Fees this year will surpass interest as the payment card industry’s largest income component for the first time, representing 52.7% of total revenue, according to R.K. Hammer, a Thousand Oaks, Calif.-based consultancy.
In 2003, the payment card industry generated 67% of its revenue from interest and 33% from fees, Hammer says, referring to the combined debit and credit card markets.
Credit card revenue streams have dramatically gravitated toward fee income, and the resulting split between what was the greatest source of income for card issuers during the past decade–interest income–and rising fee income is widening, with fees becoming the dominant income stream, company founder and CEO Robert Hammer said in a statement.
Helping to drive the switch is Bank of America Corp.’s plan to begin assessing a $5 monthly fee on debit card purchases (
Some reports have BofA making more than $3 billion a year from the new pricing, but Hammer says such estimates are overstated. Nevertheless, he says his revenue models show that the issuer’s new fee will make up about half of what it will lose from the Federal Reserve Board’s cuts in debit card interchange, unless the issuer’s pricing policy changes.
Hammer refers to issuers’ pricing changes as “card revenue engineering.”
“That some failed to see this coming has been really astonishing; it was inevitable,” he said. “Every economic action is followed by a reaction, predictable or otherwise. Legislation/regulation is enacted, financial institutions respond by necessarily adjusting their pricing models, and impacted consumers then react by doing what is in their best interests, by consolidating balances to avoid such fees, changing their purchase behavior or switching banks. It’s really no more complicated than that.”
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