by Christian Hudspeth | Dun & Bradstreet Editor April 20, 2015
Record Profits Ahead As US Credit Card Debt Soars Past $890 Billion
While nearly everyone seems to know about the $1.3 trillion in student loan debt that plagues graduates (and awaits soon-to-be graduates), few have been talking about credit card debt balances that have swelled to the highest levels since 2009.
As of last December, US consumers carried a staggering outstanding revolving credit balance of $889.5 billion, according to the Federal Reserve — an amount rivaling the entire GDP of Chile, Ecuador, Greece, and Hong Kong combined. That also works out to roughly $6,000 per card holder.
Even though credit card balances are still about 11% below the $1 trillion high set back in December 2008, American consumers have steadily returned to their old habits over the past few years (see the chart in this link).
So which industries and companies are cashing in on this growing trend?
In late 2010, when credit had dried up and credit card balances had plummeted more than 16% from their highs just two years earlier, it may have seemed risky to bet on the future of credit card companies. But with mounting credit card usage over the past few years, many credit card issuers have been reaping record revenues and profits.
Take Discover Financial Services, which serves more than 25 million cardholders and makes more than 80% of its income from credit card interest payments. Since credit card balances started rising again in late 2010, the 55-year-old company has boosted its revenue by 16% to a record-high $9.61 billion in 2014, while annual profits ballooned to all-time highs as well.
The same story holds for industry leaders MasterCard, Visa, and American Express, which join Discover as companies that have enjoyed revenue growth for the past several years, along with all-time record profit in 2014.
Credit card companies aren’t alone. Financial processing companies, which make money from merchants on every point-of-sale system installed and every swipe of the plastic, are also banking from the recent credit card binge.
Just look at New Jersey-based Heartland Payment Systems, which processes more than 11 million card transactions per day totaling some $100 billion per year. As dependence on plastic has grown, so has Heartland’s revenue, which has nearly quadrupled over the past decade.
Heartland’s revenue in 2014 alone jumped by 8% to an all-time high of $2.31 billion, mostly thanks to growth in its network services business and the size of its small-to-midsize enterprise (SME) merchant client-base, along with transaction volume growth of 7% during the year.
Electronic payment processor First Data Corporation, which serves more than 6 million merchants and around 4,000 card issuers in 35 countries, joins Heartland in posting record-high revenue in 2014. Beyond its booming business in the US, First Data’s top-line growth last year was driven by transaction volume growth in Argentina, the UK, and debt-familiar Greece. It’s also been jumping on the digital payments bandwagon as Apple Pay and similar smart phone payment devices gain steam.
Some credit reporting service companies have been benefiting as well. The Fair Isaac Corporation, which borrowers know very well for its widely used FICO Score, has basked in its most profitable years yet, mostly from growth in its fraud management services tied to customer, merchant, and institution-made payments. It’s no surprise that with ever-growing transaction volumes comes the ever-growing need for fraud monitoring and protection.
All of this could be just the start of a larger global trend too, as many of these companies are busy expanding their networks into emerging and developing markets, including the Middle East, India, and China, as their populations become more affluent and consumer-driven. Discover, for example, started issuing its cards overseas for the first time back in 2012 (in Ecuador) and has since partnered with payment processors like National Payments Corporation and Network International to extend its network reach into India and the Middle East, respectively.
If plastic becomes the new norm around the world, much as it has in the US, where nearly 60% of all transactions are now paid by debit and credit cards, according to the Federal Reserve, we may start seeing other countries mimic the US in growing card use — and debt — in the years ahead.
And we haven’t even talked about the effects of the Federal Reserve’s interest-rate hike possibilities in the near future, which, as I mentioned in a previous post, could be good news for banks and credit card companies looking to raise their own interest rates in the US.
With $890 billion in credit card balances already on the books in the US, credit card companies and banks could easily increase their interest income by billions for every percentage point rise on their credit cards.
Hopefully, I’m not giving them any ideas …