BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Report to the Congress on the Profitability of Credit 

Card Operations of Depository Institutions 

Submitted to the Congress pursuant to section 8 of the Fair Credit and Charge Card Disclosure Act 

of 1988 

June 2008
Section 8 of the Fair Credit and Charge Card Disclosure Act of 1988 directs the Federal 

Reserve Board to transmit annually to the Congress a report about the profitability of credit card 

operations of depository institutions.1

 This is the eighteenth report. The analysis here is based to 

a great extent on information from the Consolidated Reports of Condition and Income (Call 

Report) and two Federal Reserve surveys, the Quarterly Report of Credit Card Interest Rates and 

the Survey of Terms of Credit Card Plans. 

Call Report Data

 Every insured commercial bank files a Call Report each quarter with its federal 

supervisory agency. The Call Report provides a comprehensive balance sheet and income 

statement for each bank; however, it does not allocate all expenses or attribute all revenues to 

specific product lines, such as credit cards. Nevertheless, the data may be used to assess the 

profitability of credit card activities by analyzing the earnings of those banks established 

primarily to issue and service credit card accounts. These specialized or mono-lined banks are 

referred to here as "credit card banks." 

For purposes of this report, credit card banks are defined by two criteria: (1) the bulk of 

their assets are loans to individuals (consumer lending), and (2) 90 percent or more of their 

consumer lending involves credit cards or related plans. Given this definition, it can reasonably 

be assumed that the profitability of these banks primarily reflects returns from their credit card 

operations. 

The first credit card banks were chartered in the early 1980s; few were in operation prior 

to the mid-1980s. To provide a more reliable picture of the year-to-year changes in the 

profitability of the credit card operations of card issuers, this report limits its focus to credit card 

banks having at least $200 million in assets. Most of these institutions have been in continuous 

operation for several years, particularly those with assets exceeding $1 billion, and are well 

beyond the initial phase of their operations. 

As of December 31, 2007, 17 banks with assets exceeding $200 million met the 

definition of a credit card bank. At that time, these banks accounted for approximately 69.2 

percent of outstanding credit card balances on the books of commercial banks or in pools 

underlying securities backed by credit card balances. 

 

1. P.L. 100-583, 102 Stat. 2960 (1988). The 2000 report covering 1999 data was not prepared as a 

consequence of the Federal Reports Elimination and Sunset Act. The report was subsequently reinstated 

by law. 
 

 In 2007, credit card banks with assets in excess of $200 million reported net earnings 

before taxes of 2.75 percent of outstanding balances adjusted for credit card-backed 

securitization.2

 As Table 1 shows, returns for large credit card banks fell 59 basis points or 

nearly 18 percent from 2006. The 2007 rate of return is the lowest since 1997 when the rate of 

return was 2.13 percent, although the rate of return in 2005 was not substantially above the 2007 

rate. 

Table 1. Return on assets, large U.S. credit card banks, 1986–2007 

(Percent) 

Year Earnings Year Earnings 

1986 3.45 1997 2.13 

1987 3.33 1998 2.87 

1988 2.78 1999 3.34 

1989 2.83 2000 3.14 

1990 3.10 2001 3.24 

1991 2.57 2002 3.28 

1992 3.13 2003 3.66 

1993 4.06 2004 3.55 

1994 3.98 2005 2.85 

1995 2.71 2006 3.34 

1996 2.14 2007 2.75 

NOTE: Credit card banks are commercial banks with average managed assets (loans to 

individuals including securitizations) greater than or equal to 200 million dollars with 

minimum 50 percent of assets in consumer lending and 90 percent of consumer lending 

in the form of revolving credit. Profitability of credit card banks is measured as net pretax income as a percentage of average quarterly outstanding balances. 

SOURCE: Reports of Condition and Income, 1986-2007. 

2. Calculations are adjusted for credit card backed securitizations because earnings as reported on the Call 

Report reflect revenues and expenses from outstandings both on the books of the institutions and in offbalance-sheet pools backing securities. 
 

Although profitability for the large credit card banks has risen and fallen over the years, 

credit card earnings have been consistently higher than returns on all commercial bank 

activities.3 For example, for all commercial banks, the average return on all assets, before taxes 

and extraordinary items, was 1.44 percent in 2007, down about 55 basis points or 28 percent 

from the 2006 level.4

One difficulty that arises in assessing changes in profitability over time is that the sample 

of credit card banks changes somewhat from one year to the next primarily because of mergers 

and acquisitions. Thus, overall changes in profit rates from year to year reflect both real changes 

in activity and changes in the sample. To evaluate the effects of sample changes, the profitability 

of the specific banks included in the sample each year was also examined for the prior year. 

Although the level of reported profitability for the constant panel of banks is somewhat different 

from that shown in Table 1, the intertemporal pattern of profitability remains virtually the same 

as shown in the table. For 2007, returns for the constant sample fell 58 basis points from the 

2006 level, compared to a decline of 59 basis points for the credit card banks included in Table 

1. 

Changes from 2006 in overall returns to credit card operations can be better understood 

by reviewing how individual expense and revenue items changed among the credit card banks in 

the 2007 panel.5 Both interest income and interest expense rose over 2006 levels with net 

interest income increasing about 19 basis points or 4 percent. Both noninterest income and 

noninterest expenses fell over 2006 levels; on net, noninterest income declined about 17 basis 

points or 11 percent from 2006 levels. Much of the fall in average returns for credit card banks 

resulted from increased provisions for loan losses and chargeoffs. Net chargeoffs increased 24 

percent over the 2006 level. 

3. This report focuses on the profitability of large credit card banks, although many other banks engage in 

credit card lending without specializing in this activity. Reliable information on the profitability of the 

credit card activities of these other banks is not available. The cost structures, pricing behavior, and 

consequently the profitability of these diversified institutions may differ from that of the large, specialized 

issuers. The relatively high returns of credit card banks are not surprising, since one would expect that 

monoline institutions or those focused heavily on only one activity, such as credit card banks, would need 

to earn higher returns to compensate for the greater risks of holding an undiversified (by credit line) 

portfolio. 

 In earlier annual reports on credit card profitability, information from the Federal Reserve=s Functional 

Cost Analysis (FCA) Program was used to measure the profitability of the credit card activities of smaller 

credit card issuers. These data tended to show credit card activities were less profitable for smaller issuers 

than for larger ones. The FCA program was discontinued in the year 2000. For further discussion, see 

Glenn B. Canner and Charles A. Luckett, ADevelopments in the Pricing of Credit Card Services,@ Federal 

Reserve Bulletin, vol. 78, no. 9 (September 1992), pp. 652-666. 

4. Refer to William Bassett and Thomas King (2008), "Profits and Balance Sheet Developments at U.S. 

Commercial Banks in 2007," Federal Reserve Bulletin, vol. 94, p. A1-A39, 

www.federalreserve.gov/pubs/bulletin/default.htm. 

5. For another assessment of changes in credit card revenues and expenses, see Jeffrey Green, (May 2008) 

AC&P’s 2008 Bank Card Profitability Study and Annual Report,@ Cards and Payments, vol. 21, no. 5, pp. 

36-38. 
General Discussion 

 Thousands of firms offer bank cards to consumers and consumers use their cards 

extensively.6 The Federal Reserve’s G. 19 Consumer Credit report indicates that consumers 

carried a total of about $951.7 billion in outstanding balances on all their revolving accounts as 

of the end of 2007. Prior to the early 1990s, card issuers competed primarily by waiving annual 

fees and providing credit card program enhancements. Since then, however, interest-rate 

competition has played a much more prominent role. Many credit card issuers, including nearly 

all of the largest issuers, have lowered interest rates on many of their accounts below the 18 to 

19 percent levels commonly maintained through most of the 1980s and early 1990s. Credit card 

interest rates in general have become more responsive to issuers' costs of funds in recent years as 

more issuers have tied the interest rates on their plans directly to one of several indexes that 

move with market rates. 

 Today issuers segment their cardholder bases according to risk characteristics, offering 

reduced rates to existing customers who have good payment records while imposing relatively 

high rates on higher-risk or late-paying cardholders. Card issuers also closely monitor payment 

and charge volumes and adjust credit limits accordingly both to allow increased borrowing 

capacity as warranted and to limit credit risk. Many issuers have attempted to gain or maintain 

market share by offering very low, temporary rates on balances rolled over from competing firms 

and by offering a wide variety of enhancements. Trends in credit card pricing are discussed in 

more detail below. 

Over the past several years, competition has led to substantial shifts in market shares 

among the industry's largest firms. Most of the larger issuers have grown by acquiring credit card 

portfolios from smaller issuers or by merging with other firms. In addition, several of the more 

rapidly growing firms in recent years appear to have attracted market share by offering 

comparatively low-rate cards and attractive balance transfer programs. Others have gained 

market share through co-branding and associated rebates combined with waivers of annual fees.7

The U.S. general purpose credit card market is dominated by VISA and MasterCard 

labeled cards that combined accounted for an estimated 599.4 million cards in 2007, up 6.8 

percent from 2006.8 In addition, American Express and Discover provided another 109 million 

general purpose cards to consumers in 2007. 

 

6. Currently, over 6,000 depository institutions issue VISA and MasterCard credit cards and independently 

set the terms and conditions on their plans. Close to 10,000 other institutions act as agents for card-issuing 

institutions. In addition to the firms issuing cards through the VISA and MasterCard networks, two large 

nonbank firms, American Express Co. and Discover Financial Services, issue independent general 

purpose credit cards to the public. 

7. Under co-branding programs, the credit card bears the name of and is marketed to consumers of the cobranded product(s). Through use of the card, consumers typically accumulate Apoints@ good for rebates on 

purchases of the co-branded product(s). One popular type of co-branding is with airline companies; in this 

case, Afrequent-flier miles@ are earned through credit card purchases. 

8. Source: The Nilson Report, May 2008, Issue 902. 
 Direct mail solicitations continue to be the primary channel used for new account 

acquisition and account retention. After reaching an all-time high in 2005 of 6.05 billion direct 

mail solicitations, direct mailings fell off in 2006 to 5.8 billion and fell another 10 percent to 5.2 

billion in 2007.9

 Response rates remained at 2006 levels in 2007 at 0.5 percent. Much of the 

falloff in solicitations during 2007 took place toward the later portion of the year as solicitations 

of higher credit risk prospects were curtailed in the face of rising credit card delinquencies and 

difficulties in the mortgage market which seeped over into credit card activities. 

Recent Trends in Credit Card Pricing

Aside from questions about the profitability of credit card operations, considerable 

attention has been focused on credit card pricing and how it has changed in recent years. 

Analysis of the trends in credit card pricing in this report focuses on credit card interest rates 

because they are the most important component of the pricing of credit card services. Credit card 

pricing, however, involves other elements, including annual fees, fees for cash advances, rebates, 

minimum finance charges, over-the-limit fees, and late payment charges.10 In addition, the 

length of the "interest-free" grace period, if any, can have an important influence on the amount 

of interest consumers pay when they use credit cards to generate revolving credit. 

Over the past several years, pricing practices in the credit card market have changed 

significantly. Many card issuers that in the past offered programs with a single interest rate now 

offer a broad range of card plans with differing rates depending on credit risk and consumer 

usage patterns. Moreover, as noted, many issuers have also moved to variable-rate pricing that 

ties movements in their interest rates to a specified index such as the prime rate. 

At present, the Federal Reserve collects information on credit card pricing through two 

surveys of credit card issuers. Because of the significant changes in the pricing of credit card 

services, the Federal Reserve initiated the Quarterly Report of Credit Card Interest Rates 

(FR 2835a) at the end of 1994. This survey collects information from a sample of credit card 

issuers on (1) the average nominal interest rate and (2) the average computed interest rate. The 

former is the simple average interest rate across all accounts; the latter is the average interest rate 

paid by those card users that incur finance charges. These two measures can differ because some 

cardholders are convenience users who pay off their balances during the interest-free grace 

 

9. Source: Synovate Mail Monitor, February 2008, http://mailmonitor.synovate.com/news.asp 

10. In June 1996, the Supreme Court ruled that states may not regulate the fees charged by out-of-state 

credit card issuers. States have not been permitted to regulate the interest rates out-of-state banks charge. 

In making its decision, the Court supported the position previously adopted by the Comptroller of the 

Currency that a wide variety of bank charges, such as late fees, membership fees, and over-the-limit fees, 

are to be considered interest payments for this purpose. This ruling will likely ensure that banks will 

continue to price credit cards in multidimensional ways rather than pricing exclusively through interest 

rates. Source: Valerie Block, ASupreme Court Upholds Nationwide Card Charges,@ American Banker, 

June 4, 1996. 
period and therefore do not typically incur finance charges. Together, these two interest rate 

series provide a measure of credit card pricing. The data are made available to the public each 

quarter in the Federal Reserve Statistical Release G.19 Consumer Credit. The Federal Reserve 

also collects detailed information on the pricing features of the largest credit card plan of a 

sample of issuers through the Survey of Terms of Credit Card Plans (FR 2572).11

Because information from the FR 2835a survey does not have an extended historical 

interest rate series for comparison purposes, this report on credit card profitability also presents 

data from the survey that preceded and was replaced by the FR 2835a, the Federal Reserve's 

Quarterly Report of Interest Rates on Selected Direct Consumer Installment Loans (FR 2835). 

Data from the FR 2835 indicate that credit card interest rates fell sharply from mid-1991 through 

early 1994 after being relatively stable for most of the previous twenty years, and fell again over 

the 1998-2003 period (Table 2).12 Since early 1998, credit card interest rates have fluctuated 

between 12.78 and 15.85 percent. For 2007, credit card interest rates averaged 14.68 percent, the 

tenth consecutive year such rates have averaged below 15 percent. (It should be emphasized that 

the interest rates reported after August 1994 are based on the new survey and are not strictly 

comparable to the interest rates reported on the older survey.) The general decline in credit card 

interest rates from mid-1991 is the result of many factors, including greater competition on this 

aspect of credit card pricing. It is important to note that while average rates paid by consumers 

have moved in a relatively narrow band over the past several years, interest rates charged vary 

considerably across credit card plans reflecting the various features of the plans and the risk 

profile of the card holders served. 

Additional evidence on changes in credit card interest rates comes from the FR 2572. 

Although not precisely comparable from period-to-period because of changes in the sample of 

reporters, this statistical series reveals a general decline in credit card interest rates in recent 

years. For example, only 11 percent of the respondents reported interest rates below 16 percent 

on their largest credit card plan as of September 1991, but 79 percent did so as of January 2008 

(the most recent report available). In addition, the proportion of card issuers reporting that they 

utilize variable-rate pricing has also increased substantially since September 1991. As of 

September 1991, 23 percent of issuers used variable-rate pricing; as of January 2008, the 

proportion was 59 percent. The widespread use of variable-rate pricing suggests credit card rates 

are likely to respond relatively quickly to changes in market interest rates. 

 

11. The information in the FR 2572 survey is published twice a year by the Federal Reserve. Historically, 

the data were made available in a statistical release, the E.5 AReport of the Terms of Credit Card Plans.@ 

Beginning in 1995, the E.5 statistical release was discontinued and data are now available exclusively on 

the Board=s web site at http://www.federalreserve.gov/pubs/shop/survey.htm. 

12. For a comprehensive discussion of the factors that account for the levels and changes in credit card 

interest rates see, Glenn B. Canner and Charles A. Luckett, ADevelopments in the Pricing of Credit Card 

Services@; also U.S. General Accountability Office, U.S. Credit Card Industry (GAO/GGD-94-23, 1994). 

 
Table 2. Average most common interest rate on credit card plans, 1974–August 1994, and 

the interest rate assessed on accounts incurring interest charges, November 1994–2007 

(Percent) 

Year Interest rate Year Quarter Interest rate 

1974 17.20 1998 February 15.33 

1975 17.16 May 15.62 

1976 17.05 August 15.85 

1977 16.88 November 15.72 

1978 17.03 

1979 17.03 1999 February 14.73 

1980 17.31 May 14.94 

1981 17.78 August 14.79 

1982 18.51 November 14.77 

1983 18.78 

1984 18.77 2000 February 14.32 

1985 18.69 May 14.74 

1986 18.26 August 15.35 

1987 17.92 November 15.23 

1988 17.78 

1989 18.02 2001 February 14.61 

1990 18.17 May 14.63 

1991 18.23 August 14.64 

1992 17.78 November 13.88 

1993 16.83 

1994 15.77 2002 February 12.98 

1995 15.79 May 13.34 

1996 15.50 August 13.26 

1997 15.57 November 12.78 

1998 15.59 

1999 14.81 2003 February 12.85 

2000 14.91 May 12.82 

2001 14.44 August 13.11 

2002 13.09 November 12.91 

2003 12.92 

2004 13.21 2004 February 12.41 

2005 14.54 May 12.93 

2006 14.73 August 13.60 

2007 14.68 November 13.92 

2005 February 14.13 

May 14.81 

August 14.75 

November 14.48 

2006 February 14.38 

May 14.77 

August 14.67 

 

2007 

November 

February 

May 

August 

November 

15.09 

14.64 

14.47 

15.24 

14.35 

Note: Prior to November 1994 interest rates were those reported in the Quarterly Report of Interest Rates on Selected 

Direct Installment Loans. Beginning in November 1994 interest rates are those reported on the Quarterly Report of 

Credit Card Interest Rates for those credit card holders incurring interest charges. 

Source: Board of Governors of the Federal Reserve System.