Tag: money

Great Read on the Anatomy of a Credit Card Rewards Program

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Anatomy of a credit card rewards program —

This is… far less incentive compatible for you, particularly if you decided that the business of manufacturing books-dollars was so lucrative that you could rebate more than the direct interchange revenue given mix effects. These users will have blended costs very close to your headline number, not to your modeled blended costs.

These users will even band into tribes, find each other on the Internet, and swap tips for exploiting poor, defenseless credit card program managers like yourself. The tribal elders will eventually run businesses, with names like The Points Guy, which eventually get quietly acquired by very sophisticated private equity firms. Those PE firms are betting that you continue paying generous per-signup affiliate commissions to Internet properties which send you new card users. You bet you will also paying tens of millions of dollars annually to Frequently Adversely Selected New Accounts Dot Com. And Redditors bet they will continue chortling that they have pulled one over on you, because haha, you’re not nearly as good as they are at fourth grade math or keeping spreadsheets.

There are some real great insights in this piece by an advisor to Stripe, a huge financial infrastructure provider and credit card processor. One that stood out to me was Chase going to Visa to create a new product to compete with American Express. We also talk about it a bit in the Patreon supporter part of the Dots, Lines, and Destinations podcast Episode 478.

One thing that is public but not well appreciated: Chase didn’t just decide to create an extremely lucrative-for-the-customer offering out of the goodness of their hearts and out of their own P&L. No, they pitched Visa on this idea. For too long, Visa, you have watched your competitor American Express outcompete every issuer in the Visa system for the best wallets in the world. They can do that because they can afford to, because American Express charges systematically higher interchange rates than Visa does even at its topmost tier. Visa, you should create a new tier where your not-exactly-chosen champions can try to spend those interchange dollars to give American Express a run for their money.

It’s definitely a long piece but well worth reading.

Credit Score Changes Coming

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The Associated Press is reporting that big changes are coming to the way credit scores are calculated. The changes would be for VantageScore, a company that handled 8 billion account applications and is the prime score used for credit card applications.

Of note is the following:

Using what’s known as trended data is the biggest change. The phrase means credit scores will take into account the trajectory of a borrower’s debts on a month-to-month basis. So a person who is paying down debt is now likely to be scored better than a person who is making minimum monthly payments but has been slowly accumulating credit card debt.

The news continues:

But VantageScore will now mark a borrower negatively for having excessively large credit card limits, on the theory that the person could run up a high credit card debt quickly. Those who have prime credit scores may be hurt the most, since they are most likely to have multiple cards open. But those who like to play the credit card rewards program points game could be affected as well.

This could spell the end of credit card churning for those who partake in that game. Having multiple accounts open with large debt limits will possibly penalize you due to the risk that such behavior poses.

Without seeing it in action, it is hard to know if this is a good or bad thing, but my gut says that rewarding positive behavior (paying down debt, not having lots of cards open) is a good thing.

The AP doesn’t list a date for when these possible changes will take place, but it will be interesting to see play out.

Education Funding

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A quick thought for Tuesday. A lot of the hubbub over education involves funding, or the lack thereof. The notion that education is underfunded is not supported by fact, instead, the facts point the other direction, that federal education spending has seen enormous growth since the 1960s.

Maybe we should be looking at how money is spent rather than how much money is doled out. Being in the education field I can guarantee that there is a lot to learn.

The Responsibility of the Public Sector

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As we have already seen in Greece, poor management and the continued growth of government without reigns to control spending are a dangerous combination. The question this poses then is, where do we stand? At the city level, at the state level, and at the federal level, is the public sector being a responsible spender of cash? Should they be? The fact that my wife and I both work in the public sector makes this a personal issue and though neither of us would want to lose our jobs, I think the real answer is that there is a lot of waste at all levels of government.

It is my belief that the public sector should be good stewards of our tax dollars, just like we should be good stewards of our own money. Though, that may not be the best gauge with the number of Americans in debt slowly rising. What brought me to this notion of responsibility in the public sector? Observations. It seems as though efficiencies have been lost simply because they are not needed when one is spending someone else’s money. I believe it’s endemic to the idea that funds are unlimited, therefore one can spend whatever one likes. But shouldn’t it be the opposite? Shouldn’t efficiency be the norm, not the exception? Sure, we should not skimp when it comes to things that are absolutely necessary, but to spend for the sake of spending (to seal in one’s budget) is beyond wasteful, it’s idiotic.

Instead of school districts buying iPads, focus on calculators, paper, or other necessities. Technology will come eventually, but the goal is to provide education, not the newest gear, to students. The same applies to city and state services. The budgets need to be adjusted to run lean and mean. These things do not generate revenue so why should they be treated like they do? If a private company was to come in and take over a city service, I guarantee that they could find places where there is significant, unnecessary spending taking place. Not only could that company make the spending go away but they could keep service levels the same, if not improve them.

There is no reason that our public officials cannot be good spenders of our money, it’s simply a choice. Of course there might be some downgrade in service, but the end result of keeping the service around rather than possibly losing it when the budget becomes unsustainable seems worth it. With the current way we are doing things, something has to give, the question is when. We can keep that “when” at bay and still employ people and provide services that are necessary for the general public to go about their daily lives.

So, what do you think? Should the public sector be fiscally responsible or should they be free to spend as they see fit?

Lower Taxes in 2009

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I came across a quick linked post from John Gruber about the tax bills for 2009. He quotes a USA Today article saying this –

Federal, state and local taxes — including income, property, sales and other taxes — consumed 9.2% of all personal income in 2009, the lowest rate since 1950, the Bureau of Economic Analysis reports. That rate is far below the historic average of 12% for the last half-century. The overall tax burden hit bottom in December at 8.8.% of income before rising slightly in the first three months of 2010.

“The idea that taxes are high right now is pretty much nuts,” says Michael Ettlinger, head of economic policy at the liberal Center for American Progress.

First, I have to point out that I think it’s hilarious what some of these lobbying groups call themselves (Center for American Progress). Don’t get me wrong, the Republicans have some funny ones too. Maybe if we just called them what they were, lobbyists, life would be a little more drab, but at least it would be less confusing.

Now, on to the real point. I don’t disagree that tax bills were lower in 2009, but I think the idea that lower taxes are what people who are unhappy with the administration want is asinine. In the USA Today article, Dennis Cauchon actually touches on the real issue, then skims right over it; The issue of smaller government with less need for our tax dollars. If the government was to run a tighter ship then tax bills could be even lower, imagine that! The other issue that the article really doesn’t address is that of the recession. If the recession was starting or in full swing in 2008, then people surely lost their jobs in 2009, making tax bills smaller out of attrition in the workplace.

Anyway, my point in all of this is, less of a tax burden is great, but when there isn’t enough money to support the budget, we should be worried. I’m sure a few years ago Greeks were glad that their tax bills were lower, now I’m betting they would just like a job.

Education and the Silent Trillion

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Behind all of the healthcare debates and save-face moments lies another policy proposal that is quietly making its way through the House. The Obama administration is proposing to increase its current 20% share of the student-loan origination market to 80% by July 1, 2010 and letting the remaining public sector 20% just fade away.

For decades, federally backed student loans were the most common way to borrow for college. Money was raised in the private sector, loans made and the private institutions paid a fee to the government for each loan. In return, the government covered most of the defaults which in turn, allowed the private lenders to make a regulated return. All of that changed in 2007 when Congress legislated a return so low that no private lender could make a profit holding the assets.

The administration is claiming that this will save $87 billion but there are discrepancies that the Congressional Budget Office says really only mean $47 billion in savings. Long story short, be prepared for the default rates to skyrocket and for more students to suffer as they come out of college and realize missing a single payment could cost them dearly.

Education for all! [that can afford it]