Credit Card Insider

Credit Card Industry Critic Highly Opinionated, Clueless

I almost forgot my favorite part! You use the word "clueless." You quote Capital One interchange income as $146 million. It's in their 10K so it must be true. Let's think about that. Visa published interchange rates of 1.51% for Tier III retailers is a pretty good average to use would mean that Capital One cardmembers only purchased $10 billion last quarter. Actually, according to Nilson Report Capital One's volume last quarter was closer to $30 billion. So interchange gross income for that one quarter was closer to $450 million--but they only reported $150. Where did the missing $300 million go? Maybe rewards? Cap One reported total rewards expense of $180 million in 2007--divide it by 4 and suddenly we've found $45 million of that missing $300 million, but where's the the next $255? Rewards Liability? In all of 2007 rewards liability went up from $1.1B to $1.3B a difference of $200 million. Now divide that by 4 for last quarter and we found another $50 million. Now only $205 million is missing from last quarter. Where did it go? Contra-loss account to shore up losses? No! They wouldn't do that! It must be hidden somewhere. Seriously, you wall street guys need to start doing the math behind the numbers and stop taking the 10Ks as religion. The credit card house of cards is preparing to fall. Don't drive investors off the cliff again.

Credit Card Industry Critic Highly Opinionated, Clueless

Levitin is not wrong at all. and if he sounds crazy it's only because he is describing a system/business model that is a house of cards. Get real. Ever heard of the rule of thirds? Income for credit card issuers is broken up into thirds: 1/3 comes from interest income, 1/3 comes from fees, 1/3 comes from interchange. Want to hear the real dirty laundry? When credit card issuers need to raise revenue want to know where they go? #1 raise interchange fees--retailers don't have a say anyways, it's a take it or leave it proposition. #2 fees-- issuers can raise late fees and over limit fees by just $5 and have a significant impact on their P&L. #3 Interest rates--Issuers usually are very hesitant to change these because they are very visible and consumers will go and complain to congress. So issuers came up with Tiered APRs from 9% to 29% where 5% of the cardholders get the 9% APR and 50% of the cardholders get the 29% APR. The whole business model is slimy and is about forcing fees and costs down everyone's throats. Just like Levitin said, interchange income has allowed banks to lend recklessly and to develop credit line strategies that drive spend first, and worry about repayment second. Think I'm wrong? Then why do banks count "turns"? Turns indicates the total sales volume spent on a card versus that person's credit line. If a bank can get a cardholder to turn above a factor of 2, the bank will make more on interchange from that customer than they will from interest income. Banks are riding the retailers to death. I'm not even talking about the Walmarts or Targets. I'm more concerned about the dry cleaners and bakeries. Those guys are spending $20,000 or more a year to accept credit cards and in an environment like today, that amount can be the difference between staying in business or going under. Reform MUST come.