Tesco Bank may be sold

Archi_Bald

Thrugelmir wrote: »

Credit card usage generates fee income from card activity.

You reckon this is enough to generate a reasonable profit after tax? I have no idea what the margins and the tax are, but somehow think it can't be much of a profit opportunity. Especially after you factor in bad debts.

Thrugelmir

Archi_Bald wrote: »

You reckon this is enough to generate a reasonable profit after tax? I have no idea what the margins and the tax are, but somehow think it can't be much of a profit opportunity. Especially after you factor in bad debts.

Fees to merchants vary but between 1% and 4% depending on the card provider and retailer that accepts the card. Offering 0% purchases cards has to generate an income.

Archi_Bald

Thrugelmir wrote: »

Fees to merchants vary but between 1% and 4% depending on the card provider and retailer that accepts the card. Offering 0% purchases cards has to generate an income.

Yeah I can see the 1% - 4% charges, and the gravy train from those that default on 0% deals. But is all of that really yielding a significant enough profit, after all the costs the provider has? If it was easy money, wouldn't we have many more CC providers , and much more competitive deals for consumers?

bowlhead99

It is true that the bank issuing the cards pockets a fee with every transaction.

Typically there are 3 main types of fees borne by the merchant - someone is providing the basic network: Mastercard/ visa (they take a tiny fee); and someone is taking on the risks of maintaining the customer's account and getting the money back from them: e.g. Tesco, Lloyds, Santander etc etc (they take quite a big fee); and someone is providing the hardware and gateway access to the network etc and actually taking the fee off the merchant to split between all the interested parties (taking more than the network, but less than the card provider, for themselves). These days there can be several layers of interested parties.

The fees that the card issuers take off the network for the risk of running the consumer credit and the account administration and ultimately getting the money from the customer is known as an interchange fee - it can sound relatively high on some transactions but on a weighted average basis it is not much as a percentage. Samples for Visa and Mastercard here.

Basically Thrugelmir is right that the issuers will be generating an income on each transaction whether or not they charge an interest rate.

But Archi is right that a percent or so of the amount that you then have to go to try and collect from the customer is not very much when you consider the customer acquisition costs in terms of marketing, credit checks, and employing thousands of people to run the call centres, as well as the x% per annum cost of actually financing the borrowing not to mention the bad debts. So, while the interest rate is on a zero percent deal it can't be a winner.

While the interest rate is in the 10-30% range, that should be enough to cover the risks of unsecured consumer finance but the zero percent stuff is surely a loss leader even if there is money dripping in with each transaction. Someone who just does one transaction to put £10k on the card and leave it for 18 months with zero interest charges is not going to be giving you recurring interchange fees, only the initial one.

By contrast, someone that spends £500pm monthly and pays it off on time every month might be generating a fiver a month of interchange fees which cover the 40-50 days finance cost with some money to spare... even after you've paid the debit card fees for their on-time settlement, or done the admin to match the direct debits coming in against the outstanding amounts, and generated and issued the statement etc, and hopefully not taken up any customer service time to handle any queries because the customer never calls you and the merchant never has any chargebacks. In that situation the recurring revenue is what allows you to give the customer their 'up to 50 days free credit' when they pay off on time.

But if you give them a year's free credit the maths surely stops stacking up unless you turn them into a regular ongoing profitable customer, either from lots of future transaction fees or from high rates when eventually they on do the minimum payments on a 20% APR.

System

The card issuer will only get a small percentage of that amount (interchange mentioned earlier) as it will also be be split with the merchant's bank and card scheme.

Therefore, many cardholders are only spending but repaying in full each month and they are not profitable for the bank itself.

Thrugelmir wrote: »

Fees to merchants vary but between 1% and 4% depending on the card provider and retailer that accepts the card. Offering 0% purchases cards has to generate an income.

Jim431

Thomas_Crown wrote: »

Jim431, you forgot to include the word ''partial'' in your post. It should read ''The troubled supermarket giant is considering the partial sale or float of Tesco Bank''. They are not looking at selling/floating the whole of the bank.

The following quote from the link indicates that a complete sale could be under consideration. The English language is a wonderful thing, with plenty of abiguity, so you could read it either way

"The grocer’s new chief executive Dave Lewis has been forced to consider the possible sale of the bank and several other prized assets "

Jim431

I think there are a couple of important problems about this "sale or float" that need answers.

1. If a part of the Bank were put up for sale then who would want to enter a partnership with Tesco given its recent track record and the bank's falling profits. A part sale might actually be impossible at the moment. A sale of the entire bank might be more attractive to investors.

2. If "float" means sell shares in Tesco bank (which is a subsidiary of Tesco). Then the Tesco shareholders might be a little puzzled about how Tesco can "float" something that forms part of the shares that they already think they own.

callum9999

Jim431 wrote: »

I think there are a couple of important problems about this "sale or float" that need answers.

1. If a part of the Bank were put up for sale then who would want to enter a partnership with Tesco given its recent track record and the bank's falling profits. A part sale might actually be impossible at the moment. A sale of the entire bank might be more attractive to investors.

2. If "float" means sell shares in Tesco bank (which is a subsidiary of Tesco). Then the Tesco shareholders might be a little puzzled about how Tesco can "float" something that forms part of the shares that they already think they own.

1. Industry experts who know what they're doing as opposed to armchair experts who see fraud headlines and jump to conclusions.

2. Shareholders own shares in Tesco Plc - they don't own it's assets. Tesco could float it's entire supermarket business and just become a bank should they want to (though obviously they wouldn't!).

planteria

i think selling the bank would be a mistake. they are well-placed to develop instore-banking services, effectively cross-selling.