Crafting new credit card fees that consumers will swallow is likely to be the key to survival for the credit card industry.

Fees outpaced interest as a source of income for credit card issuers last year and it looks like that will be the case again this year, as revenues from interchange flatten and fewer consumers revolve balances in a shrunken card market.

Marking a switch from recent years, fees on average last year comprised more than half, or 52.7%, of total card income, while interest made up the remaining 47.3%. In 2010, interest comprised 52% of total income and fees comprised the remaining 48%.

Overall credit card income in 2011 declined 5.1%, to $154.9 billion from $163.3 billion, as card issuers continued to absorb significant losses following the recession and wound up with fewer overall accounts, RK Hammer said in a Jan. 17 report.

The Thousand Oaks, Calif.-based firm bases its estimates on combined bankcard and private-label card data gleaned from public and private sources.

The Credit Card Accountability, Responsibility and Disclosure Act, which went into effect in February 2010, continued to put a damper on issuers’ profits last year, including a ban on raising consumers’ interest rates, except in certain cases, RK Hammer noted.

Credit card interchange once again contributed the largest share of income to issuers’ fees, but the weak economy also took a bite out of that column in 2011.

“Credit card usage was down in 2011, which hurt results across the board,” Robert Hammer, the firm’s chairman and CEO, tells PaymentsSource.

Credit card income associated with consumer fees for late payments, cash advances and annual fees for rewards cards rose 4.2%, to $81.7 billion from $78.4 billion in 2010, Hammer said.

Certain fees trended differently from others.

Interchange income fell 1.6%, to $36.3 billion, or 44.4% of total fee income, from $36.9 billion the previous year. Interchange accounted for 47% of total fee income in 2010.

Penalty-fee income, which includes late fees, fell 13.8%, to $19.4 billion, or 23.8% of total fee income, from $22.5 billion in 2010. Penalty-fee income comprised 28.6% of total fee income in the prior year.

Income from cash-advance fees rose 38.9%, to $13.2 billion, or 16.1% of total fee income, from $9.5 billion in 2010. Cash-advance fees accounted for 12.3% of total fee income that year.

Annual-fee income rose 40%, to $11.2 billion or 13.7% of total fee income, from $8 billion. Annual fees accounted for 10.2% of total fee income in 2010.

Income from “enhancements,” such as insurance and other ancillary services, rose 6.7%, to $1.6 billion, or 2% of total fee income, from $1.5 billion. Enhancements comprised 1.9% of total fee income in 2010.

The combination of industry regulations and economic uncertainty the credit card industry faces will cause fees to continue to drive the majority of profits again in 2012, Hammer speculates.

The savviest issuers will use polls, surveys and focus groups to refine their products and fees to understand “what their cardholders want and will pay for,” he says.

Issuers that fail to carefully weigh consumer reactions to fee changes may run into trouble from certain “fee price-change false starts” seen in 2011, Hammer warns, alluding to Bank of America Corp.’s doomed attempt in the fall to impose a $5 monthly debit fee on checking account customers (see story).

“Card issuers who use technology and calibrate their business models more effectively will show higher fee-income growth than others in their peer group,” Hammer says.

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