Report to the Congress on the

Profitability of Credit Card

Operations of Depository
Institutions

July 2019

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Report to the Congress on the
Profitability of Credit Card
Operations of Depository
Institutions

July 2019

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

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 iii

Contents

Introduction ............................................................................................................................... 1
Identification of Credit Card Banks ................................................................................. 3

Credit Card Bank Profitability ............................................................................................ 5

Market Structure ...................................................................................................................... 7
Recent Trends in Credit Card Pricing ............................................................................... 9
 1

Introduction

Section 8 of the Fair Credit and Charge Card Dis- analysis in this report is based to a great extent on
closure Act of 1988 directs the Federal Reserve information from the Consolidated Reports of Con-
Board to transmit annually to the Congress a report dition and Income (Call Reports) and the Quarterly
about the profitability of credit card operations of Report of Credit Card Plans.2
depository institutions.1 This is the 29th report. The
Reports Elimination and Sunset Act. The report was subse-
1
See Fair Credit and Charge Card Disclosure Act, Pub. L. quently reinstated by law.
2
No. 100-583, 102 Stat. 2960 (1988). The 2000 report covering The Federal Reserve collects the Quarterly Report of Credit
1999 data was not prepared as a consequence of the Federal Card Plans (Form FR 2835a).
 3

Identification of Credit Card Banks

Every insured commercial bank files a Call Report The first credit card banks were chartered in the
each quarter with its federal supervisory agency. early 1980s; few were in operation prior to the mid-
While the Call Report provides a comprehensive bal- 1980s. To provide a more reliable picture of the year-
ance sheet and income statement for each bank, it to-year changes in the profitability of the credit card
does not allocate all expenses or attribute all revenues operations of card issuers, this report limits its focus
to specific product lines, such as credit cards. Never- to credit card banks having at least $200 million in
theless, the data may be used to assess the profitabil- assets. Most of these institutions have been in con-
ity of credit card activities by analyzing the earnings tinuous operation for several years, particularly those
of those banks established primarily to issue and ser- with assets exceeding $1 billion, and are well beyond
vice credit card accounts. These specialized, or the initial phase of their operations.
monoline, banks are referred to here as “credit
card banks.” As of December 31, 2018, 10 banks with assets
exceeding $200 million met the definition of a credit
For purposes of this report, credit card banks are card bank, two fewer than at the end of 2017. These
defined by two criteria: (1) More than 50 percent of banks accounted for just over 50 percent of out-
their assets are loans to individuals (consumer lend- standing credit card balances on the books of
ing), and (2) 90 percent or more of their consumer depository institutions.
lending involves credit cards or related plans. Given
this definition, it can reasonably be assumed that the
profitability of these banks primarily reflects returns
from their credit card operations.3
banks are major issuers on the Discover and American Express
3
Two banks (Discover Bank and American Express Bank) networks, and their balance sheets are largely consistent with
included in the sample did not exactly meet these criteria. These the credit-card-focused business model.
 5

Credit Card Bank Profitability

Tracking credit card profitability over time is compli-

Table 1. Return on assets, large U.S. credit card banks,
cated. Accounting rule changes implemented in 2010 2001–18
require banking institutions to consolidate onto their Percent
Call Reports some previously off-balance-sheet items
(such as credit-card-backed securities). To the extent Year Return
that previously off-balance-sheet assets have a differ- 2001 4.83
ent rate of return than on-balance-sheet assets, prof- 2002 6.06
itability measures based on Call Report data in 2010 2003 6.73
and after are not necessarily comparable with those 2004 6.30
before 2010. 2005 4.40
2006 7.65
2007 5.08
Another difficulty that arises in assessing changes in 2008 2.60
the profitability of credit card activities over time is 2009 -5.33
that the sample of credit card banks changes some- 2010 2.41
what from one year to the next primarily because of 2011 5.37
changing bank loan portfolios and reorganizations. 2012 4.80
2013 5.20
Thus, overall changes in profit rates from year to
2014 4.94
year reflect both real changes in activity and changes 2015 4.36
in the sample. In 2018, credit card banks with assets 2016 4.04
in excess of $200 million reported net earnings 2017 3.37
before taxes and extraordinary items of 3.79 percent 2018 3.79
of average quarterly assets (table 1). The level of Note: Credit card banks are commercial banks with average assets greater than
earnings in 2018 increased from that reported in or equal to $200 million, with a minimum 50 percent of assets in consumer
lending and 90 percent of consumer lending in the form of revolving credit.
2017. Profitability of credit card banks is measured as net pretax income as
a percentage of average quarterly assets.
The increase in profitability in 2018 reflects an Source: Federal Financial Institutions Examination Council, Consolidated Reports
of Condition and Income (Call Reports), https://www.ffiec.gov/.
increase in net interest income, as interest income
grew at a faster pace than interest expenses. This
increase is partially offset by decreases in net nonin-
were consistent with historical experience: The aver-
terest income stemming from expanding noninterest
age return on all assets, before taxes and extraordi-
expenses (table 2). Delinquency rates and charge-off
nary items, was 1.46 percent for all commercial
rates for credit card loans across all banks in the
banks, compared with 3.79 percent for the large
sample remained stable and well below their histori-
credit card banks (as shown in table 2).
cal averages.

Although profitability for the large credit card banks

has fallen over the years, credit card earnings have
almost always been higher than returns on all com-
mercial bank activities.4 Earnings patterns for 2018
4
This report focuses on the profitability of large credit card
banks, although many other banks engage in credit card lend-
ing without specializing in this activity. The profitability of the consequently, profitability of these diversified institutions may
credit card activities of these other banks is difficult to discern. differ from that of the large, specialized card issuers considered
The cost structures, pricing behavior, cardholder profiles, and, in this report.
6 Report to the Congress on the Profitability of Credit Card Operations of Depository Institutions

Table 2. Income and expenses for U.S. banks in 2017 and

2018
Percent of average quarterly assets

All
Credit card Credit card
commercial
banks banks
banks
in 2018 in 2017
in 2018

Total interest income 11.53 10.60 3.13

Total interest expenses 1.82 1.35 .59
Net interest income 9.71 9.25 2.54

Total noninterest income 3.78 3.57 1.39

Total noninterest expenses 6.32 5.89 2.25
Net noninterest income -2.54 -2.32 -.86

Provisions for loan losses 3.36 3.57 .23

Return 3.79 3.37 1.46

Note: Credit card banks are commercial banks with average assets greater than
or equal to $200 million, with a minimum 50 percent of assets in consumer
lending and 90 percent of consumer lending in the form of revolving credit.
Source: Federal Financial Institutions Examination Council, Consolidated Reports
of Condition and Income (Call Reports), https://www.ffiec.gov/.
 7

Market Structure

Bank cards are widely held and extensively used by A relatively small group of card issuers holds most of
consumers. According to the Federal Reserve’s Sur- the outstanding credit card balances, with the top 10
vey of Consumer Finances (SCF), about 71 percent holding 81.5 percent.7 Several thousand other bank-
of families had at least one credit card in 2016. Con- ing institutions and credit unions offer credit cards
sumers use credit cards for borrowing, as standby to consumers, and these institutions are free to set
lines of credit for unforeseen expenses, and as a con- their terms and conditions.8 In the aggregate, the
venient payment device. As a source of credit, credit Federal Reserve Statistical Release G.19, “Consumer
card loans have substituted for borrowing that, in Credit,” indicates that consumers carried slightly
years past, might have taken place using other loan over $1.05 trillion in outstanding balances on their
products, such as closed-end installment loans and revolving accounts as of the end of 2018, about
personal lines of credit. As a convenient payment 3.1 percent higher than the level at the end of 2017.9
device, a portion of the outstanding balances reflects
primarily “convenience use”—that is, balances con- Based on credit record data, the amount of available
sumers intend to repay within the standard “interest credit under outstanding credit card lines far exceeds
free” grace period offered by card issuers. In fact, the aggregate of balances owed on such accounts.
consumer surveys, such as the SCF, typically find Credit record data indicate that as of the end of
that over half of cardholders report they nearly 2018, individuals were using less than one-fourth of
always repay their outstanding balance in full before the total dollar amount available on their lines under
incurring interest each month.5 credit card plans.10 The total dollar amount available
has risen since 2010 and is now almost at the same
The general-purpose bank credit card market in the level as its peak in the third quarter of 2008.
United States is dominated by cards issued on the
Visa and Mastercard networks, which, combined, In soliciting new accounts and managing existing
accounted for nearly 569 million cards, or about account relationships, issuers segment their card-
84 percent of general-purpose credit cards, in 2018. holder bases along a number of dimensions. For
In addition, American Express and Discover net- example, issuers offer more attractive rates to cus-
works accounted for another 111 million general-
purpose cards in 2018. The combined total number 7
Five of the top 10 card issuers are in the sample of credit card
of charges and cash advances using such cards in banks used in this report. The other five issuers do not meet the
2018 reached 41 billion transactions, amounting to a requirements for inclusion in the sample.
8
dollar volume of about $3.8 trillion.6 Currently, depository institutions, including commercial banks,
credit unions, and savings institutions, issue Visa and Master-
card credit cards and independently set the terms and condi-
tions on their plans. Many other institutions act as agents for
card-issuing institutions. In addition to the firms issuing cards
5
The numbers from the 2016 SCF—the most recent survey avail- through the Visa and Mastercard networks, a few institutions
able—are little changed since 2010; for a discussion of credit issue cards on two other large networks, American Express and
borrowing in 2016, see Jesse Bricker, Lisa J. Dettling, Alice Discover. However, the vast majority of cards issued on the
Henriques, Joanne W. Hsu, Lindsay Jacobs, Kevin B. Moore, American Express and Discover networks are originated by
Sarah Pack, John Sabelhaus, Jeffrey Thompson, and Richard A direct subsidiaries.
9
Windle (2017), “Changes in U.S. Family Finances from 2013 to The G.19 release is available on the Board’s website at https://
2016: Evidence from the Survey of Consumer Finances,” Fed- www.federalreserve.gov/releases/g19/Current. Revolving credit
eral Reserve Bulletin, vol. 103 (September), pp. 1–42, https:// consists largely of credit card balances but also includes some
www.federalreserve.gov/publications/files/scf17.pdf. other types of open-end debt, such as personal lines of credit.
6 10
Figures cited in this sentence and the remainder of the para- See the Quarterly Report on Household Debt and Credit
graph are from the Nilson Report. See HSN Consultants, Inc. 2018:Q4 available on the Federal Reserve Bank of New York’s
(2019), Nilson Report, no. 1148 (Carpinteria, Calif.: The Nilson website at https://www.newyorkfed.org/medialibrary/
Report, February). interactives/householdcredit/data/pdf/hhdc_2018q4.pdf.
8 Report to the Congress on the Profitability of Credit Card Operations of Depository Institutions

tomers who have good payment records while impos- channel is generally referred to as the digital channel,
ing relatively high rates on higher-risk or late-paying which includes email solicitations, website advertise-
cardholders. Card issuers also closely monitor pay- ments, and social media advertisements. These solici-
ment behavior, charge volume, and account profit- tations could stem directly from the bank or from
ability, and they adjust credit limits accordingly both third-party firms. Branches, kiosks, and ATMs are
to allow increased borrowing capacity as warranted another important channel for account acquisition
and to limit credit risk. as banks take advantage of cross-selling opportuni-
ties. Finally, direct mailings continue to be a relevant
Various channels are used for new account acquisi- channel, with about 3.3 billion offers mailed in
tion and account retention.11 The most important 2018.12
11 12
Information and data on acquisition channels are from Mintel Direct mail solicitations are down considerably from their
Comperemedia; see www.comperemedia.com. height of 7.1 billion in 2006.
 9

Recent Trends in Credit Card Pricing

The topic of credit card pricing and how it has the issuer may reprice the account to reflect the
changed in recent years has been a focus of public higher credit risk revealed by the new behavior.
attention and is consequently reviewed in this report. Regulations that became effective in February 2010
Analysis of the trends in credit card pricing here limit the ability of card issuers to reprice outstanding
focuses on credit card interest rates because they are balances for cardholders who have not fallen more
the most important component of the pricing of than 60 days behind on the payments on their
credit card services. Credit card pricing, however, accounts. Issuers may, however, reprice outstanding
involves other elements, including annual fees, fees balances if they were extended under a variable-rate
for cash advances and balance transfers, rebates, plan and the underlying index used to establish the
minimum finance charges, over-the-limit fees, and rate of interest (such as the prime rate) changes.14
late payment charges.13 In addition, the length of the The new rules do not explicitly restrict initial pricing
interest-free grace period, if any, can have an impor- of new accounts.
tant influence on the amount of interest consum-
ers pay. The credit card pricing information used in this
report is obtained from the Quarterly Report of
Over time, pricing practices in the credit card market Credit Card Plans (Form FR 2835a). This survey
have changed. Today card issuers offer a broad range collects information from a sample of credit card
of plans with differing fees and rates depending on issuers on (1) the average nominal interest rate and
credit risk, consumer usage patterns, and the benefits (2) the average computed interest rate. The former is
of the card. The economic downturn and new credit the simple average interest rate posted across all
card rules spurred changes in interest rate pricing in accounts; the latter is the average interest rate paid
2009 and 2010. In most plans, an issuer establishes a by those cardholders who incur finance charges.
rate of interest for customers of a given risk profile; These two measures can differ because some card-
if the consumer borrows and pays within the terms holders are convenience users who pay off their bal-
of the plan, that rate applies. If the borrower fails to ances during the interest-free grace period and there-
meet the plan requirements—for example, the bor- fore do not typically incur finance charges. Together,
rower pays late or goes over his or her credit limit— these two interest rate series provide a measure of
credit card pricing. The data are made available to
13
In June 1996, the Supreme Court ruled that states may not the public each quarter in the Federal Reserve Statis-
regulate the fees charged by out-of-state credit card issuers.
States have not been permitted to regulate the interest rates that
tical Release G.19, “Consumer Credit.”
out-of-state banks charge. In making its decision, the Court
supported the position previously adopted by the Office of the Data from Form FR 2835a indicate that the average
Comptroller of the Currency that a wide variety of bank
charges, such as late fees, membership fees, and over-the-limit
credit card interest rate across all accounts increased
fees, are to be considered interest payments for this purpose. to a level nearing 15 percent in the fourth quarter of
This ruling will likely ensure that banks will continue to price 2018, while the two-year Treasury rate—a measure
credit cards in multidimensional ways rather than pricing exclu-
sively through interest rates. See Valerie Block (1996), “Supreme
of the baseline, or “risk free,” rate—rose to about
Court Upholds Nationwide Card Charges,” American Banker, 2.8 percent (figure 1). Average interest rates on
June 4. accounts that assessed interest are reported to be
An assessment of the fees charged by credit card issuers is pro- higher, at closer to 17 percent as of the fourth quar-
vided in U.S. Government Accountability Office (2006), Credit
Cards: Increased Complexity in Rates and Fees Heightens Need ter of 2018. It is important to note that while average
for More Effective Disclosures to Consumers, report to the rank-
14
ing minority member, Permanent Subcommittee on Investiga- According to the Mintel Comperemedia data, 97 percent of
tions, Committee on Homeland Security and Governmental credit card mail offerings in 2018 were for variable-rate cards.
Affairs, U.S. Senate, GAO-06-929 (Washington: GAO, Septem- Other data sources on credit card accounts confirm this
ber), www.gao.gov/new.items/d06929.pdf. observation.
10 Report to the Congress on the Profitability of Credit Card Operations of Depository Institutions

Figure 1. Quarterly average interest rates on credit card accounts

Percent
20
Quarterly

16

12 Q4

8 Interest rate, card accounts assessed interest

Interest rate, all card accounts
Two-year Treasury rate

0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Source: Federal Reserve Board, Form 2835a, Quarterly Report of Credit Card Plans.

interest rates paid by consumers have moved in a card plans and borrowers, reflecting the various fea-
relatively narrow band over the past several years, tures of the plans and the risk profile of the card-
interest rates charged vary considerably across credit holders served.
www.federalreserve.gov
0719