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I am unable to understand this revenue stream for VISO

VISO
New answer on Apr 22, 2024
3 Answers
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Trishanan
Premium
asked on Apr 21, 2024

Interest on negative credit card balances

This is equal to the value of a loan multiplied by the interest rate. The interest rate is 10%. Negative credit card balances are 20% of the average amount paid via credit card.

 

When there is negative credit card balance, it means customer has overpaid the credit limit. And banks usually dont charge interest rate if we overpay. I am unable to understand the 10% interest rate and 20% of average amount paid. How did we arrive at those percentages ?


 

(edited)

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Nish
Expert
replied on Apr 21, 2024
Ex BCG | MBB | Tier 2 | Building a Problem Solving Mindset | 6yrs of Consulting experience in Asia & Europe

Hi Trishanan

I understand why the term negative balance can be confusing. However in the context of the case, it refers to ‘unpaid credit card dues’ on average per customer for the year. This ‘negative balance’  is on average 20% of the annual spend and constitutes a loan at 10% interest.

Do get in touch if you have further questions!

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Trishanan on Apr 21, 2024

I appreciate your clarification, Nish. It’s my understanding that the Annual Percentage Rate (APR) for credit cards becomes applicable when there is an outstanding balance. I presume that the APR in this context is 10%, which seems rather conservative considering that credit card providers typically charge around 18% to 19%. I’m curious if the interviewer might inquire about the 20% figure. Could you please explain how we arrived at this percentage?

Nish on Apr 22, 2024

Hi Trishanan Thanks for your query. For part 1 of your query on interest rate, I agree it's conservative but it's part of the case information. However, in the interview your observations can fetch brownie points, so do make those remarks to the interviewer! :) For part 2 of your query on avg. balance assumption, 20% is ballpark. In absence of any data provided to you, 10%/15%/20% would all seem reasonable. Though a substantially higher number might raise an eyebrow. The essential point though is that it would be similar for both the client and competitor as this number is an industry avg. Hence, you would arrive at a similar estimate for both in terms of avg. revenue per customer. Do get in touch if you have further questions! :)

Cristian
Expert
Content Creator
replied on Apr 21, 2024
#1 rated MBB & McKinsey Coach
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Trishanan on Apr 21, 2024

Thank you for your guidance, Christian. I’m uncertain if the interviewer might probe me about the 20% figure. Could you explain how I derived this percentage? Would it necessitate a market sizing exercise to ascertain this number, or should I commit to memory that 20% of a customer’s credit typically remains unpaid, thereby triggering the APR? I appreciate your assistance.

Pedro
Expert
replied on Apr 22, 2024
Bain | Roland Berger | EY-Parthenon | Mentoring Approach | 30% off first 10 sessions in May| Market Sizing | DARDEN MBA

My understanding (general understanding, not from the case) is that you would pay 10% on any loan within the credit limit. But would pay 20% for any ammounts above the credit limit.

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Nish gave the best answer

Nish

Ex BCG | MBB | Tier 2 | Building a Problem Solving Mindset | 6yrs of Consulting experience in Asia & Europe
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