McLEAN, Va. – Credit card revenue margins have dipped at some major issuers in recent months as executives have cited intense competition for the most desirable customers and ongoing pressure from a sea change in regulation.
Broadly, however, the thesis that emerged after the enactment of the CARD Act in 2009 has held up: price increases rolled out ahead of the implementation of the law’s major provisions preempted restrictions on penalty fees and jumps in interest rates, according to analysis by American Banker, an affiliate of Credit Union Journal. Data on securitized loans shows the Big Six issuers have had varying success in lifting revenues, but, overall, portfolio yields have climbed to their highest range in two decades and stayed there.
“We’ve just had a lot of strength on the revenue side,” Capital One CEO Richard Fairbank said in April, advising investors to take his guidance with a grain of salt because, “I kept predicting this revenue margin to come down and it stubbornly kind of refused to do that.”
The ascent in interest, fees, interchange and other income as a percentage of loans has been particularly sharp at Capital One, increasing 2.8 percentage points from the three months through March 2009 to 20.1% on average during the three months through June this year, American Banker reported.
Capital One has attributed the results in part to less attrition in high-yielding accounts than it anticipated, and the fact that the company has largely steered clear of the balance transfer business, where teaser rates tend to bring down portfoliowide margins.
The yield on Citigroup’s securitized receivables ended the period considered here even with where it started, and fell 1.5 percentage points at Bank of America to average 15.7% during the three months through June.
BofA experienced the sharpest increase in bad loans during the downturn among its largest credit card competitors, and has worked to transform a portfolio that it has said was characterized by both revenue and charge-offs that “were excessive.”
Nevertheless, trust data for both companies shows a shared pattern of yield increases that came under pressure as the major elements of the CARD Act were phased in beginning in early 2010.
One factor that has helped prop up revenue margins has been a growing contribution of swipe fees as issuers have gravitated toward higher-credit-quality customers who tend to pay off their bills each month, resulting in portfolios characterized by higher transaction volume for each borrowed dollar.
A temporary, 10-basis-point reduction in interchange fees under the proposed settlement of the antitrust lawsuit against MasterCard and Visa would eat into this stream, but probably not by much, American Banker noted.