Expect More Conservative Credit Card Issuance in 2018 as the Lenders Face Increased Delinquency and Rising Interest Rates
Bank credit cards, the lending and
transacting products offered by domestic financial institutions, are risk-based
products that permit a cardholder to transact on the payments network. Credit
cards differ from debit and prepaid products because they require the issuing
bank to extend credit to the customer. Since credit products generate fees, interest,
and interchange, they are more profitable than debit cards, which rely on the
presence of a deposit by the account holder, or prepaid cards, which require an
account load. Credit cards earn income from interchange and fees.
Mercator Advisory Group’s report, The Credit Card Data Book: 12 Significant Indicators, reviews the performance of the general
purpose bank card industry in the United States. The report focuses on the
extension, collection, and operational risks of bank cards issued and governed
by financial institutions accountable to
the Federal Reserve System and the National Credit Union Administration (NCUA).
Credit cards are ubiquitous in the
United States, with nearly 500 million general purpose cards in force at 130
million households and more than $1 trillion in outstanding debt on the
financial books of 6,000 banks and credit unions.
Beyond the credit debt carried from
month to month by households are the aggregate credit lines that facilitate
cardholder accounts. Total open credit lines in 2017 amount to $3.5 trillion,
slightly lower than the peak set before the 2009 recession. Both revolving debt
and the contingent liability of open credit lines require issuing banks to
maintain performance standards that ensure the account is kept current. Nonpayment
will result in credit losses that directly affect an issuing bank’s
profitability. Ideally, banks lose no
more than 3.0% to 3.5% of their receivables to bad
debt annually, but changes in household budgets and external economic factors
can increase the loss rate and diminish credit card profitability. As the
industry saw during the recession, if the loss rate increases, credit card businesses may
not yield a profit and may generate potentially billion dollar losses to
large financial institutions.