The credit card business has a very long run ahead but the business model is evolving. Card issuers are pulling back some product enhancements; regulators forced price controls on credit cards that slashed interchange (down to 30bp in the UK, 50bp in AU, and 28bp in FR), and consumers expect reward points for just for using bank products. Moreover, in the U.S., junk fees are gone, thanks to the CARD Act of 2009.
Credit cards will be around for many years to come but change is evident. The next-gen card, ten years from now may take a different format as electronic commerce advances. Perhaps the card will be a metaphor for a bank-like product that interacts in any way with a merchant system.
Issuers, merchants and cardholders need to anticipate the change and act accordingly. Today’s WSJ summarizes.
Rising loan losses and increased rewards expenses are putting pressure on card lenders’ returns.
The result is that one of the most profitable consumer-lending categories in recent years may become more of a middling player.
Return on Assets at card businesses outpace retail banking by a landslide, but the glory days of cards passed a few years ago. Competition is stiff, margins are sensitive, and as we saw in the recession, credit risk can seize profits very quickly.
Some analysts predict that profitability will keep falling, though it remains significantly higher than many other banking products.
Credit cards delivered a projected 3.8% return on assets to 14 large banks highly concentrated in the card business last year, compared with an overall 1.35% projected
for all commercial banks, according to payments consulting firm Mercator Advisory Group Inc. Mercator projects that card returns will fall in 2018 to 3.5% due to losses and challenges cutting further costs.
Credit cards are mature financial services products. Staying ahead of the curve requires issuers to anticipate a change in the environment, function, and market. But don’t expect the credit card to go the way of the old-fashioned paper check.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group