Credit Economy

Ever wonder what credit card companies make in a given year? Below is a list of annual income (after all expenses) for all the largest players in the United States. Based on current market conditions and rising delinquency rates (i.e. non-payment within due date), 2009 will likely lead to significant pressure on profits.

Annual Income (Last Calendar Year):

Mastercard: $1 Billion (2007)
Visa: $1,075 Billion (2006)
American Express: $4 Billion (2007)
Discovercard: $588 Million (2007)
Bank of America: $15 Billion (2007)
Chase: $15.4 Billion (2007)
Capital One: $1.57 Billion (2007)
Advanta: $72 Million (2007)

Recently, Chase stuck it to their online affiliates. In a quick effort to cut costs, JP Morgan Chase advised affiliate networks late last month that they would not be marketing their credit card offers through any affiliate websites. This was a surprising move to many because Chase was one of the first banks to offer an online affiliate program under the FirstUSA brand.

With offline direct mail conversion rates declining over the past years, credit card companies have found online marketing to be more cost effective in driving new credit card accounts.  According to TNS Media Intelligence, in 2005, credit card issuers spent over $100 Million on marketing credit cards to consumers over the Internet.

 

 Like other affiliate programs, Chase affiliates or "online partners" were only compensated if a lead is generated. Advertisers are fond of the affiliate advertising model because they only pay on a per performance basis and the results can be easily measured.

As times get tougher for obtaining new credit, big companies such as Chase are cutting back on their lead generation efforts to lessen their potential exposure in 2009. While there is rumor Chase may re-enter the affiliate space in the future, they have left many affiliates in the cold looking for replacement credit card offers. However, I'm sure that Chase's competitors who have decided to continue to invest in the online channel are chomping at the bit for increasing their respective market shares.

Most consumers probably wouldn’t admit it to their closest friends, but they tend to inflate or overstate their financial information on credit card applications.

From an inside source, we have heard that the most common areas on a credit card application that people boost up are:

1. Employment Title – From Supervisor to Manager

2. Annual Household Income – Typically 10% greater than their real pre-tax income amount

3. Income Source – Higher 401k and savings portfolio amounts which can be explained due to “market conditions”

4. Monthly mortgage payment – Don’t include property taxes, even if they are escrowed

You can bet in this economy, those who need credit the most are taking even more time to convince the banks to lend to them, beyond having just a good credit score.

According to a recent National Retail Federation survey, consumers will be using more cash from their checking accounts to pay for holiday purchases this year versus their credit cards. While the change from a year ago isn’t dramatic, up to 41.5% from 40.1%, it does clearly illustrate a sign of the times. Conversely, people that plan on using credit cards to pay for holiday gifts dropped 1.2%. Consumers are starting to realize that there is a fundamental difference between having money in the bank to pay for goods and services versus “plastic money” which has led to nearly $1 Trillion in US credit card debt.

A recent article in the New York Times highlights that small business owners are lobbying for credit card transaction companies such as American Express, Mastercard and Visa to lower fees charged per transaction. Typically, these companies charge an average 1.7% "interchange fee" of the total sale price along with a flat transaction fee - around .04%.

With small businesses facing stiff competition and a difficult economy, the upcoming Holiday season could be even gloomier. People are spending less versus last year, so its more challenging to pay fees that don't change with the times.   Last year, Nilson reported a 26.7% increase in merchant fees compared to 2005. Merchants are turing to Congress to relieve credit card fees or to place a ceiling on the amounts that credit card processing companies can charge on each transaction. With fewer profits to fight fraud, credit card processors may place additional constraints on credit card issuers.

The global credit card business for Citigroup lost over $900 Million based on selling credit card debt as bonds for pennies on the dollars. Prior to Q3 of 2008, Citi had earned profits on selling its credit card debt to other companies. However, Citigroup found it cheaper to package credit card debt and sell the debt off as bonds versus trying to deploy resources toward recovering the outstanding debt among a segment of its card holders.

   

Firms like Sherman Financial Group purchase distressed debt from large banks and financial institutions with the intent to recover it based on their own efficient practices. When you combine the profits from Citi's normal credit card operations with the $1.44 Billion loss on the sale of credit card bonds, the net effect for the Quarter was a loss of nearly $1 Billion. Ouch.

Russian businesses have recently been reported to be refusing to accept credit cards as payment due to the global financial crisis. Among the types of merchants denying credit cards as a form of payment are restaurants, state banks and airlines such as Aeroflot. In particular, many merchants will only accept payment from specific merchant banks that are highly unlikey to fail like US banks in recent months.

The International Monetary Fund is serving in a similar way like the US government did in its recent $700 Billion bailout package - to provide liquidity and loans to support ailing countries affected by the global credit situation.  

The IMF has loaned over $16 Billion to the Ukraine, $2 Billion to Iceland and an unspecified amount to Hungary.

In an interview with Forbes.com, Dan Clements of CardCops stated that "Credit card numbers fetch only $2 or $3 each on today's market...by contrast, a decade ago, credit card information comanded as much as $20 to $30 per credit card." For an extra $8, a thief can purchase a consumer's full profile which contains a mother's maiden name, social security number and date of birth. 

Prices for credit card numbers among thieves are dropping based on ample supply in the market. Competition for selling credit information has increased, thereby placing price pressure on hackers. Its interesting to think that the law of supply & demand, and not delinquent consumer accounts, has made the cost of such information a commodity.

The Wisconsin Journal Sentinel reported this week that the number of lawsuits against consumers in Wisconsin for non payment of credit card balances has taken a sharp jump since 2007. 

Throughout the state, the number of lawsuits above $5,000 involving credit card debt is on track to increase by 16 percent. Waukesha is one county hit hardest by the lawsuits with an increase of 44% versus a year ago. According to the paper, in one week alone, 38 consumers were individually sued for an average of $12,306 in credit card debt. This is around 20% higher than the national average.  

Like other parts of the country, the major factors leading to the inability to make payment on credit card debts are declining wages, increasing unemployment and rises in living costs such as energy and food. Due to tighter lending standards, people are also less likely to be able to tap into the equity of their homes to cover short-term cash needs.  

Consumers are likely to continue to tap into multiple credit cards to stay afloat. This is likely to become a growing trend among states in the coming months as well as into 2009.

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Current estimates show that roughly 100 Million credit cards have been issued within Mainland China. Unlike automated systems in the United States, which rely on personal credit scores from credit bureaus, applicants are considered through a highly manual process in which workers verify each record of information. While slow, the system is used to make certain that credit is only issued to those who can truly afford it.

Some analysts forecast that China has the potential to issue a total of 1 Billion credit cards by 2015. Such growth comes on the heals of credit card companies in the US reducing the number card holders due to rising delinquency rates or missed monthly payments. In China, however, the government forces a credit card holder to pay a full balance off immediately if they miss two credit card payments in a row. Delinquent account holders are also slapped with steep penalties and if these aren't paid right away, the card holder is subject to public notice through newspapers or advertisements.      

American Express recently reported that Amex cards are used 3 times more than other dual currency cards. American Express credits their market penetration to being close to the Chinese market. It seems that credit cards in China could be the next major opportunity for credit card companies to offset losses here in America. Other Resources:

• Competing for China's Credit Card Market
• Chinese Credit Card Market Overview
• China Charges into Credit Cards