Credit cards can have many benefits for cardholders, such as easy access to emergency funds and the ability to rebuild bad credit, but the issuing banks realize substantial benefits as well. According to CreditCards.com, the nine largest credit card issuers earned a combined profit of about $3.85 billion in 2008 from a total of more than 1 billion issued cards.
The greatest benefit of issuing credit cards is the ability to collect interest revenue from cardholders. Since issuing banks do not sell physical products, their cost of goods sold is extremely small, allowing them to realize large profit margins on interest alone.
In addition to interest revenue, credit card issuers often collect additional fee-based revenue from cardholders that is not associated with any type of expenditure, allowing the bank to realize a pure profit on these amounts.
Every business that accepts credit cards must pay either a regular fee or a commission on sales to the issuing bank. This revenue is associated with the cost of the technological infrastructure necessary to process charges from business customers, allowing the bank to realize a profit here as well.
The majority of credit card issuers' assets are accounts receivable, which can be sold quickly to collection agencies to minimize default risk and quickly convert souring assets to cash.
The benefits of credit cards to issuing banks have outweighed the benefits to cardholders in recent years, so much so that in 2009, President Barack Obama signed the Credit Card Accountability, Responsibility and Disclosure (CARD) Act into law. The law is designed to tip the balance of power in favor of cardholders by increasing the transparency of credit agreements and eliminating the ability of card issuers to make unannounced changes in interest rates and other conditions, while still encouraging greater responsibility on the part of cardholders.
- Photo Credit Image by Flickr.com, courtesy of Andres Rueda
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