Background
Earlier this week Dreamhost, the company hosting this blog, accidentally over billed their users for $7.5 million. Over a couple days time, they looked into the issue and have mostly corrected the problem and now consider it solved.
Of course, this has resulted in thoroughly pissing off their users and the delivery of the explanation was so poor TechCrunch called them out on it. I wasn’t too upset, my credit card had expired and I didn’t have the auto-bill feature activated so I didn’t get hit by it. If I had, it would have been awful. Dreamhost bills my bank account via check card where I usually operate around a $1000 buffer/emergency balance. However, at this time I was shifting some funds around and arranging my various balances because I am gearing up to move to Dallas. Long story short, I only had $50 in my account at the time and a $120 hosting bill would have caused an overdraft.
The cost of my overdraft fees are $35 but, there is more. I also had 4 small transactions pending, all of which would have triggered fees when they attempted to settle. So, I dodged a $175 bullet fired by a trigger happy “fat finger.” Luckily, I never trust any service enough to allow them to auto-bill me and my card was expired anyway but, for many users this event had a real cost.
Financial Analysis
This is a very rudimentary and somewhat ridiculous analysis of how much “fat fingers” can cost your users. I’ll explain my logic but you can get the Excel file and make up your own assumptions.
First, I identified three ways this event has real costs:- Finance Charges
- Overdraft Charges
- Affect on Credit Rating
Finance Charges
This cost is associated with having an elevated credit card balance. Most credit cards calculate finance charges based on an average daily balance. This means an elevated balance for more than one day, even if refunded in the future, will cost you money.
Given:- $7.5 million dollars worth of balance elevation
- 18% APR / 365 = 0.049% Daily rate; ignored compounding
- 3 days elevated (days until refund)
- 85% of balances were credit cards, otherwise no finance charge
Cost to Users: $9,432
The only given in this analysis is that $7.5 million was billed to users. I assumed the average APR is 18% and that it would take 3 days on average to refund the charges. Also, I figured about 85% of transactions were on credit cards, it could be much more/less. Charges to non-credit card accounts are assumed to bear no cost.
Overdraft Charges
This cost is associated with those users who experienced overdraft, over-the-limit, or some type of fee due to the unexpected charge.
Assumptions:- $125 average bill
- 60,000 bills
- 10% of bills defaulted
- $35 fee
Cost to Users: $210,000
Based on Dreamhost’s prices and the user’s comments I estimated $125 as an average billing price. With $7.5 million in total billing, that gives us 60,000 bills that were erroneously collected. The default rate is rather subjective, I wouldn’t be surprised if it was actually 1% while it may be upwards of 20%. And, $35 is on the high side of fees but they are usually in that general range.
Affect on Credit Rating
This cost is associated with the long-term affects of a blemished credit rating. Specifically, the risk that your interest rates will be increased.
Assumptions:- 6,000 users affected
- $9,000 average debt held
- 2% rate increase
- 1 year affected
Cost to Users: $1,080,000
If affected, this cost can be huge. However, it is difficult to estimate and the formula I used is extremely sensitive to change. I’ve read reports that puts average U.S. consumer debt at any where from $8,000 to $12,000; so, I went with $9,000. I know the 2% rate increase and 6,000 users affected (all users who received overdraft charges) are probably over-estimates. But, I also only assumed they would be affected for one year. In reality, those affected may be paying up for several years, all the while interest is compounding. For that matter, I also ignored daily compounding throughout the year.
Result
Total Cost to Users: $1,299,432
with
Total Cost per User: $21.66
With the continuous growth of large subscription based sites, I wonder how often this happens? Dollar amount over billed? Real cost to users? And lastly, how long until these issues turn into class action lawsuits?
