A couple of interesting sightings that indicate how profitable credit cards by showing how much new entrants are willing to spend to enter the business (and obviously still believe they can generate a decent return).
First, from Elizabeth Warner at Credit Slips:
If you ever wondered just how profitable credit card lending can be, take a look at what a savvy business will pay for the chance to lend money to people already in financial trouble.
According to Nilson Reports, HSBC just sold its subprime credit card operations (338,000 accounts) in the UK to SAV Credit for $796,000,000. SAV paid an average of $2,355 per account.
After the customer has repaid the loan in full, SAV needs to make enough money on each account to cover the cost of funds, the cost of mailings and advertising, the cost to answer the call center queries and stay after the late payers, and the cost of the executives and overhead–and they still need to make another $2,355 per account just to break even.
Of course, if a few people default or die, then their share of the $2,355 needs to be made up by someone else in the pool–pushing the minimum needed return on the other accounts toward a handsome $3000 or so. And with high turnover rates in the credit card industry generally and high default rates in the subprime market in particular, SAV can’t count on having all 338,000 customers for a year or longer. SAV must be counting on even higher returns from the smaller number of families who stay on as paying customers.
What can we infer about SAV’s business model? They must look at each subprime family as another goose that will lay golden eggs for years to come.
Even though that $2,355 figure is eye-popping, it clearly was a pounds value translated into dollars, which at least makes it seem plausible. But even recovering, say a more normal FX equivalent still says this is a rich business.
Similarly, according to Springwise, Steve Case is launching a new type of credit card, RevolutionMoney, with some major tweaks on the classic card model. thinks he can cut credit card fees on a number of axes – the biggest being the merchants’ fees – on a new credit card product and still come out ahead. However, the card instead of having a classic debit card feature, instead acts like a stored value card (you can load funds on it). That of course means the card company earns float on those balances until they are spent. RevolutionCard will also charge interest on balances, but it is unlikely he can (or will) extract more than the already breathtaking fees and interest rates other cards already levy.
It’s not every day that a new credit card is launched, and it appears that the new RevolutionCard is not an everyday credit card, either. Breaking away from the long-standing MasterCard and Visa mold, the RevolutionCard aims to establish a more flexible, secure and internet-enabled model of credit card.
First on the list of paradigm-busting features is that the RevolutionCard does not print users’ names or account numbers on their cards; rather, use of the card is based entirely on encryption and a 4-digit PIN. There is no annual fee, and the interest rate charged on unpaid balances depends on the user’s credit profile. Consumers can store money on the card, loaded from their bank accounts. Merchants accepting the card, meanwhile, pay a fee of just 0.5 percent of the total sale, rather than the industry average of 1.9 percent.
The RevolutionCard was launched in late September by Revolution Money, a new iteration of the GratisCard division of Revolution LLC, which was founded in 2005 by AOL cofounder Steve Case. (Revolution Money is backed by Citi, Morgan Stanley and Deutsche Bank.)
It’s intriguing that Citi is participating in launching a product that competes with its traditional credit card business.