#credit card loans
Banks that make the most money, and the least, on credit card loans
By Fred O. Williams
The most lucrative card companies are ones you probably never heard of — but whose cards you just might carry.
Store-card issuers Comenity Bank and Synchrony Financial, formerly called GE Capital, reaped the most interest and fees from their cardholders among 12 major card issuers, an analysis by CreditCards.com found.
Banks that issue credit cards are enjoying high profits these days, buoyed by low defaults and cheap funding costs. But some card banks are better off than others, thanks to cardholders who shell out more interest and fees. Creditcards.com analyzed financial reports filed by 1,300 U.S. banks to see who made the most — and the least — from their card business in 2013. (See Credit card income at 500 U.S. banks . )
The analysis found a wide spread in card income — with some big banks collecting three times as much from cardholders as their competitors. The industry generated an average yield of 12.4 cents on each dollar of card balances last year, before losses and other costs. Among the top dozen issuers, yields ranged from a high of 28.4 cents to a low of 8.4 cents per dollar of card loans.
How can some card companies charge much, much more than others?
No. 1, consumers are not doing a lot of shopping around, said Jeanne Hogarth, vice president of policy at the Center for Financial Services Innovation. And No. 2, it amazes me how insensitive consumers are to [the] price of credit.
Even people with good credit are lured into high-rate cards, when they could qualify for a cheaper deal, the analysis found. On the other hand, companies making the least from cardholders kept a lid on rates and fees that other banks use to drive profits.
Many applicants, drawn in by a card’s instant discounts or rewards, overlook its interest rates, penalty fees and other important costs — to their own detriment. When you’re looking to get a credit card, we want you to shop based on the lowest cost of borrowing, said Todd Mark, vice president of education at Consumer Credit Counseling Service of Greater Dallas.
What yields measure
Credit cards are known as one of banking’s profit centers. A group of 16 banks that specialize in credit cards had triple the industry’s average return on assets in the third quarter of 2014, according to the Federal Deposit Insurance Corp.’s Quarterly Banking Profile.
The yields calculated by CreditCards.com are not a look at bottom-line profits. They exclude the costs of running a card business, such as marketing, customer service, fraud prevention and the cost of funds. The yields also leave out some income sources, such as the swipe fees that retailers pay. However, the yield is a good yardstick for comparing how much money each company charges its cardholders, per dollar in balances.
The chart lists 12 banks with the biggest U.S. card business in 2013. The first bar represents their average yield — cents of interest and fees they collect per dollar of balances. The second bar shows the yield after deducting money lost when cardholders default.
After Comenity and GE, the issuers with the next-highest yields are Capital One and Citibank — both of which have large store-card businesses in addition to their general purpose cards. APRs on store-card agreements are typically several points higher than rates on general-purpose cards. Wells Fargo, Discover, Chase and Bank of America were in the middle of the pack of the 12 card banks, with interest and fee income that hovered near the industry average.
Most expensive card companies
Comenity, a unit of Plano, Texas-based Alliance Data Systems, is the bank behind more than 120 store-branded cards from niche retailers such as Abercrombie, Dress Barn and ZGallerie. Although its name may not ring a bell, the bank has a long reach — with 33 million active accounts, it estimates that one in 10 employed U.S. adults carries at least one of its cards.