Cash, Credit, or Cell?

"Hey can you cover me I left my charger at work?"

This is how you will sucker your friend in to paying for your night out in a year or two.

Confused?

Yeah... you, Master Card, Visa, and American Express too.


In just a few short months consumers will have the option to pay with cash, credit card, or their smart phone.

That's right soon your smart phone will be just like a credit card except better; it won't be a credit card.

Who Is Behind This New Payment Method?

More then several players are going to be directly offering a cell phone payment method.

Below is a quick list of the bigger companies creating an alternative credit method for your smart phone.

Isis

AT&T, Verizon, and T-Mobile are all joining forces to form a company or entity or whatever they are call such a partnership. This new transaction processing company will be called Isis.

Google and the Android Operating System

Google is developing a system that will integrate with their Android operating system. All a phone will need is the embedded chip.

New Start-Ups 

There are several new companies that have already formed that are going to offer solutions for both consumers and merchants as an alternative to paying with the old credit card.

Why the Push to Create a New Payment Method and Credit Card Alternative?

Mobile Networks

This is the obvious answer. All the big data networks such as AT&T, Verizon, and T-Mobile will expand their offered services in a big way. The electronic transaction solution business is one hell of an extra business to get in to. They will get a cut of every transaction just like the credit card companies do now.

Consumer Choice

Then of course there is the consumer demand for an alternative to credit cads. there is an obvious benefit to being able to pay with your smart phone in addition to the other two choices that we already have. though this is an obvious motive for coming up with another merchant transaction solution and alternative to credit cards it is not even close to the main driver of this new industry.

Merchant Incentive - A Cheaper Better and Smarter Alternative

Merchants are going to welcome this thing with open arms. Merchants have a real love hate relationship with credit cards. The problem that merchants have with the existing credit card transaction solutions is the price they are charged by the credit card companies. It really puts a dent into the margins.

Also the credit card companies have been increasing rates on the merchants to make up losses that the banks have incurred during the credit crunch and massive waves of loan defaults.

To top it off the credit card companies have made it a breach of contract for merchants to say anything about the expense to consumers.

In fact many people have no idea how credit card companies make money. It's not the interest we all pay.

Merchants will be able to cut the transaction expense in half. This means bigger gains in margin. This thing will be huge for merchants.

Credit Card Companies are in Trouble

The one thing that is crystal clear amidst all this new possibility and choice that consumers, networks, and merchants will have in the very near future is that credit card companies are not going to fair well.

Sure there is going be a place for credit cards. Trust me when I tell you that credit cards are not going anywhere. I am actually surprised that the bigger credit cad companies are not more involved with this new movement but the again I guess these phone networks have a pretty solid infrastructure already in place.

My next post is going to be on what this will mean for consumers and merchants as well as the data networks. The positive impact and benefits of ths shift is going to be a lot bigger then most people would think and I really want to paint a vivid picture for everyone.

So check back soon!


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How Credit Card Companies Make Money - What you may not know

If you are a consumer then chances are you have a credit card account, or at least have had a credit card account in the past.

Do you know how credit card companies make money? 


Do you know why credit card companies are so willing to lend via unsecured revolving accounts?


Most people would guess credit card companies such as Visa, Master Card, Discover, and American Express make their huge profits by charging consumer borrowers interest on the money they borrow via their credit card.

Most people are wrong.


Though some credit card companies lend some of their own money or at least make money off the interest that is charged this typically represents a insignificant portion of their overall revenue. This information may come as quite a surprise. But it is more true then most can imagine.

Common Credit Card Company Revenue Streams and Origins


Transaction Commissions

Transaction commissions are the bread and butter of the credit card industry.

When you pull out that Visa card and make a purchase the merchant pays a portion of the money charged to Visa or whatever credit card or bank applicable. The exact percentage of the charge that is handed over to the credit card company variable. This rate is different from card company to card company and from merchant to merchant.

Small merchants pay more. Big merchants pay less. Exclusive and smaller credit card brands charge more. Larger and bigger credit card companies charge less.

For instance McDonald's pays a small fraction of what a "Mom and Pop" store would have to pay. Having said that the typical merchant is going to end up paying 1%-7% depending on the card.

American Express and Discover typically charge higher rates then the larger companies such as Visa and Master Card.


Borrower Fee's

Many credit card companies charge annual maintenance fee's, late fee's, and whatever other fee that some guy wearing a tie and a rolex dreams up. These fee's are typically 10 - 100 bucks a year per card. That may not sound like so much but take 50 bucks and multiply it by say 50 million accounts. Now we are talking real money.

Advertising and Marketing Revenues

Information. The commodity of all commodities. Credit card companies have found themselves knee deep in consumer information. What population of Visa card holders have made at least one monthly online purchase for the last nine  months? Well you can most likely obtain some pretty accurate answers to that question if you are willing to pay for it. Even if a buyer of such information is unable to buy that info they will still be able to reap the benefits of knowing the answer.

What do I mean by that?

Perhaps the buyer is able to place an email blast to all those card holders, or a direct mailing campaign, or whatever. For a fee per mail-out or phone number or maybe a part of the revenue generated from the marketing list. the possibilities are limitless.

Cross Selling Related Products

Protect your credit score. Buy life insurance. The offers a consumer gets are limitless. many of these offers are through one of your existing credit card companies. these large cross selling efforts have a similar macro effect as does the annual maintenance fee. If a card issuer is able to generate an average of 18 dollars per credit account via other products and services then these companies are able to generate billions an additional revenue.

These same tactics work great for other outside company products and an affiliate program.

So there you have it. Now you know that your credit card company is not focusing on that interest rate they are focusing on transaction volume, marketing dollars, and consumer information.

Sleep well.

Bank of America - Ruining a Good Thing at WaWa's

This is based on a personal experience and is a personal post. It is about both Bank of America and WaWa.


I love WaWa. I am a sucker for innovative businesses that just do things right. WaWa is one of these businesses.

WaWa stays competitive in large part by creating cheap pricing on everyday items. So stuff like cigarettes, coffee, use of the ATM, and gas are priced extremely competitively compared to the surrounding competition whom ever those poor souls may be.

I needed some cash the other day and their is a WaWa located conveniently to my home. I know they don't charge for their ATM use which is a deal that they have worked out with their bank or credit union.

So I checked my balance and then withdrew 20 dollars.

Then a few days later I check my bank statement. I was charged 4.00 dollars by my bank which is Bank of America.

They charged me 4.00 or 20% of what I took from my account.

Think about this WaWa paid for the location and electricity that was needed for this transaction. Their bank supplied the cash, and all of this was provided free of charge to me. Then Bank of America has the nerve to charge 4.00 dollars.

Man that really hurt my finance feelings.

Consumer Credit Declines

Consumer credit is declining. The American consumer is able to buy less and less on credit with every passing month.

During the month of July consumer credit dropped by about 3 billion dollars. As of August the collective American consumer was able to buy 2.4 trillion dollars worth of merchandise via credit if we were to all max out every account we had.


2.4 trillion is the lowest levels of consumer credit sense 2007.

More specifically revolving credit accounts which are dominated by credit card accounts fell by 5 billion dollars down to a total of 822 billion dollars in credit.

You may notice that those numbers do not exactly make sense. The 5 billion lost on credit card accounts was off set by a rise in auto loans and non revolving credit. Non-revolving credit rose by almost 2 billion dollars. to about 1.6 trillion.

oddly enough mortgage rates are at all time lows with the average 30 year fixed rate home loan at a microscopic 4.27%.

I think the declining consumer credit is a good thing, or at least a necessary thing. The US consumer has been overspending for years. We now are able to see what effect easy money ultimately has on the economy. I think we have all learned the finance lesson for the decade.

America's Banks are Financially Baked - Crispy and Risky

Financially crispy, and unfortunately risky. That is the blunt truth regarding the US banking industry.

The unfortunate and scary reality of the matter is that out of the nearly 8,000 banks that are FDIC insured almost 830 of them are on the "oh crap" list that is kept by the FDIC.

That is a little more then 1 out of every 10 banks, or more specifically 11%.


By "oh crap" I am implying that they have been flagged by the FDIC as a potential credit risk. This does not mean that they have or will fail, nor does this mean that they are even likely to fail. It just means that they are seen as having an unfavorably high level of risk compared to the typical FDIC insured banking firm. If you are one of those that want nothing to do with finance (you must be lost) please note that "risk" always exist. There is a risk that you will find and lose a suitcase full of money today.

They all will continue to be insured by the FDIC. Your money is safe (besides it's just paper we can print as much as we want, what it is, or will be, worth is the only risk) up to the insured limit.


Bank Failures


Almost 120 banks have failed year to date. 140 banks failed last year. if we stay on this pace then we should have 300 bank failures in two years time by Christmas of 2010.

I just love the holidays don't you?

Another big event or lack of event reported by the FDIC is that there have been zero new FDIC insured banking firms over the last quarter. I am not sure but that may very well be a first.

Loan Origination

Though default rates have eased for the first time since 2006 or something crazy like that, banks are still not lending. The only loans that are really being originated are car loans.

This is no good. I have no more to say on that end.

How about some brighter numbers...

One glimmer of hope is that in terms of profitability, things are headed in the right direction. For instance during the second quarter these 7,800 banking institutions collectively profited by 21.6 billion dollars which is 25 billion dollars better then last years second quarter results.

As of now 80% of banks are profitable.

Back to the bad news...

But then again that means that 1 in 5 banks are operating at a loss.

During the first three months of 2010 total assets held by banking institutions decreased by 135 billion dollars.

The bottom line of all this is in line with the a previous and recent post on this finance blog that discussed the current state of the US economy.

Things are kinda... almost... could be improving. However there is room to worry.

The most bothersome notion from all this is that I, and some other folks who know a thing or two about finance and all that other god awful subject matter, see a very close, and very scary ledge, or rather cliff, running parallel to the narrow road of recovery that are hybrid economy car is traveling.

All we can do is pray that it is not a Toyota.

(I made a funny)

(I like Toyota)

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Low Mortgage Rates Create High Demand for Mortgage Refinancing

Mortgage rates are low as they can be. I honestly do not know if we are ever going to see rates this low ever again. Though I should say that statements like that some how always seem to turn out wrong.




So with low mortgage rates you may suspect as I would that there would be high levels of mortgage origination's. Consumers would take advantage of such an opportunity.



Right…



…well…



…yes and no.



See the level of mortgage origination's is not rising. This is due to the low home sale figures as of late. But consumers are still taking advantage of the low mortgage rates.



Consumers are taking advantage of low mortgage interest rates by refinancing out of higher more profitable (for lenders) interest rate mortgage products into lower more borrower friendly loans. Mortgage refinancing activity has doubled from the end of the first quarter.



According to MBA, the Mortgage Banking Association, the weekly refinance index has pushed past 4,000. That number dwarfs recent index lows of 2,000.



I think that this is a positive trend for the American consumer. By refinancing into a lower mortgage rate homeowners will be able to lower monthly mortgage rates and and make home affordable.



This is a great opportunity for consumers to take advantage of the ability to utilize mortgage refinance as a debt solution in these times of financial hardship.

Financial Reform Pushed Through By Democratic Majority and Three Republicans

A New Financial Industry Reform Bill Has Passed

Well 2,100 pages of potential American Policy and Law fixing to keep a tighter watch on the financial industries practices of marketing products to the American Consumer is on its way to Presidents Obama's Desk. Obama is expected to sign.


From what I have read thus far this bill is not really “known”.

That is a confusing way for me to put it but everything I have read has been vague at best.

ABC has said that the bill will add some consumer protection agency to keep a close watch on lending practices. Also Bond rating agencies may have to come up with a new business model which is well.... long over due.

Another potentially big aspect of this thing will effect derivative trading and the regulations that are put on private equity and hedge funds. That will be interesting to see play out.

Overall I think the financial markets do need some shape up or restructuring I guess I am just not sure that a 2100 page bill that no one really seems to understand or have even read seems a little fast.

I do believe and have faith in Obama to make the right decision on this one. He truly believes something needs to be done. I will support his decision regarding reform of the financial industry.


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Goldman Sachs Settles with the SEC - Over Half a Billion Dollars - No Financial Biggie

Goldman Sachs who really caught some heat from the subprime mortgage securities it was selling as securities (imagine that) settled with the SEC for a little more then 500 million dollars.

In the grad scope of things this is no big deal to old Goldman. However in light that i still do not see how acting as a broker and selling securities can end up as a 550 million settlement with the SEC.

I don't know about those guys.

The brass tax of all this boils down to a fine that represents approximately 4% of what Goldman made in earnings for that year. I think they are probably happy just to get this stuff over with.

I know I would be.



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Credit Unions or Banks? Are they the Same? Whats the Difference?

So I was out with a girl the other night. It is our second date. We were talking and some how the term bank and credit union came up. She didn't know the difference.

Know the difference between credit unions and banks. Please.

Well to save the very few others who don't know here is the scoop...




Credit Unions

• Nonprofit Organizations
• Owned by the members (customers)
• Board of Directors call the shots and they are volunters (though nothing is free)
• Profits are driven back into the banks costfunctions and thus yield discounts for the members in the form of lower interest rates, smaller fees, and whatever.

Banks

• For Profit Organizations
• Owned by Shareholders
• Board of Directors call the shots and they are paid. They are paid to make profit for share holders
• Profits are either invested into bank or paid to shareholders

To put all this in perspective...

Banks are generally going to be more innovative, motivated, and hire better talent.

Banks are going to try and take as much money from you as possible with out losing you.

Customers of banks potentially will feel less attached or as motivated to pay up, though these margins are so slight that they may not even matter.

Credit Unions are going to be a little old fashioned and do as it is done and has been done.

Credit unions are going to try and keep rates as low as possible. They want to keep costs down.

Credit Unions will have good people working but these are not gona be the change the world type for the most part.

Members (customers) may potentially have a stronger sense of duty, responsibility, and loyalty.

The Bottom Line Round

Go with a Credit Union over a Bank. Or not what do I care.

Big Banks Bet and Bank on Trading Profits - BoA and Chase Ride Trading Revenue to Profitability

Both JP Morgan and Chase and Bank of America reported profitable quarters this earnings season go around.

Though Chase has been in better shape over this economic down turn both banks profitable quarters relied on their investment banking activities.

Chase Bank reported 3.3 billion dollars for the first quarters profit. Bank of America came in right behind them with 3.2 billion dollars. 3/4's or 75% of Chase Bank profits came from trading and investment banking activities and 2/3 or about 65% of Bank of Americas profits came from their newly found investment banking operations. This profitable Merrill Lynch deal has beat the overall outside consensus and expectations. Just goes to show you that old Ken Lewis knew and still likely knows what he is talking about.


Though it is the new guy Brian M. over there amidst the executive offices of Bank of America who is wiping the sweat of his forehead as the new CEO of Bank of America.

The New CEO, Brian T. Moynihan of BoA is doing a great job in my opinion. He is making some great decisions as the banking giant's leader.

His focus on image, loss mitigation, referral networking with the new investment banking operations and corporate banking division, and what ever else he is doing is certainly getting the job done (at least from what I have seen).

My finance hat goes off to him, as well as Ken Lewis who deserves some credit from the media, and of course the genius over there at Chase Bank, Mr. Diamond.

The stock prices of these two banking giants were unfortunately blocked and pushed down due to the outrageous claims of mortgage backed securities fraud against Goldman Sachs. This claim and lawsuit courtesy of the SEC.


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Reform or Refrain - What Will Become of the Push to Reform the Financial Markets

It is no secret that the financial markets have not performed at there best. The free market by default will always be on the move, sometimes up, and sometimes down.

The last few years has been a bit skewed if we go by the history of the financial markets. We have not seen performance this low since the Great Depression.

Should the government reform the financial markets and current regulatory practices?


The federal government has already stepped in and bailed out or contributed to the financial stability of most of the large financial institutions and banks who are in large part the reason for the economic down turn of the economy. Just as the the government has reasoned that they needed to step in and aid the financial institutions so to do they believe that they need to step in and take a bigger presence as a government regulatory force in the broader financial markets and financial services industry. However as one might imagine there has been some negative feedback from the financial institutions and from many politicians.

Shouldn't the government step in and play a larger role given the fact that they already have stepped in the form of financial aid to these very same institutions? Many say yes. However just the many say no. The argument and rebuttal to this proposal is that regulators and the government will have a negative impact on the markets as they will increase artificial constraints and will increase the degree of uncertainty for investors.

This seems a fair argument as regulatory bodies will make mistakes as they are only human in the end. plus there is also room for the unseen and unintended consequences that seem to always pop up when Uncle Sam gets in the way and these blunders are not easily changed if they don't work. Plus it is arguable to say that the regulatory bodies have done a mediocre job thus far in enforcing the current line up of rules and regulations that are already in place for financial markets and the business world.

On the other hand there does seem to be a obvious problem with the markets at this given point and time. Also to be fair to the regulatory bodies such as the FED and the FDIC there are some loop holes that need to be fixed so that these guys can have the control they need over non bank deposit financial institutions whom leverage up to obscene levels and add systemic risk to the downside for everybody. Such institutions are not subject to the same liquidity or capitol levels that the typical savings and loan bank is held to. Thus these guys potentially can take things to far and as of now it seems as if they have.

Given these above notions I would like to hear what people think. Should there be added regulation to the world of finance?

If yes what do you think should be done?