This distinction is important because the main sources of revenue differ for the two functions. The transaction, or payment, function allows the user to purchase goods without using cash, whereas the credit function allows the user to borrow by carrying balances on their credit cards, resulting in interest charges accruing on the account. Specifically, we break down profitability based on the two main functions of credit cards: a transaction function and a credit function. Our analysis focuses on the business model of credit cards from the perspective of both issuers and borrowers. We overcome issues that plagued many of the past analyses by using detailed data on the credit card portfolios of some of the largest credit card lenders. In this note, we contribute to the analysis of credit card profitability by examining the drivers of profitability. 2 Most of these analyses of credit cards rely on bank-level regulatory data, which allow only the calculation of bank-level profitability, rather than the profitability of just the credit card portfolio. Over the past 40 years, the profitability of the credit card industry has received much attention from both academic research and regulatory reports. 1 According to the G.19 Consumer Credit Statistical release, revolving consumer credit, which mainly consists of credit cards and related plans, stood at over one trillion dollars at the end of 2021. Bord, and Bradley Katcher IntroductionĬredit cards are one of the most ubiquitous consumer financial products in the United States, with more than 75 percent of households owning at least one general purpose credit card in 2019.
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