Credit Cards - Slower Growth, Leaner Profits, and Higher Risks
As an industry segment, general purpose credit cards have impressive metrics in the United States, with nearly 500 million general purpose cards in force representing 130 million households and more than $1 trillion in outstanding debt on the financial books of 6,000 banks and credit unions. Changes in the operating metrics of these accounts can quickly affect the fortunes of cardholders and issuers alike. And as the U.S. economy and lending environments begin to downshift after an extensive bull run, monitoring these key metrics will be critical to financial institutions concerned about managing potential negative impacts to their portfolios.
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 income, they are more profitable than debit cards, which rely on the presence of a deposit by the account holder, or prepaid cards, which require money to be "loaded onto the card" (that is, paid to fund the account).
Although credit cards have greater revenue potential, credit risk carries a potential downside. 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 2018 amount to an estimated $3.6 trillion, close to 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 remains 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, which can result in losses of potentially billions of dollars to large financial institutions.
The Mercator Advisory Group research report, The 2019 Credit Card Data Book: Key Indicators of a Slowing Market, reviews the performance of the general purpose bankcard 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). Many metrics discussed in this document are of interest to regulators such as the Office of the Comptroller of the Currency (OCC), which audits the industry for safety and soundness, and the Federal Reserve, whose responsibility is to ensure financial adequacy and ability of banks in the United States to operate under serious economic stress.