Just Make Stuff Up

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.

On the subject of credit card debt and bankruptcy reform he links to this WaPo article, and tells us this:

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.

LAST BIT:  Can't argue with John Cole.  More background on late fees here.  And a huge round-up at the InstaPundit.

Comments

[Jim Glass]

".. credit card companies now make half their profits from penalties and late fees ... banks collected $14.8 billion in penalty fees last year, or 10.9 percent of revenue..."

See, this is how dumbass badly managed these card companies are: only 10.9% of revenue produces 50% of profits, while their other 89.1% of revenue produces no more!

So why the heck are they wasting so much of their resources producing that other 89.1% of revenue to drag their profit margin down?

If they just shucked the stupid lending business and concentrated on collecting penalties and fees, they wouldn't waste all that expensive labor and capital it consumes -- and think how high their profit margin would zoom!

Instead of Drum complaining about how high those penalties and fees are, he should be thankful that the credit card companies are so dumb as to run the other 89% of their business for so dang little return.

If they couldn't collect such penalties and fees, no doubt they would continue to do so. Hey, there's an idea for a new law!

[Meep]

Eh. I get at least two credit card come-ons in my mailbox every day, and I would seem to be a less-than-ideal customer: I almost always pay my entire balance each month. But I guess it must be those retailer fees that are getting them some moolah. I haven't paid much in interest charges in the past 10 years, and I don't remember being late, ever.

I think they just go scattershot. They try to get =everybody= to get the cards.

[Forbes]

What's the saying? Stupid is as stupid does.

I'm a fan of mocking KDrum, and his knowledge of things economic/financial is often demonstrated as juvenile, at best.

The media almost never gets it correct when discussing concepts such as revenue and income and profits--and often interchangably using income and revenue to mean the same thing in the same article, while simultaneously doing the same thing with profits and income, or net income. I'd go on with examples, but the bottom line is KDrum sees a storyline or a stat that fits his world view, he uses it. Debunking him is as shooting fish in a barrel. KDrum has no shame in the dishonesty he presents.

[TM]

The bottom line is, he doesn't really know the difference between the top line, revenue, and the bottom line, income.

[John Anderson]

Credit card companies are making money on - *GASP* - credit cards?!?

I do think the interest rates on the cards are ridiculous after 15% or so, and the various fees and other charges are even more so.

------ RANT ------
But then, my bank charges me $25 if I overdraw my checking account and $5 per day [after five days, covered by the instant $25] until I cover the full amount. This despite my not getting "overdraft protection" because, as I explicitly stated, I did not want them to cover overdrafts. So, they screw up by paying out too much money, and I am penalized!

OR, my mortgage. I overpaid a couple of times, until I found the extra was being put against interest - not due for up to 30 years! - instead of balance. So, when I later sold the house and paid off the balance, those overpayments just disappeared.

[SDN]

John,

Need to read the fine print. My mortgage thru Chase had a specific spot on the payment coupon marked "Extra Principal Payment" and that's where it went. I just refinanced thru Quicken, and they also got asked: Can I pay principal early? The answer was yes, and their coupons also have a clearly labeled principal payment.

[Aaron]

Fed-up with high interest credit cards?

Against "usury?"

Here's the solution.

http://www.shamilbank.net/news01.htm

http://www.islamonline.net/English/News/2002-07/25/article06.shtml

[Aaron]

Also, anyone consider that sub-prime lenders can lose money and go bankrupt? It's not as if they are "predatory" when in fact their "prey" can kill them off:

http://www.economist.com/displaystory.cfm?story_id=3672805

"All this is easier to describe than to do, especially when the economy slows. After the bursting of the technology bubble in 2000, several sub-prime credit-card providers failed. According to the Federal Deposit Insurance Corporation, an American bank regulator, in December 2000 there were 156 lenders specialising in the sub-prime market (including mortgage lenders and car-loan companies as well as credit-card issuers). Now there are only around 100, of which nine issue credit cards. Survivors such as Metris and Providian, two of the bigger sub-prime card companies, have become choosier about their customers' credit histories."

Read the entire article. They often only lend US$ 500. So, I doubt they are really socking it to the poor folks.

[Jerome]

A lot of expert here.. So no comments from me except that we will be safe using credit cards as long as we can pay the monthly bills accordingly, so that least fee and charge would be applied into our credit cards.