To charge or not to charge, that is the question
In these uncertain times, if the theme for bankers is the flight to quality, the theme for their customers is a flight away from debt.
| “We're always looking for new sources of revenue," says Mike McWhortor, a spokesman for First Horizon National bank, based in Memphis, Tennessee.” 2 |
Those customers who can afford it are voting with their feet and paying down existing debt as fast as they can go, while at the same time cutting down on discretionary expenditure. Increasingly, the accounts which revolve regularly are those who have little choice but to continue to owe money – and that, by definition, can include customers who ultimately won’t be able to continue to carry the debt burden, and will go into delinquency and collection.
Net result? Billings fall, and so does interest income: it can sometimes seem that the only performance measure on the rise is the write-off rate. It’s another problem to add to shrinking interest margins, and state-regulated cuts in interchange. The harassed marketer could be forgiven for asking Is there a magic trick to get me out of this?
Some bankers clearly think they’ve found one: fees. Here’s Keith Horowitz, a banking analyst at Citigroup Inc.: "If you need to hit your target, one of the easiest ways to do it is to raise your fees," he says. "It falls straight to the bottom line." 3
Clearly, many financial services institutions have taken his advice. Last year in the US, card issuers generated no less than an estimated $30 billion in card holder fees, up about 6% on the previous year. Around $18 billion of this was penalty fees of one sort or another – typically unauthorised over-limits, late payments, and returned cheques. Compare this with the $33 billion they earned in interchange, and there’s no room for doubt that fees, and especially penalty fees, are a huge part of the bottom line for these issuers. By way of comparison, interest income amounted to some $97 billion. 4
But, as bankers in the UK are finding out, fees can be a double-edged sword. Encouraged by consumer advocates and media campaigns, current account customers who feel that penalty fees on overdraft over-limits and returned cheques are excessive are taking banks to court in a bid to have these charges overturned and previous payments refunded. For their part, the banks argue that the fees involved reflect the costs incurred and that, in any event, customers were made well aware of the charges when they signed up for the service. No decision has yet been reached on the principle, but there has to be a real risk that the courts will find against the banks.
If so, that’s where our old friend, the Law of Unintended Consequences, will come into play.
Because it does seem at least possible that in the past the so-called free banking enjoyed by UK current account holders has been subsidised by precisely the penalty fees which are now complained of. If the fees go away, so does free banking. At that point, financial services marketers will have to consider whether they can introduce charges for products and to customers who previously have never had to pay them.
Some justification will have to be found for those charges. Simply implying that “Surely you understood that there’s no such thing as a free lunch” won’t work. It will be necessary to provide some sort of service element above and beyond what is currently offered free to make any kind of sense of introducing a move to charges.
The principle, of course, applies across all markets and across all kinds of financial services. Current account product managers in Russia, card marketers in the UAE, all have to face similar challenges: how can I generate more income?
And, as an answer to that question, intuitively it makes more sense long term to find a way of adding value to your product than, openly or otherwise, hitting customers with penalty fees.
Otherwise, the phrase “charge card” is likely to take on a whole new meaning.
3 Wall Street Journal, 26 January 2008
4 CardFlash, quoting R.K. Hammer, 22 January 2008 |
And they aren’t alone: in every continent, banks are moving to assess loan applications using fast-response scoring software. Today, systems like these are being implemented or evaluated in markets as diverse as Saudi Arabia and Panama, Poland and Peru.
dizzying rise in personal loans outstanding, as a new middle class emerges in India with a whole range of material needs for which they’re prepared to borrow. The needs aren’t new: what is new is the ability of lenders to assess would-be borrowers’ ability to repay. And that has to be a good thing for all concerned. 
Well, you could follow the example that’s been set by one issuer: Egg, part of the giant Citibank empire, has recently written to 161,000 credit card accounts in the UK saying that their accounts have been terminated. These customers – around 7% of the total – were deemed to be “unacceptably high risk”2 . That may be so, but at least some of those customers claim that they paid off their accounts in full every month, and that the consequent lack of profitability through interest income was the real reason they were cancelled. Egg strenuously denies this allegation.
