The Durbin amendment to the Dodd-Frank law has sapped debit card revenue, but swipe fees are contributing a growing share of earnings at large credit card businesses.
The trend mirrors a tilt in the industry toward higher-credit-quality cardholders who tend to pay off their bills each month, resulting in portfolios characterized by higher transaction volume for each borrowed dollar.
That means a bigger base of activity for interchange assessments, the controversial fees merchants ultimately pay to issuers through their acquirers at a rate of roughly 1% to 2% of sales, and a vital boost for business models that have been upended by the recession and new regulations.
Annualized interchange income for securitized accounts at Bank of America Corp. averaged 3.3% of receivables from October through December last year compared with an average of 2.4% in the three months through December 2008.
The increase partially offset a decline in the yield produced by finance charges in the portfolio, which fell 2.4 percentage points to 12.7% over the same period.
Interchange yield likewise increased by 1.8 percentage points to 5.2% for securitized accounts at Capital One Financial Corp., and by 1 percentage point to 4.4% for securitized accounts at Discover Financial Services.
Meanwhile, finance charge yields have oscillated wildly at Capital One and Discover, finishing 2011 almost a percentage point lower for both than in late 2008.
American Express Co., Citigroup Inc. and JPMorgan Chase & Co. do not present interchange income separately in monthly securitization reports, but most of the nation’s credit card giants have posted numbers showing large increases in transaction volume as a multiple of loans.
Amex, which touts the fee-generating power of its focus on wealthy customers and has long outshone competitors in this measure, has extended its lead.
In the fourth quarter, transactions on its U.S. cards at an annual rate were 8.5 times the amount of its receivables, up from 5.9 times in the fourth quarter of 2008.
After Amex, Capital One, Chase and BofA made the biggest gains in transaction velocity. Citi lagged the rest of the Big Six, holding about flat at a multiple of 2.1. The comparisons are exaggerated by the violent decline in household consumption that took hold in late 2008.
Still, major issuers have said they believe changes in strategy and tactics they have instituted, including price increases rolled out ahead of restrictions implemented under the Credit Card Accountability, Responsibility and Disclosure Act, have set their businesses up to emerge from the downturn with their pre-crisis profitability intact.
Barring a Durbin amendment for the credit card business, interchange appears to be an important part of the equation.
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