Twelve measures to improve net interest income for issuers: |
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Data for today’s episode is provided by the Mercator Advisory Group report – Profitability of Credit Cards: Interest Spreads and Credit Quality Pave the Way for 2020.
Twelve actions to improve the net interest income of issuers:
- To increase net interest income, underwrite risk with a range of rates and test markets with higher rates
- To reduce interest charges, large issuers should use financial markets and small issuers should increase deposits
- To reduce interest expense, also focus on high risk accounts and aggressively close lines of credit when risk warrants it.
- To increase non-interest income, maximize the late charge structure and improve the collection fee recovery process
- To increase non-interest income, also encourage product offerings to redeem user-friendly card products
- Reduce non-interest charges, protect against misuse of credit card rewards, and tighten underwriting in response to growth in installment loans
- To reduce non-interest charges, also strengthen collection functions and policies ahead of the next economic downturn
About the report
Credit cards remain one of the most profitable offerings of retail banks in the United States. Yet margins began to slide between 2014 and 2017, as credit card issuers rebuilt their portfolios after the recession and normalized their strategies in response to the 2009 Credit Card Liability and Disclosure Act (the CARD law). The return on assets (ROA) of credit card banks fell from 4.94% to 3.37% during this period.
The tides turned in 2018, when the ROA measure improved 42 basis points to 3.79%. Credit card issuers increased their lines of credit and benefited from improving credit quality.
The analysis presented in the latest research report from Mercator Advisory Group, Profitability of Credit Cards: Interest Spreads and Credit Quality Pave the Way for 2020, explains the measurement of return on assets, illustrates the elements that affect results, and explains why momentum is expected to maintain profitability for major credit card issuers over the next decade.
“Credit card issuers started increasing their credit card interest margins in 2017, when the prime rate was 3.75%, and they continued to improve their margins in 2018. It appears that the interest spread, or margin, will increase slightly in 2020 ”. Brian Riley, Director, Credit Advisory Services at Mercator Advisory Group. “The momentum will likely continue until 2020, as almost 200 million cards have been issued since 2017.” Riley also notes that the increased margin protects the return measurement on credit card assets and helps protect against credit losses should the US market 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, US Bank and Wells Fargo