When interest rates rise in mid-2015, the credit-card business will likely see more subprime cardholders, higher credit losses for card issuers and greater reliance on customers who use their cards to borrow, not just earn rewards, American Banker reported.
For the last half-decade, credit-card profits have relied on high repayment rates, cheap funding and surging revenue from swipe fees, leading to 5.2 percent return-on-assets for large card issuers in 2013. But higher rates mean it will be costlier to float short-term, interest-free loans to customers who pay off their bills each month. That will shift profitability to customers who run a balance from month to month, analysts said.
The CEOs of both Capital One and American Express said at an industry conference in December that they expect growth to shift to interest charges on their cards. That has already begun to happen: Revolving consumer credit in the U.S. grew by 1.8 percent Q1 of 2014, 6.3 percent in Q2 and 3 percent in Q3, according to data from the Federal Reserve Board.
But that also means higher chargeoff losses. In November, the net chargeoff rate rose at each of the six biggest credit-card issuers: Amex, Bank of America, Citigroup, Capital One, Discover and JPMorgan Chase.
Issuers also face recent regulatory changes that restrict some fees and prohibit repricing of existing consumer debt, making it harder to get money back when accounts become delinquent. Young adults who have been burned by bad credit-card experiences may also keep shying away from plastic; 63 percent of U.S. adults under age 30 don't have any credit cards, according to Bankrate.