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Stealing a penny from every transaction

Everybody has heard of the famous (perhaps fictional scam) where someone embezzles millions of dollars from a bank by skimming a penny (or even a fractional penny) from every transaction and waiting. As it turns out, this sort of pocket lining is a key component of the business model for many transaction-based businesses. For example, David Pogue points out that mobile carriers increase their profits by inserting that annoying instructional message that’s played after your personal greeting but before the beep when you get someone’s voice mail.

Check out his estimate for Verizon alone:

Second, we’re PAYING for these messages. These little 15-second waits add up–bigtime. If Verizon’s 70 million customers leave or check messages twice a weekday, Verizon rakes in about $620 million a year. That’s your money. And your time: three hours of your time a year, just sitting there listening to the same message over and over again every year.

Half of me wants to be even more alert when it comes to this kind of thing, and the other half wants to figure out how I can profit from a small surcharge on a common type of transaction.

11 Comments

  1. Did you ever consider what kind of return the processors of banking transactions get for each and every card swipe? POS, ATM, etc.?

  2. I’m skeptical. Who’s “paying” for those extra 15 seconds? Callers without nationwide long distance coverage? Cell callers who go over their allocated minutes every month? Callers without a free “friend’s and family” or “calling circle”? Pay per minute cell users?

    These groups are a tiny fraction of the possible “payers”. Most people pay the same if it’s a simple “beep” or a 15 second instruction.

    Sorry, I think his numbers don’t make much sense.

    Surely there are more useful things we could complain about – taxes, credit card fees, etc.

  3. In choosing between the two, I recommend the how you can profit half. It’ll be healthier for your sanity.

  4. That’s a great point John.

    It’s clearly not as much of a cash cow as David Pogue makes it out to be, however that doesn’t mean it isn’t a money maker.

    Let’s go with the assumption that the $620 million number is right for all of Verizon’s customers. Now if we assume that even one percent of their customers go over their usage limits each month, that’s still $6.2 million per year! Not an insignificant amount given the effort invested on Verizon’s part.

  5. I honestly think that this kind of skimming has a significant economic effect, and is responsible for a significant fraction of the increased funneling of income to the top 1%. Credit card transaction fees amount to a roughly 3% private sales tax paid directly to banks. The bullshit “fees” on cable and telephone bills that essentially amount to an undeclared, unadvertised bump to the advertised rates can be 10-20%. We’ve essentially given in to the idea that we should tolerate corporations enacting their own private taxation schemes in the name of the free market, when in fact this is exactly the opposite.

    The drag on the economy is the friction of someone sucking off 3% here, 5% there out of the income streams of productive enterprises. The more income that comes in exchange for non-productive activities, the less productive the economy is. And when you allow a system to develop where these frictional losses become entrenched you have a very hard time getting rid of them. Look at the obviously anti-competitive Visa & Mastercard cartels for an example – they use market power to prevent competition, and so there is no real price competition on transaction charges.

  6. Jacob, have you heard about the high speed computer trading scam? That one will get your blood boiling when talking about skimming a little off the top.

    http://www.nytimes.com/2009/07/24/business/24trading.html

  7. The term of art — per Wikipedia, at least — is salami slicing, Rafe. (Sam Lloyd‘s famous “disappearing Chinaman” puzzle also comes to mind.)

  8. Love the term “salami slicing”.

  9. inserts witty Office Space quotes

  10. @John

    The extra (wasted waiting for voicemail instructions) minutes add up to N each month. You buy a cell phone plan that includes M + N minutes. If you didn’t have to worry about N, you’d buy a smaller plan that includes only M minutes. Of course, this isn’t a smooth graph. But it must have at least some practical effect.

    As for “surely there are more useful things we could complain about,” yes, of course there are, but how is that relevant? Must people devote 100% of their energy to whichever single item happens to be at the top of their list of priorities?

  11. I believe the actual scam, back in the 70s, involved rounding to the nearest penny. Whenever a transaction rounded down to the nearest penny, the program would move that fractional penny into a particular account. The books would balance, but the implicit averaging assumed for rounding led to slightly different statistics. The total take was in the 10s or 100s of thousands of dollars, not millions.

    (There may have been a penny scam, but that would have been hard to hide from even a simple audit.)

    I doubt the voicemail instructions are anything more than an annoyance. I have a legacy 100 minute plan because it is cheaper than any plan on the market today, and I still rarely hit my limit. I keep calling and asking if competition has forced the company to offer a cheaper plan, but all they’ve done is offered me more minutes.

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