There exists a heterogeneity of strategies and a wide distribution in customer behavior. Some banks (and some products at a particular bank) might be caricatured as being more of the first, and some more of the second. And some are both, for different people.
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Financially unsophisticated people, including very smart financially unsophisticated people, often believe "Banks can't make any money from you if you are a responsible user of credit. They want you to get in over your head." This is false as stated.
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Banks sell financial services. Sometimes the pricing is a little opaque to the end user, because it is subsidized by someone else. If you consume a lot of financial services, and banks are eagerly courting your business, it is *probably not* because they're bad at math.
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A concrete example: which of the following two customers is more lucrative? A: Spends $10k. This strains them; they can pay back the minimums, but it will take them years to pay off, at a 15% APR the whole while. B: Spends $10k monthly. Never pays a cent in interest.
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Answer: depends *almost entirely* on what it cost the bank to acquire and keep B's business, because B is *printing money* via interchange. A contributes about ~$1.3k of revenue per year (plus $200~$300 in month 1). B contributes about $2.5~$3k annually.
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(Should insert a *plausibly* before "contributes" because there are actually a lot of different interchange rates the issuer could be receiving depending on product, jurisdiction, card brand, regulation, etc, and I should clarify "I'm being very handwavy on math here.")
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Replying to @patio11
Really interesting assumptions though! Is this knowledge a by product of being with Stripe?
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Replying to @sinnet3000
I had weird hobbies prior to joining Stripe, too, and I could have done that math in 2006, but suffice it to say my appreciation for interchange has not gone down as a function of my current job.
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Replying to @patio11 @sinnet3000
Most secrets about how the world works aren’t secrets, they’re just knowledge unevenly distributed.
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Replying to @patio11 @sinnet3000
@patio11 great thread as usual! I wonder if you have any go-to resources for learning more about this “unevenly distributed knowledge” in banking?1 reply 0 retweets 2 likes
A *surprisingly* underrated tactic is reading lots of bank annual and quarterly reports, particularly for banks which are relatively simple. (First Republic or Wintrust or Silvergate are good starting points; largish enough to have insight but relatively straightforward.)
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Replying to @patio11 @sinnet3000
Thanks! I skimmed through a few of those reports before, but mostly to figure out their net interest margins et al., but will revisit them with more care.
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