Credit cards are very good for me. Card issuers think that I would be good for them, too, and they keep offering me credit cards which I refuse—I have three already, and that is quite enough, thank you.
Actually, I am a bad, no, useless actually, credit card customer. This is because I never borrow on a credit card. Each of my cards has a ‘100% payment on due date’ arrangement in place. That makes me a 'transactor' and not a 'revolver' (nothing lethal, relax—I will explain soon).
Transactors like me use their cards for almost anything they buy, in a shop, online, or even to buy a loaf of bread from French Loaf. This is not because they are ardent followers of Modi-ji and fervently believe in Digital India. It is because buying on a card, instead of paying cash, does not cost anything extra. On the contrary, there are two tiny benefits—credit for up to 45 days (you pay only when the monthly bill becomes due), and the accumulation of points, with which you can (eventually) buy some useful, or useless, thing.
The card issuer usually loses money on customers like me, because all it gets is a small interchange fee (about 0.5% or thereabouts) on every transaction, but has to pay the shop, or vendor, upfront and, hence, bear the interest cost on the money until I settle my bill.
But card issuers tolerate useless customers like me because they milk the revolvers (a poor analogy, but true).
A ‘revolver’ is a credit card-holder who does not pay the full monthly bill. He pays only 10% of it. The rest of the bill amount ’revolves’ (gets carried forward), on which the card issuer charges him a hefty interest, 2.5%-3% per month, i.e., 30%-36% a year. The best customer for a credit card company is the permanent revolver, one who keeps paying 10% of the bill every month and does not bother about the usurious interest rate.
Typically, if 60% of the customers are revolvers and 40% are transactors, the card company is doing OK. If the ratio is 75/25, it is doing very well, thank you. But hold on—90/10 means dark clouds are looming, and 100/0 means bankruptcy. A high revolving rate can get to be too much of a good thing!
Ok, so much for the ‘good’.
Next – the ‘bad’.
For the customer, ‘bad’ is when he defaults on the card payments. He starts getting calls, first in a polite voice, then in harsher and harsher tones; finally, a tough-looking guy lands up at his office or doorstep and starts yelling for payment, so that everyone around can hear and he is shamed into paying. That is when he faces a mountain (all right—a hillock) of debt, including all kinds of penal interest and default fees, which boost the amount he has to pay.
For the card company, ‘bad’ = excessive delinquency. Let me explain a little bit.
A card issuer has a large fixed costs on: a sophisticated computer system, a 24x7 call centre, sales people, debt collectors, advertising and marketing. It starts making money only when it has:
- a substantial card base, 1 million plus;
- a revolver rate of 60% or so; and
- bad debts (delinquency) of not more than 5%-6%.
The key number is the delinquency. Credit card issuers tolerate, actually like, a ‘reasonable’ amount of bad debts because it shows that the risk level is optimum, i.e., high enough to show that they are attracting customers, who are always tight for money, so that they will keep revolving and paying interest, but low enough to maintain profitability.
But if delinquency shoots up to 10%+, all the profits will disappear. Any higher, and the card issuer will be in loss and there will be ‘alarm and despondency’ in the management.
Credit card is a business in which there are a few ways to make money—interest, annual fees, interchange, late fees and foreign exchange. But there are many ways to lose money. That is what makes this an ugly business, for both issuer and customer.
The biggest issue is fraud. Over several decades, issuers have been installing newer and more sophisticated fraud prevention systems; but, whatever they do, the fraudsters seem to be able to catch up very quickly. Online shopping with credit cards seems to have opened up new possibilities of stealing money from credit cards. Sometimes, the card issuer takes the hit; at other times, the processing or paying bank (called the acquirer) bears the loss.
This can get ugly for the customer, too. My wife did not hear several pings on her mobile phone in the early hours of the morning. Then came a phone call from the issuing bank “Have you done such-&-such transactions?” It turned out that several fraud transactions had been done on her card in quick succession (hence, the pings – SMS from the issuer) until the fraud detection system detected that something was amiss and had blocked the card. Over Rs50,000 were missing.
I went to the police station to lodge a report. The first thing they asked was “Was it a credit card or a debit card?” When I said it was a credit card, the cops lost interest – it seems they were only worried about debit card frauds. It took me more than two months, after endless emails and conversations, to get the money back from the issuer.
The credit card business also turns ugly for issuers when other forms of fraud happen. Two major ones are: hackers entering the system and stealing credit card data and sales people colluding with customers to forge bank statements and ID cards to get approval for a new card. Sales peoples usually worry about their targets and incentives, not future bad debts.
But whatever be its complexion—good, bad or ugly—the credit card is here to stay and it is up to everyone involved to save their skin while reaping its benefits.
(Deserting engineering after a year in a factory, Amitabha Banerjee did an MBA in the US and returned to India. Choosing work-to-live over live-to-work, he joined banking and worked for various banks in India and the Middle East. Post retirement, he returned to his hometown Kolkata and is now spending his golden years travelling the world (until Covid, that is), playing bridge, befriending Netflix & Prime Video and writing in his wife’s travel blog.