My bank as recently decided they will charge an annual fee for the overdraft protection feature on my checking account. In the current low interest climate it’s been very very hard for banks to make a profit on their deposits sufficient to cover their costs. That has forced them into the uncomfortable position of having to raise fees. Their marketing departments have been very clever, and I don’t mean that in a nice way, about finding means to do that while avoiding being straight forward about it.
So it was with some interest that I read that the credit card industry captured an 18% increase in fees last year. You’d think that an industry that is, oh, 10 thousand years old and right in the sweet spot of our productivity improvements wouldn’t be growing like that. But what with deregulation it looks like usury is making quite the come back.
There is kind of a stack of points in the relationship with a customer where a firm spends and makes money. Looks something like this:
- Exceptional events, like an overdraft.
- Typcial transactions, deposits, check cashing, etc.
- Account Maintainance
- Account Setup or “Provisioning”
- Customer Acquisition, aka sales.
- Market Development
The firm can play lots of games with were in this stack it make v.s. spends money.
Some of the games played here are really obnoxious. I keep getting letters from one of my credit card companies that offers me %1.9 percent on balance transfers, but deep in the fine print it says that if I ever have an exceptional event the interest rate then goes to 29.8%. Included in the suite of exceptional events is any late payment.
It’s an interesting counter point to the discriminatory pricing games. There the seller would like to get a better model of your willingness to pay. In these pricing games the seller wants to create a haze of obscure pricing structure which makes it impossible for you to perceive what the price really is. Privacy is a two way street in all the negotiations.
One weird side effect of all this is that as the firms have begun to play this game better they have started to play a particular game that somebody who’s time is worthless can play to their benefit. The firm works to make a profit over all N layers in that stack. It is often willing to forgo revenue in the lower layers that it believes it will make up in the upper ones.
For example the cell phone companies bribe you to sign up, with a free phone for example, and then make the money back on the monthly fees and “exceptional” transactions. They also lock you in with n-year contracts.
If your not locked-in then your almost certainly able to benefit from being disloyal and regularly switching vendors. For example it’s very common for credit card vendors to offer short term cash back deals. 5% off all purchase for 2 months for example. Presumably if you switch cards ever few months you can maintain that cash back rate.
I wonder if they have worked out some way to damage your credit rating if you do that consistently.