Telegraph looking for tarts!

oscarhugo

See the other thread "Stoozing With The Sunday Telegraph".

johnllew

The article is now on the Telegraph website here.

Joe_Bloggs

She forgot to say 'always read the terms and conditions'. Many new 0% cards are 0% on purchases only eg Sainsburys.
What motivates card companies to do the 0% rate ? How can they still make a profit ? Who has the answers ?
J_B.

Robert_Sterling_3

What motivates card companies to do the 0% rate ? How can they still make a profit ?
J_B.

 

There is a cash stream from the retailers as well as a cash stream from the card users in general.
To some extent the 0% cards are a loss leader in other respects they are a sprat to catch a mackerel.  Enjoy it while it lasts.

Joe_Bloggs

@Robert
Very well said. It could be thought of as a fishy business.
I will take your word on this regarding the things that go on at sea. I don't want to go overboard but further analysis is required regarding the financial motivations of credit card companies. All insider clarification is welcome.

J_B.

Tim_L

The credit card industry is volume driven. This means that the companies place great importance on getting and retaining customers so they can boost their numbers, particularly prior to industry surveys or annual results. Hence the attention paid to retain even very obvious tarts.

There is no direct correlation currently made (as I understand it) between the cost of 0% deals and the overall profitability of the operation. These are separate balance sheet issues (cost of sale v. interest income). However the companies know that if they get a particular number of customers, they can expect a particular return.

MarkyMarkD

There is no direct correlation currently made (as I understand it) between the cost of 0% deals and the overall profitability of the operation. These are separate balance sheet issues (cost of sale v. interest income). However the companies know that if they get a particular number of customers, they can expect a particular return.

Eh?

In a bank's accounts, there is one line in the profit and loss account - not the balance sheet - "net interest income", within which the cost of 0% deals and the revenue from customers actually paying interest are both included, i.e. offset.

I can't see how you think they are not correlated. They are directly linked and shown as part of the same figure in the accounts.

Obviously, however, 0% deals are seen as a cost of winning customers and the banks will only do it, if they earn enough interest from other customers to cover the cost of 0%.

Tim_L

This isn't the information I was given, but I am paraphrasing from memory. The important thing is that the cost of the 0% deals - where this can be quantified - is netted across the entire customer base as a cost of sale overhead, not individually assessed customer by customer.

There is no one by one simple equation that Customer X will transfer his/her debt and we can make Y from this debt at the end of the period. This is obvious really, or else tarts would quickly be weeded out (how to identify a tart: look for a large balance transfer paid off in full during the introductory period, disallow them further deals, sorted).

The process (as I understand it) is driven by focusing on increasing the number of customers on the card's books because market leaders tend to make the largest profits. The only individual calculation the lenders use (I am told) is the likelihood that they will be able to repay the loan. They are thus less interested in the money they can make from specific individuals than the quality of the debt, because ultimately they are playing a numbers game.

I was also told that the situation was changing because of the loss due to 0% deals starts become a significant overhead in relation to the profits from interest, and that the rise in interest rates wasn't helping.

All of which does chime with recent experience that issuers are trying harder to retain existing customers, but the quality of 0% new deals is falling.

peterbaker

.... I have my Egg and Natwest cards' money in a Cahoot savings account ....

Cahoot pays 5.10% gross right?  Surely you might now consider having your Egg card money in an Egg savings account at 5.5% !!!

I was very pleasantly surprised to learn that Egg have opened their new 5.5% intro deal (first six months of a new savings account) to existing savings account customers.  I applied in about two minutes online and the new (second) savings account was up and running in 24 hrs.

MarkyMarkD

Tim, you are so right that calculations are not performed at the customer level, apart from the initial (and subsequent if credit limit increases are requested) underwriting decision.

Things like pricing (setting the rate, and charges on the credit card product across the board) have to be assessed on a global basis and the cost of marketing (including 0% deals) is just part of the costs that go into those calculations.