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Archive for March, 2009

Mar 24

How TransFS Adds Value

By sean

Every business needs to justify its existence by consistently providing value to its customers.  At TransFS our business is connecting business owners looking for financial services with financial services companies that meet their needs.

We talk a lot on this blog about how we create value for business owners:

  • apples to apples comparison of pricing
  • participating financial services providers must follow a set of merchant-friendly rules (no cancel fee, only interchange-plus pricing, etc)
  • streamlined collection of documents for underwriting
  • no unsolicited calls from salespeople
  • pricing set in a competitive auction which usually results in a much lower rate with less shopping time

But we don’t talk too much about how we create value for the financial services companies, so for a moment now I will:  we dramatically lower their sales costs.

For example, in credit card processing, the First Annapolis Group, a consulting firm focused on the payments industry, estimates that for a credit card processing company to acquire a new customer it costs them about $1000 on average.  Their estimate includes all direct sales costs, such as the commissions and salaries paid to salespeople.  For more detail on the research, see First Annapolis Group Navigator January 2009.

At TransFS we charge less, more like $300 per customer, and we only get paid when we actually deliver a customer, so unlike hiring a new salesperson or doing advertising, there is no risk.  Delivering such a great value to the financial services company also helps our small business customers, because a big part of that cost savings is passed along to them.

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Mar 10

Credit Cards: Highly Profitable.

By sean

Lately I have been really geeking out on the Federal Reserve website, which has lots of great data.  Today I was looking at Report to the Congress on the Profitability of Credit Card Operations of Depository Institutions, a deep analysis of the profitability of credit card issuers.  To do this analysis the fed takes advantage of the fact that there are many banks whose primary business is issuing cards and that those banks need to report their profitability and return on assets to the Fed, FDIC and other regulators.  Here is what I learned:

  • Issuing credit cards is a good business with return on assets between 2% and 4% depending on the year.  Compare this to the overall profitability of banks from another Fed Bulletin entitled Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007 which shows overall bank return on assets varying between 0.2% and 1.6% over the same time period.  Clearly credit card issuing has historically been more profitable then most other banking products.

    Credit Card Issuer Return on Assets

    Credit Card Issuer Return on Assets

  • At the end of 2007 there were $917 billion in consumer credit card balances outstanding, I wonder how that has changed since then.
  • There were about 600 million Visa and Mastercard credit cards at the end of 2007 and another 100 million Discover and American Express.
  • There were 5.2billion credit card offers mailed out in 2007 – around 17 per person in the US, or around 52 per household.  The response rate was around 0.5%.
  • The average credit card interest rate was around 14%.

Credit card issuers make money in two ways, first by charging merchants credit card processing fees for each transaction (for visa and mastercard those fees are called Interchange) which is collected by the credit card processor and passed along to the bank that issued the credit card (about 30% of their revenue), and second by charging fees and interest rates to the consumer for any balances that are carried (about 70% of their revenue) which are billed directly to the consumer.

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