Credit cards: where the money is (and isn’t)

In a recent published the McKinsey reportthe company discusses BNPL lending options, but they include some interesting insights into revenue-level credit card accounts derived from sampling and their Global Payments model.

The model examines consumer credit card revenue into two components, customers who transact with their accounts and pay balances each month and those who rotate, postponing their transactions.

Transaction agents pay no interest because they reduce their balances to zero each billing cycle, and revolvers tend to make fewer transactions because they use up much of their available credit. According to the recently released report,

However, today’s issuers face circumstances that make profitable growth more difficult to sustain.

Their profits are mostly based on revolvers or customers who carry a balance on their credit card account from month to month.

Revolvers make up about 60% of credit card accounts, but they generate 85-90% of issuer revenue, net of rewards.

Profit per account is around $240 for revolvers, but only $25 for merchants or customers who pay off their balance monthly.

Building a business on guns rather than deal makers can be a risky situation. Net trade numbers could make credit card rewards think twice if the Senate Judiciary Committee starts paying attention to trades.

It will be interesting to see these numbers change as the recession forms. Reduced consumer spending would reduce interchange revenue. Revolvers could increase, or the amount they carry could increase, affecting net interest income. On top of that, if the CFPB takes action on credit card late fees, expect to see fee revenue decline.

Operating costs will increase as collection volumes increase and losses, which currently amount to only 1.82% in the value of the portfolio and could easily double. If you recall, in the 2nd quarter of 2010, the number of losses hit an all-time high of 10.97%, putting even the best-run credit card company in a pre-tax loss position.

But the best news of the day concerns the stress tests of the banks, which the NYT reported. Win, lose or draw, financial institutions are well positioned if (and when) the recessionary cycle sets in.

Preview by Brian RileyDirector, Credit Advisory Services at Groupe Conseil Mercator