Twelve actions to improve net interest income for issuers:
- To increase net interest revenue, underwrite to risk with a range of rates & test markets with higher rates
- To decrease interest expense, large issuers should use capital markets & small issuers should increase deposits
- To decrease interest expense, also focus on high-risk accounts and aggressively close credit lines when risk warrants
- To increase non-interest revenue, maximize delinquency fee structure & improve collection charge-off recovery process
- To increase non-interest revenue, also drive product offerings to interchange friendly card products
- To decrease non-interest expenses, protect against abuse of credit card rewards & tighten underwriting in reaction to growth of installment loans
- To decrease non interest expense, also strengthen collection functions and policies in advance of next economic downturn
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Data for today’s episode is provided by Mercator Advisory Group’s report – Credit Card Profitability: Interest Spreads and Credit Quality Set the Course for 2020.
About issuers Report
Credit cards remain one of the most profitable offerings by retail banks in the United States. Still, margins began to slip between 2014 and 2017 as credit card issuers rebuilt their portfolios after the recession and normalized strategies in response to the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act). Return on Assets (ROA) for credit card banks fell from 4.94% to 3.37% during that period.
The tides turned in 2018, when the ROA metric improved 42 basis points to 3.79%. Credit card issuers increased their lending margins and benefited by improved credit quality.
The analysis presented in Mercator Advisory Group’s latest research report, Credit Card Profitability: Interest Spreads and Credit Quality Set the Course for 2020, explains the Return on Assets metric, illustrates which components affect the results, and describes why momentum should keep top credit card issuers profitable in the coming decade.
“Credit card issuers began to increase credit card interest margins in 2017 when the prime rate was 3.75%, and they continued to improve their margins in 2018. Indications are that the interest spread, or margin, will rise slightly into 2020,” Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group. “The momentum will likely continue through 2020 as almost 200 million cards were issued since 2017.” Riley also notes that the increased margin protects the credit card Return on Assets metric and helps shield against credit losses if the U.S. market should experience a downturn.
This research report contains 20 pages and 9 exhibits.
Companies and other organizations mentioned in this research report include: American Express, Barclaycard, BMO, Capital One, Chase, Citi, Discover, Equifax, Experian, Scotiabank, TD, TransUnion, U.S. Bank, and Wells Fargo
