Sam Sez

Date: Tuesday, July 24, 2001

Question: "Stable Bank and Credit Card Fees and Income?"

Answer:

Not really --- Creditors only have ratcheted up their reliance on substantial late fees and annual card renewal charges as substitutes for legitimate interest.

Previously, credit card operations and banks profited from interest income. Now substantial cash flow is generated by the imposition of onerous late charges, annual fees, and other gimmicks to juice the interest and revenue streams. This so called paradigm shift in business strategy is ill fated because it is predicated on the weakening the borrowing segments of the economy.

If a credit card issuer has 1,000,000 accounts with an average $1,500 balance a two-percent net interest margin (NIM) would indicate annual profits of $30,000,000 (2% NIM of $1.5 billion). However, a $35 monthly late fee - plus additional interest - fuels reported revenues by the amount of $35 million per MONTH not per ANNUM. The model then becomes one of snaring consumers with engineered lates charges and punitive interest. Here, fees in theory seem to be stable income generators but in practice they are a technique to evade usury. If a financial institution can "profit" more by late fees or interest income, which do you suppose they will focus on?

This credit administration approach undermines the credit process and effectively cannibalizes the borrowers financial position, ultimately resulting in losses for the financial company or credit card issuer. Also, for the less fortunate or financially compromised consumer, the real cost (interest, fees, late charges) takes a larger bite out of wages than taxes. This pernicious condition does not promote vigorous economic growth.

What are the impacts on your business, investments, or balance sheets?

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