Banks make money because they are better at arithmetic than their customers. They know that if they fix monthly repayments on a credit card at 2 per cent of the outstanding amount with a minimum of Ā£5 it will take 25 years to clear a Ā£2,000 debt and they will have been paid Ā£3,500 in interest.
They know that after 43 years of charging 1.5 per cent a year on a pension pot with 4 per cent growth they will have taken the equivalent of a third of the pot. Even for the section of the population that is not functionally innumerate those are difficult sums.
And where the arithmetic could be simple the banks devise ways to make them complex. A theme that has run through my working life is explaining complex things to people in a simple way. Over the years I have come to believe that this process of making things complicated ā complexification, as I call it ā is deliberate. And it is anti-competitive.
Imagine if you went to fill up your car. The local garage is Esso and the price is 136.9p a litre. But Sainsburyās sells it for 132.9p a litre. So you drive the extra mile to Sainsbury and save yourself a couple of quid.
Suppose instead that your garage charges 129.9p a litre plus Ā£5 to enter the forecourt. That would be dearer. But if you agree to make it your petrol station for the next 10 visits it waives the forecourt charge. Is that still cheaper than Sainsburyās at 132.9p, which charges you Ā£2 to visit and then gives you back Ā£1 if you fill up for two consecutive times?
Such an approach would be retail madness. But it is often the way you are charged for personal finance products.
I wonāt post the whole thing, but the article goes on to talk about how all sorts of products are made more complicated than they need to be.
Routine (āevery dayā) spending on credit card makes basic budgeting more complicated than it needs to be and Iāve pretty much given up on it, despite losing out on cashback. Itās madness that spending on credit gives you extra legal protections (see above for how apparently simple financial decisions are made needlessly complex) but this means credit cards are still useful occasionally.
Would I use a monzo card? Maybe. I keep asking myself this every time this thread pops up. Despite my reluctance, if monzo offered even 0.25% cashback (in line with Lloyds and barclaycard), and bill splits worked on credit card purchases, I probably would end up using it for every day purchases.
By doing an offset credit card - what will happen is that youāll exacerbate this dynamic even further - youāll charge even less interest to ācustomers who have moneyā and therefore youāll need to charge more interest to ācustomers who donāt have moneyā - effectively further driving the wealth gap
You mean like how Monzo charges differing APRs to different customers?
The sad truth of credit cards is that they mostly rely on a small population of customers who are stuck in debt to fund the the population of customers who never pay interest and pay off in full each month
Iāve never fully understood why CC companies keep those customers. They obviously get interchange fees (which are pretty small, albeit I believe are higher than debit cards) but then they have the statements etc that they send out, cost of the cards, call centre contacts etc. Feels like a difficult way to make money. Are they restricted by regulations to not close those accounts? Do they gamble on those customers someday needing something bigger and stretching the payments?
I think @TheoGibson gave us the answer in his reply:
The sad truth of credit cards is that they mostly rely on a small population of customers who are stuck in debt to fund the the population of customers who never pay interest and pay off in full each month.
Basically, those who are stuck in a debt trap end up subsidising the products for the well-off. If what you suggested happened, then there would be fees all round. Probably a societally better outcome, but no one likes to lose out, especially if folk are happy in their ignorance about how these things actually workā¦
Basically, those who are stuck in a debt trap end up subsidising the products for the well-off. If what you suggested happened, then there would be fees all round. Probably a societally better outcome, but no one likes to lose out, especially if folk are happy in their ignorance about how these things actually workā¦
Iām probably being daft but Iām not seeing the answer. Why do they still keep the accounts who are being subsidised? Why not make a higher profit margin by only keeping the ones in the debt traps?
Oh sorry, I thought you meant closing the accounts of those in the debt trap, rather than well-to-do, never pay interest folk.
Iām guessing but I think that 95%+ of users wouldnāt pay any fees (or just pay marginal ones). I suspect the answer is a few-fold: they only need one or two percent of users to forget to sort things out after, for example, the end of a 0% deal to turn a healthy profit (so itās a numbers game), they want credit cards to be seen as an affluent thing, rather than a device for the poor (which would probably then attract additional regulation), and (more fundamentally) when someone opens a credit card account, all the credit scoring in the world canāt tell you if theyāll ultimately default (commercially bad), be in the debt trap (commercially good), or pay no fees or interest (commercially bad).
Iām not saying weāre completely innocent of this dynamic either but itās also not a binary 1/ 0. Thereās a sliding scale.
A few reasons are:
They use sneaky fees to catch people out - eg. missed payment fees, FX fees, ATM fees, losing your balance transfer promo if you miss a payment, etc.
They hope that you eventually pay some interest.
There are ecosystem benefits (this is an important one for us) - eg. If you get and use Flex, even if only the interest free options, then youāre more likely to move more of your financial life to Monzo, get plus/ premium, etc.
Itād just be really odd to not accept these customers.
They float around Ā£0 profitability - so not massively negative, just not highly positive.
Itās much much less than this.
This is really interesting - and also helps answer the above question
For what itās worth, Iām the same as you - I donāt use a credit card - I donāt care about the Ā£100 - Ā£200 cashback I might get per year.
Most people I know only use credit cards for a large purchase they want to split over a few months, thus paying interest. I suspect the number who use them for day to day spending is relatively small.
Why keep accounts that never pay interest. Mostly it is a risk management excercise. Depending on different profile of customers, different set of customers will get into debt trap at different times. To ensure one always has some interest paying customers, one wants to have a diverse set, when things improve for some versus others.
Plus credit cards do have slightly higher interchange fee, thus for example Monzo makes slightly more money of people using their flex card versus the debit card.
If people use the virtual card yes, but I would be curious to know how many flex a transaction from their debit card rather than using the virtual card number.
In an ideal world, someone like Monzo (or Starling) could acquire Tymit.
Tymit is a pretty good product, just (in my opinion) quite poorly executed.
Iām sure either Monzo or Starling could make a better job of it.
Yes, 3 months interest free credit, or 6/12/24/36 months at fixed interest.
The difference between Tymit and a standard credit card is there is no minimum payment, you have to decide the terms on every purchase you make.
but itās also not a binary 1/ 0. Thereās a sliding scale.
tymit