Report to the Congress on the Profitability of Credit
Card Operations of Depository Institutions
Thousands of firms offer bank cards to consumers and consumers use their cards extensively.8 The Federal Reserve's G.19 Consumer Credit report indicates that consumers carried a total of about $850 billion in outstanding balances on their revolving accounts as of the end of 2012, a value little changed from the amount outstanding at the end of 2011.9 Outstanding balances are notably lower now than when they reached their high point of about $1.01 trillion in 2008 and reflect the lingering effects of the financial crisis that emerged in 2008 and the ensuing recession and muted recovery that have seen consumers reduce spending and card issuers tighten credit availability.
Based on credit record data, it is estimated that in 2012 credit card borrowing accounted for about 6 percent of all outstanding household debt including mortgage debt.10 The amount of available credit under outstanding credit card lines far exceeds the aggregate of balances owed on such accounts. Credit record data indicate that as of the end of 2012 individuals were only using about one-quarter of the total dollar amount available on their lines under revolving credit card plans.
Consumers use credit cards for purposes of borrowing, and as a convenient payment device and standby line of credit for unforeseen expenses. As a source of credit, credit card loans have substituted for borrowing that in years past might have taken place using other loan products, such as closed-end installment loans and personal lines of credit. As a convenient payment device, a portion of the outstanding balances reflects primarily "convenience use", that is, balances consumers intend to repay within the standard interest-rate grace period offered by card issuers. In fact, consumer surveys, such as the Federal Reserve's Survey of Consumer Finances, typically find that about half of card holders report they nearly always repay their outstanding balance in full before incurring interest each month.11
Prior to the early 1990s, card issuers competed primarily by waiving annual fees and providing credit card program enhancements such as airline mileage programs or other travel-related benefits. Since then, interest rate competition has played a more prominent role, although for some market segments enhancements, including "reward" programs, such as cash-back or point features, and temporary interest-free or reduced interest-rate periods (for balance transfers or new purchases), are especially important in gaining market acceptance.12
Until the recent financial crisis, many credit card issuers, including nearly all of the largest issuers, had lowered interest rates on the majority of their accounts below the 18 to 19 percent levels commonly maintained through most of the 1980s and early 1990s. More generally, credit card interest rates have become more responsive to issuers' cost of funds in recent years as more issuers have tied the interest rates on their plans directly to one of several indexes that move with market rates. Moreover, recent changes in credit card regulations that restrict the ability of card issuers to change interest rates on outstanding balances create an incentive for more issuers to convert from fixed-rate to variable-rate plans.
In soliciting new accounts and managing existing account relationships, issuers segment their cardholder bases along a number of dimensions including by risk characteristics, offering more attractive rates to customers who have good payment records while imposing relatively high rates on higher-risk or late-paying cardholders. Card issuers also closely monitor payment behavior, charge volume and account profitability and adjust credit limits accordingly both to allow increased borrowing capacity as warranted and to limit credit risk.
In the recent economic downturn card issuers aggressively reviewed interest rates and credit limits and reduced limits on millions of accounts, particularly accounts that were inactive or little used by cardholders.13 Issuers responded aggressively to the difficult economic environment because inactive or little used accounts posed considerable potential risk of loss while offering little potential for profit, as cardholders may draw on these accounts when they encounter financial distress. More recently, issuers have begun to expand credit access some by raising credit limits, although primarily for their best customers.14 Trends in credit card pricing are discussed in more detail below.
The U.S. general purpose bank credit card market is dominated by VISA and MasterCard labeled cards that combined accounted for an estimated 423 million cards in 2012, an increase of about 3 percent from 2011.15 In addition, American Express and Discover Card Services provided another 113 million general purpose cards to consumers in 2012, up about 4 percent from 2010. The combined total of charge volume and cash advances using these credit cards in 2012 reached $2.31 trillion up about 8 percent from the 2011 level. In total, these credit cards were used in transactions that involved over $24 trillion dollars in 2012.
Direct mail solicitations continue to be an important channel used for new account acquisition and account retention. After reaching an all-time high in 2006 of 7.0 billion direct mail solicitations, mailings fell sharply as the recent recession emerged. Mail solicitations fell to only 1.5 billion in 2009.16 Industry data indicate however that the retrenchment in mailings began to reverse starting in the third quarter of 2009 as prospects for economic recovery improved. Industry data on mail solicitation activity indicate mailings rebounded to 3.0 billion in 2010 and 4.2 billion in 2011. Solicitations fell back to about 2.6 billion in 2012.
8. Currently, over 5,000 depository institutions including commercial banks, credit unions and savings institutions, issue VISA and MasterCard credit cards and independently set the terms and conditions on their plans. Many thousands of other institutions act as agents for card-issuing institutions. In addition to the firms issuing cards through the VISA and MasterCard networks, two other large firms, American Express Co. and Discover Financial Services, issue independent general purpose credit cards to the public. Return to text
11. The most recent survey found that 56.4 percent of card holders reported they usually pay their balances in full. Refer to Jesse Bricker, Arthur B. Kennickell, Kevin B. Moore, and John Sabelhaus, (2012) "Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances." Federal Reserve Bulletin . Return to text
12. Refer to "Credit Cards: Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosures to Consumers," Government Accountability Office, GAO-06-929, April 21, 2006; available at www.gao.gov . Return to text
13. Information from a nationally representative sample of credit records found that about half of the bankcard holders that had at least one bankcard at the end of 2007 experienced a reduction in the aggregate limit available on their combined bankcards by end of 2010; this share rises to about three-fifths when the estimation period is extended to the end of 2012. These estimates include those individuals that had at least one bankcard account closed, which everything else the same would result in a lower aggregate limit. Estimate based on the FRBNY Consumer Credit Panel, refer to www.newyorkfed.org/index.html . Return to text
15. Figures cited in this sentence and the remainder of the paragraph is from The Nilson Report, February 2013 issue 1,011. Return to text