Citigroup the Underdog
With universal increases in minimum payment requirements now in effect, credit card companies have begun to lament their strained bottom lines. For example, this article, which describes recent SEC filings from Citigroup and JP Morgan, echoes growing concern over a projected $500 million in lost revenue for each lender.
Are those concerns justified?
Before a tear wells up in your eye for the banks, take a look at the other figures included in the above article. The two lenders noted above combined for more than $200 billion in revenue last year. Suddenly circumstances don't seem so dire at Citigroup.
Sure, higher minimum payments can make it difficult for consumers to pay their bills, but isn't that a sign of a greater problem? If a 4% minimum payment is too much of a financial burden it's an awfully strong indication that the affected consumer is far too leveraged. Raising minimum payments is an important step in reducing consumer reliance on revolving lines of credit, which has become a serious problem across the country.
That said, wait just a minute before accepting the story coming from the banks. Is the "loss" really coming from increasing consumer defaults, or are the credit companies taking a hit because faster-paying consumers equal less opportunity to gouge wallets with astronomical finance charges and fees?
Maybe the banks will do what they do best: start throwing money at Congress to get laws changed in their favor. It's worked before.
Never lose sight of the point that before anyone files for bankruptcy, they have already paid a signficant amount in penalties, late fees and interest to their credit card lender.
The credit card issuers are also receiving penalties and late fees and interest from those who manage not to file for bankruptcy, but nonetheless find themselves making purchases they can't pay off at the end of the month.
Isn't this enough? Do the card issuers think they deserve more?
Shall we start to quantify these fees? Perhaps if more people who do manage to pay off their credit cards each month understood what their less fortunate brethren were paying, there would be more pressure to make the credit card business a little less profitable.
lvtfan
http://www.wealthandwant.com ... if you'd like to see an end to poverty
March 14, 2006 5:40 AM | Reply | Permalink
My wife and I have been in the process of selling some highly appreciated assets to pay off our credit card bills. Frankly, I doubt we will ever charge much again. Looking into the future the prospects of real wage growth don't look that good for us. Nor do they look that promising for most middle class Americans. If we multiply our reaction by the millions of folks having to make similar decisions (mostly involving removing equity from residential real estate) it is possible that the median term prospects for the big time credit card companies are not very rosy. I would suggest the big time credit card companies are going to want to think about moving their money elsewhere.
Without an expansion of real income among members of the American middle class, America's days as the economic engine of the world might be in jeopardy. A society can only live off its equity so long before living standards decline. And I don't care how much cheap junk we import from China. I think I might ask my broker for some stock recommendations in India and China. Oh, you say, most Americans don't have much stock. A lot of our under educated children will find work making shoes for Nike. Many of our older adults will die unnecessarily early because they don't have health care. Our rich tax cut beneficiaries will do what my wife and I are doing. They will (probably already have) move their money to Asia. They will also move their homes to someplace nice and gated. I am sure they don't want to be around America as its people deal with the "correction." After all they are really people of the world. My problem is that I am sort of caught in between. I don't have enough money to pay for the chalet in Swizerland. I am stuck with the rest of you. We are going to have an interesting ride.
Ron Byers
March 14, 2006 7:20 AM | Reply | Permalink
Before a tear wells up in your eye for the banks...
Wait for a second while I get a new box of tissue, I just ran out...
Whew... that was a tough one. These guys have it so tough.
I think without the credit card profits, the banks are in trouble. They make their money on the margin between what they borrow the money for from the Federal Reserve Bank and what they lend it out for to the public. When that margin is squeezed, they try to make it up with account fees, and tricky ways of charging interest that isn't considered interest by law (i.e. overdraft fees on checking accounts). The credit card industry pulled banking out of a crisis when exporting interest rates to other states became legal. We may be headed back that directon, if a little thing like increased minimum payments wake up Americans to the credit card trap. If they can't make the fortunes they do on late and overlimit fees, and inflated interest rates, on credit cards, they lose their cash cow. The CEO of Citibank may need to sacrifice his position on the top 10 list of highest paid CEOs in the country, and save the bank millions of dollars in his salary cut alone. (an example of the selfish nature of management in these companies). The CEO of Citibank, Sandy Weill, made $54 million in 2003, also the only CEO to get a cumulative pay of over $1.1 billion since 1990.
Maybe we should consider, as a country, the merits of a non-profit banking system. In other words, using the Credit Union business model in our banking system.
Jim Anderson
www.lighthouseonline.net
March 16, 2006 12:28 PM | Reply | Permalink