Today’s environment for credit card issuers has a lot going for it. Despite pressures at some of the larger issuers, credit losses have remained fairly stable for the regional and community based credit card issuers. Further, consumer spending remains relatively robust, demand for revolving credit continues to grow, and funding costs are at a low unseen in the modern age of the credit card industry.
The last of these happy accidents is one issuers must consider carefully when managing their existing card portfolios. The good news is that low funding costs have increased card industry profitability across the board. Many issuers with increasing credit losses have been able to more than offset that increase through funding cost improvements. However, there are a few potential traps that must be considered before we grow too complacent.
TRAP #1:
An issuer must carefully consider the funding methodology used when measuring portfolio profitability. Are you assuming your cost of funds is your average deposit interest rate? Your marginal rate to gather new deposits? A proxy rate, such as LIBOR, based on capital markets? Do you vary the funding rate depending on the duration of the asset...
