Kevin Drum has a new time-management technique which, we expect, will bolster his productivity - rather than research a topic, he just makes stuff up.
Bottom line: credit card companies now make half their profits from penalties and late fees.
And his source is what? Well, he excerpts the WaPo article, which tells us this:
According to R.K. Hammer Investment Bankers, a California credit card consulting firm, banks collected $14.8 billion in penalty fees last year, or 10.9 percent of revenue, up from $10.7 billion, or 9 percent of revenue, in 2002, the first year the firm began to track penalty fees.
Hmm, $14.8 billion is 11% of revenue, but is it really half of profits? What, one wonders are total profits, and what sort of costs are associated with producing the $14.8 billion?
Per CardTrak, we find this deceptive chart designed to mislead folks in a hurry. The story is dated Feb 2004, the text refers to profits in 2003, but the colorful graphic refers to total profits in 2004 of $30 billion. Well, $14.8 billion is half of $30 billion - maybe someone thinks that there are no costs associated with that revenue, and that it simply drops to the bottom line.
CardTrak has a discussion of 2004 credit card profitability here, giving us all sort of details but no dollar figure. However, we can get a hint by comparing that with the recently released results for MBNA and Citigroup - MBNA's profits rose from $2.34 billion to $2.68 billion, which we will estimate to be a 12% increase.
Bit of a dead end - is there any way that $14.8 billion could be "half" of an industry profit figure that may have grown to $35 billion?
Fortunately, there is another avenue: this 2004 USA Today article tells us that:
Credit card fees become cash cow
...Last year the industry took in $43 billion in fee income, up from $39 billion in 2002, according to R.K. Hammer Investment Bankers. Fees accounted for 35% of industry income last year, up from 18% six years ago.
A major source of income, of course, is simply the interest charged on balances. But what are fees? Well, USA Today cites late fees, over-limit fees, and fees for balance transfers and cash advances.
CardTrak has more detail here - apparently, fees paid by merchants is a big part of the total presented by R. K. Hammer, who estimates that penalty fees in 2004 were $14.8 billion out of total fees of $50.8 billion (so, penalties were roughly 30% of the total).
Well. If total fees were 35% of industry income in 2003, and penalty fees were about 30% of total fees in 2004, what are the odds that penalty fees were "half" of total profit in 2004?
I think that what we are seeing here is "Reality based accounting" for the "Reality based community".
MORE: While we are at it, and although I scarcely have the courage to ask, what, if anything, is the source for the next bit of Drum's "bottom line", which was:
[Credit card companies] actively seek out customers who are likely to miss payments and end up in a penalty fee spiral.
Emphasis added. Perhaps he has access to a marketing strategy memo which he would like to share with the rest of us. Or perhaps the same common sense that led to the "half of profits" claim led to that conclusion as well.