SG Budget Babe
Asked on 02 Dec 2019
In regards to signing up a new credit card, in recent years, many of us are signing up a credit card because of the freebies. After receiving the freebies or cashbacks, people would then cancel the credit card. Would it eventually cost a loss to the company?
Hi Mui Leng,
It's widely acknowleged that the sign up will be a loss, but the banks are willing to absorb this loss as it is a method of letting the banks achieve a broadening of their client database. Amongst these new clients obtained, there will be a small majority that will engage the bank for other services such as loans, which is where the banks expect the recoup the money spent on acquiring new customers.
So in short: Yes, the credit card division is not likely to turn much of a profit, but there will be far more to be made in other segments of the bank's services.
By spreading the net wide, these companies could ensnare more people and some are blur card spenders and users, hence they profit from their late fees and interests. Annual fees I waived are also a revenue generator.
Hi Mui Ling,
In short, yes the banks will lose in my opinion if 100% of the folks all made timely payments.
However, I think just based on 80/20 rule, imagine 20% of the folks defaulted on their payments and suffer a ridiculous 25% interest debt (which I believe is a reality in modern society), the banks would not lose from a net-net perspective.
It's not a loss because by casting their nets far and wide, and gaining traction, credit card companies will earn back their investments in the Long run
Yes, if we do the sign up and cancel way, credit card companies do make a loss.
What they are hoping for is that people sign up then incur debts which they then charge at an upward rate of effective interest 15%. Securing such a customer is enough to cover the acquistion cost of a few credit card sign ups.
Furthermore, in recent times, I noticed the annual fee waiver for credit cards especially American Express Krisflyer and UOB cards are increasingly difficult to be waive. The charging of sign up fee is a potential revenue source to them. Many of us says it is okay for instances where we pay the annual fee and receive krisflyer miles. But to the banks they are MORE THAN HAPPY. WHY?
This is because they buy airflyer miles on the cheap from airline carriers. Banks are actually making a profit selling you these airmiles in exchange for you paying the credit card annual fee. This last point is something many people disregard and say it is okay. But to me it is not :0
I doubt so - before any company carries out a promotion or a program, a team of analysts would have to do the math and convince the management that the promotion/program works and will generate income. No management will approve something that is losing money.
Probability of loss. In every sale, there is a calculated risk. So long as the return is higher than the risk within a manageable level, then it is okay.
Additionally, some credit cards include terms and conditions with regards to the free gift. Hence, please ensure that you know what is going on exactly before you sign.
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For the dudes that do it - sure that one person is a loss.
Banks have lots of analysts who look at the overall customer base - there are those who (happily?) pay the fees/interest and generate lots of profit. (25%+ interest on balances ? Thats so much higher than any other loan products; 2.5% foreign exchange fees where YT/Revolut are doing for almost free?)
Taken as a whole the fact these programs have been running for so long shows that for the overall program - it is still benefical to the bank.
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