Banks that make the most money, and the least, on credit card loans
By Fred O. Williams | Published: December 2, 2014
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.
The store cards have filled in where other banks have pulled back.
|-- Dan Werner
Synchrony backs cards from several major retailers including WalMart, Lowes and Amazon. It is the biggest issuer of store cards by purchase volume and total balances. Cardholders swiped its store cards to make $76 billion in purchases in 2013, while its CareCredit card for medical expenses charged $6.8 billion.
Something the two store-card issuers have in common is the high yield they generate from their card businesses. Comenity collected 28 cents in fees and interest for each dollar it loaned cardholders in 2013, according to its reports to bank regulators. That's more than double the industry average of 12.2 cents in 2013. GE Capital collected nearly 18 cents per dollar loaned.
What's driving the high yields? The first page of their card agreements reveals a strong clue: Their cards typically carry annual percentage rates of 24 percent, a level what would be penalty APR territory on general-purpose cards.
Synchrony extends a welcome to subprime borrowers, who get a cold shoulder at many other card issuers. More than one in four of its cardholders has a FICO credit score of 660 or below, the company's annual report said. Subprime cardholders have fewer choices, so they are more willing to use a higher-rate card, analysts say.
"The store cards have filled in where other banks have pulled back," said Dan Werner, a former bank examiner who now studies Synchrony as an analyst for Morningstar. After suffering high default losses during the recession, general-purpose card issuers are wary of less-than-prime borrowers. "Nonprime customers who needed credit, I think they turned toward the store cards to fill the gap," he said.
After subtracting losses from defaults, Synchrony's yield is about 13 cents per dollar of loans. That's 50 percent more than the average after-loss rate of 8.5 cents. Subprime lenders can generate high profits despite losses, industry experts said. By keeping credit limits low, subprime lenders minimize risk, while their rates make sure that losses are covered, said Marla Blow, the CEO of FS Card, a subprime card that is scheduled to launch in 2015.
"During the financial crisis, I think a lot of subprime products were more resilient" than mainstream lenders, she said. "Losses might go up by 50 percent, which is pretty severe, but you've priced it for the risk, and you've managed your exposure to the risk."
Not all store card banks cater to subprime borrowers, and this is where Comenity and Synchrony part ways.
"Our accountholder base consists primarily of middle- to upper-income individuals, in particular women who use our credit cards primarily as brand affinity tools," Comenity parent Alliance Data says in its annual report. "We focus our sales efforts on prime borrowers and do not target subprime borrowers."
Not paying attention
to high rates
Why would well-off shoppers sign up for a 24 percent interest rate if they don't have to?
"You may not be paying attention to the fine print" when applying for a store card, said Marks at the credit counseling service. Shoppers often snatch up merchant-branded cards to win discounts or frequent-shopper benefits, he said, hardly glancing at the rates and fees.
Private label credit card customers are interested in the loyalty and rewards that the private label credit card programs offer and don't consider the programs a financing tool.
| -- Annabelle Baxter
Retailers' special discounts and rewards programs for cardholders may take some of the sting out of store card APRs. Then again, the discounts are usually a way to encourage spending, so the savings might be illusory. The card bank usually shares a portion of its profits with the retailer, supporting the perks that the retailer hands out to customers. Synchrony paid retailers $2.4 billion through revenue share arrangements in 2013, Werner said.
Cardholders may not even think of store cards as credit cards, issuers say.
"Private label credit card customers are interested in the loyalty and rewards that the private label credit card programs offer and don't consider the programs a financing tool," Alliance Data spokeswoman Annabelle Baxter said in an email response to questions.
But cardholders paid Alliance Data's Comenity Bank unit nearly $2 billion in interest and fees in 2013, according to its financial reports, so many of them used their cards to finance purchases. The company generated more interest dollars on its card loans than some large issuers of general-purpose cards, including U.S. Bank and Barclaycard US.
"There is a segment of the market that is young and inexperienced," Hogarth said. "They really don't know what a good interest rate is."
Traits of inexpensive
At the other end of the spectrum, some of the largest card issuers collect much lower yields on their card business, meaning lower interest and fees for cardholders. Of the 12 largest issuers, USAA, a lender to military families, had the lowest yield, at 8.4 cents per dollar of card loans in 2013.
What sets USAA apart? One big difference: The company doesn't charge a penalty rate on its cards. Customers who get behind on payments will continue to owe the same APR they signed up for. A penalty rate survey by CreditCards.com found that more companies are offering penalty-free cards. USAA does so across its card lineup, holding down its overall yield from cardholders.
"We do try to fulfill our mission of securing the finances of military families by offering very competitive products," said Jennifer Adams, assistant vice president of credit card product management. Applicants for USAA cards must be part of a military family to qualify for an account.
Another distinguishing mark is that USAA prices its rewards and nonrewards cards separately. The bottom rate for a nonrewards card starts at 6.9 percent versus 9.9 percent for a rewards card. Pricing nonrewards lower allows consumers who carry a balance to opt for lower financing costs instead of a program that will reward them for spending. Fees are low as well. The cash advance fee is 3 percent, and a $200 cap on advances keeps a lid on cardholder costs.
American Express also collects low yields, at 9 percent of card loans, but its cards work differently than those of other big issuers, making comparison difficult. Many of its accounts are charge cards that are paid off monthly, so balances and interest are relatively low. Its generally affluent cardholders charge big-dollar transactions, generating swipe fees that merchants pay. This revenue, and the hefty annual fees that come with some AmEx cards, support company profits, but they don't hike the yield on card loans.
nets big bucks
American Express is linked with affluence, but credit cards don't need well-heeled customers to make a good buck, their financial reports show.
In fact, the opposite is often true: Card issuers that cater to hard-pressed borrowers often collect more interest and fees than conservative lenders, financial reports show. Even after subtracting bad loans, many subprime lenders still come out ahead of conservative rivals.
Put another way, financially strapped consumers -- or at least those who had trouble paying their bills in the past -- are generating more money for banks, per $1 of card balances, than consumers who are flush.
"I would expect to see a pretty robust profile (for subprime lenders,) especially when losses are low, as they have been recently," said Blow, the FS Card CEO, whose resume includes stops at the U.S. Consumer Financial Protection Bureau and the credit risk management division of Capital One.
In the chart, the first bar shows the bank's yield on card loans after losses due to default. The second bar is the portion of loans to subprime borrowers. Banks that don't say how much of their lending is subprime are excluded.
About one-third of Capital One's card loans are subprime, the highest rate of the large banks, according to financial reports. After losses, its yield on the card business is still over 10 percent, better than most of its more conservative rivals. The No. 2 subprime lender of the group, GE Capital, now called Synchrony, made the highest yield on its card business.
GE Capital didn't profit only when times were good. Even during the depths of the recession, when laid-off cardholders stopped making payments in droves, the company was able to remain profitable, according to its reports to the U.S. Securities Exchange Commission. GE Capital Financial's income in 2009 was only about a fifth of last year's profit, but it was still in the black.
When someone gets a solicitation they're very likely to say, 'Oh, I must qualify for this, or they wouldn't have sent it to me.' So then they don't bother to shop around.
|-- Jeanne Hogarth
Center for Financial Services Innovation
"I was a bank examiner and I was told then, 'It's really hard to lose money on credit cards when you charge rates like that,'" said Werner, the Morningstar analyst. "And it's really true."
Subprime borrowers have few options, experts say, giving subprime lenders more power to set rates higher.
"When someone gets a solicitation they're very likely to say, 'Oh, I must qualify for this, or they wouldn't have sent it to me,'" said Hogarth at the Center for Financial Services Innovation. "So then they don't bother to shop around."
Nationwide, about 35 percent of people with a credit score are below 660, putting them in subprime territory, according to an analysis by the Consumer Financial Protection Bureau. Some lenders set the bar higher, at 680.
Looking at all 1,300 banks with credit card interest in 2013, some of the most lucrative ones are subprime lenders. Merrick Bank, a Utah institution that specializes in customers with blemished credit, collected 26 cents per $1 of card loans, its financial reports said. After defaults, its yield was 18 cents. Webbank, which backs credit repair programs from retailers Fingerhut and Gettington, made nearly 50 cents per dollar of card loans in 2013, its financial reports say. Its yield after defaults wasn't reported, and representatives of the Utah-based bank didn't respond to questions.
Card profits keep growing
The Federal Reserve is set to begin raising interest rates again in 2015, and the variable rates that most cardholders pay on their balances will start going up as well. Credit cards will continue to generate high profits for banks as the economy continues to improve, analysts expect. "The card business is back," industry analyst Robert Hammer said in a September news release.
And even if the economy turns down again and jobs disappear, cards see a silver lining. Some consumers who signed up for high-rate cards because they never expected to carry a balance will find themselves leaning on the credit to pay for weekly necessities.
Marks of the Dallas credit counseling service said he always pulls out his REDcard at the register when he shops at Target, because it gives him 5 percent off his total. "I don't even know the interest rate," he said, "because I pay off my bill each month."See related: Retail card survey 2014: APRs get higher, rewards more complicated
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