Credit Card Profitability: Western Europe

Credit Card Profitability: Western Europe

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Countries covered: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom

Western Europe has long been one of the strongest and most profitable credit cards regions in the world. A mixture of economic prosperity, an affluent mass market, a developed banking infrastructure and a progressive regulatory environment has meant the market for credit cards penetrates far and wide.

The global financial crisis effectively changed that. Losses among credit card borrowers piled up and per-card profitability plunged. Across Western Europe, high profile casualties occurred among some of the region’s most iconic banks with many bailed out by public purses, forced to merge, or broken up and sold off.

Yet what occurred suddenly three years ago appears to be reversing again almost as quickly. Credit Card Profitability: Western Europe shows that a rebound in the region's credit card sector appears to be underway.

·       But what are the dynamics behind credit card profitability?

·       How and why are credit card revenue streams changing?

·       What are the effects of – and trends in – credit losses?

·       And what can be learned by comparing credit card markets at different stages of maturity?

These are among the significant questions addressed by Credit Card Profitability, a new series of Lafferty Group research reports that look at the credit card revenue mix in four distinct categories: net interest revenues, revenues generated by merchant service charges, card fee revenues and other non-interest income.

In many markets, net interest income is the dominant source, often accounting for up to half of all revenues. But the financial crisis has resulted in significant deleveraging from consumers who have responded to adversity by paying down expensive debt and exhibiting a reduced appetite for credit, particularly revolving credit.

On the positive side, issuers have enjoyed historically low funding costs due principally to prevailing low interest rates, coupled with the effect of various stimulus packages in the wake of the financial crisis.

Merchant fees make up the next biggest element but downward pressure on billed volume is having a negative effect in more mature markets. Similar pressure, often driven by regulatory bodies, is being exerted on merchant service charges.

In response, many issuers have turned towards new or increased card fees that have the effect of increasing revenues and, more appropriately, reflect the risk associated with credit card issuance. They have also sought to boost other non-interest charges yet, once again, efforts in this area are being stymied in many countries by regulatory intervention and organised consumer action.

Meanwhile, the worst may be over in terms of net credit losses, which doubled between 2006 and 2009 on a global basis, peaking at 7.7 percent in 2010, and were the main cause for the halving of over global credit cards profits between 2008 and 2010.

As net credit losses stabilise and begin to reverse, the outlook for the global credit card market is set to brighten considerably and give issuers much cause for optimism in 2013 and beyond.


About the author

Andrew Neeson is head of World Cards Intelligence and consumer finance research at Lafferty Group. Andrew joined Lafferty Group in 2007 and, with over ten years’ research experience, has an excellent track-record in payment cards and consumer finance research as well as conducting bespoke client-based research.

Pages: 114

Release date: August 2012

About Lafferty Group

Lafferty Group is a major provider of advanced knowledge services for the financial industry worldwide, with particular specialisations in the fields of retail banking, cards & payments and central banking.

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