting that the determinant of bankruptcy these days is willingness to pay rather than ability.
Doug's point about fees being the real driver of profitability is right on the money, as usual -- in the UK, the overdraft product is usually the bearer of the big fee action. But note that cutthroat competition is beginning to erode even this lovely money-earner -- Bank One recently announced two profit warnings because customers stopped being willing to pay the level of fees which B1 decided they needed to charge.
All in all, the credit card product is a beast which looks like it might just be ready to bite its keeper.
dd
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