Late Fees and Charges

This is going to first sound like a rant. But I need you to stay with me and read through this patiently. I’m in the process of getting over the fact that Citibank charged me over $100 worth in late fees and interest charges on a credit card bill of about $260. They declined my fee waiver request and when I called in to appeal, it was declined again.

My latest attempt to appeal further through the secure mail system once again resulted in my request being declined. While you may think I’m an angsty customer just looking to air this in public to shame the bank, I am more concerned that you, as a current or prospective customer, knows about the vicious cycle that banks and credit card companies are now getting themselves into.

Sign-up bonuses and customer acquisition costs

Just a quick look a Milelion’s credit card page shows you the active sign-up bonuses for ‘new-to-bank’ customers which have been getting more and more generous since 2-3 years ago. When I first got my credit cards more than 5 years ago, the competition for customer acquisition was just getting heated up and the best prizes they were giving out were just American Tourister luggages. Then came the one-off cashbacks on minimum spend within months of activating the credit card, grab vouchers thrown in on some. And then it grew bigger, freebies that became more costly: Apple Airpods, Nespresso machines, and even Airpod Pros. Often, these sign-up bonuses don’t even have minimum spend requirements. Just sign up by a certain date.

Assuming that with all the marketing efforts and tie-ups with various web platforms, the cost of customer acquisition comes down to $300 per customer. Let’s suppose further that the customers then goes on to spend about $500 a month for that year. Assuming a 2% fee charged to merchants, the credit card company earns only $120 over that entire year from you gross, not withstanding the other infrastructure costs and the administrative cost of billing you, etc. Even if you spend an average of $1000 a month, that is only $240, not enough to cover the cost of acquiring you as customer especially when first year annual fees are usually waived to lure you in (in any case, we all absolutely hate credit card annual fees).

Problem of having to cover acquisition costs

You can see how that is a problem, the credit card companies need to cover their cost, but also they are forced to acquire you in order to maintain their market share so that they can tell merchants they have a certain number of customer base and convince merchants to continue accepting credit cards. There are some network effect that helps maintain some degree of stickiness but competition from other e-payment methods is intense and being incumbents, the credit card companies have the most to lose from the new entrants.

So they have to recover more of their costs from you. How do they do that? They can hope you pay only the minimum payment and incur interest charges on the balance. The interest rates are as high as 28% on some bank credit cards so they can earn quite a fair amount from here if customers willingly borrow at such rip-off rates. Unfortunately, most customers are not so clueless and also have access to cheaper credit so credit card credit is not viable as a form of consumer credit for most people. Only those really out of options resort to “borrowing” on the credit card. Now, if majority of the credit card customers would pay their bills in full anyways, then how else can the companies generate more income to cover the costs?

Late fees. That’s a big way of generating income to cover cost. Basically be a payment punctuality Nazi and zap every single customer with late payment charge as long as they are just even hours late. Now you’ve got a huge pool of customers who are beholden to you and have to pay you the late fees. Then you can look at your customer acquisition cost and ask yourself, how much late fees do I need to collect in order to cover my costs? So having decided how much you need to “keep”, you can then feign magnanimity by allowing for fee waivers to those who call in to request. Of course, the biggest spenders whose acquisition fees have been more than covered by the merchant fees, they’ll be happy to waive the late fees and interest charges. The rest to missed their payments, but are low-spenders like me, become victims who will have to fork out to pay for and shoulder the customer acquisition costs.

This creates perverse scenarios like this where I now owe the credit card company $366 – where $106 consists of late fees and interest charges and only $260 was my actual spending. In a climate like this with Covid-19 still wrecking havoc in the economy, the banks are hardly doing their part.

So you, prospective customers, think twice before being drawn to that Airpods Pro. And the current customers who have got your Airpods Pro; you might end up having to pay for it anyways!