When it comes to credit card debt, American consumers aren’t the only ones who are suffering. New results show that the big four U.S. retail banks dealt with an almost 20 percent increase in credit card losses last year.
“People are using their cards to get from paycheck to paycheck,” said Charles Peabody, managing director at the Washington-based investment group Compass Point, according to a report in Financial Times. “There’s an underlying deterioration in the ability of the consumer to keep up with their debt service burden.”
Last year, Citigroup, JPMorgan Chase, Bank of America and Wells Fargo suffered a combined $12.5 billion in losses from delinquent credit card loans – around $2 billion more than in 2016.
Yet banks are doing their best to lure in new customers, offering air miles, cashback deals and more. Why? Despite the losses, credit cards are still highly profitable, since the issuers earn fees from vendors for every transaction processed, as well as charges to customers who have difficulty keeping up with higher interest rates (usually about 13 percent).
With that in mind, financial institutions see a return on credit card assets of almost 4 percent, while only seeing a 1.4 percent return for retail banking.
Still, there are concerns about financial institutions getting too wrapped up in the competition of gaining new customers, even if it means signing up less-than-creditworthy consumers.
“The driving factor behind the losses is that banks are putting weaker credits on the books,” said Brian Riley, a former credit card executive and current director at Mercator Advisory Group.
JPMorgan, for example, added $200 million to its reserves for future card losses in the fourth quarter. The company has been targeting millennials with its Sapphire brand of cards.
But Marianne Lake, CFO at JPMorgan, said the trend did not reflect a “deterioration. This is seasoning and maturation of the newer vintages, and growth.”