As of 2016, banks have been steadily recovering from the height of the financial crisis in 2008, while a number of factors and influences have broadly changed the banking landscape. As regulations have tightened the standards for loans, market factors have converged for an increased focus on bank lending through credit cards.
Banking Industry Shift to Credit Cards
Following the 2008 financial crisis, capital ratios have substantially increased the limitations on banks and their ability to lend. Standards for lending have also constricted the market for eligible borrowers through higher credit requirements. While the 2008 crisis and subsequent market regulations have been focused primarily on loans, little has been directed toward credit card standards.
Given the main focus on loans, banks have been increasingly shifting their credit product portfolios to credit cards as they have become more profitable and marketable in the current environment. For banks, credit cards offer numerous advantages over loans, including greater operational efficiency and higher interest rates. Lending balances tied to ongoing spending by consumers as opposed to lump sum loans with definitive end dates are also a significant advantage of credit card products for banks. Additionally, higher interest rates on credit cards are one of the product’s most appealing characteristics for banks. These rates are even on the rise in the current market environment.
Increased Consumer Confidence in Spending and Borrowing
In tandem with a shift to increased credit card issuance, consumers are also increasing their confidence in spending as positive effects emerge from the improvements made to the banking system and economy overall following the financial crisis.
Eight years following the height of the financial crisis, consumers are again reporting increased confidence with higher spending levels. This has been evidenced in improving corporate profits by consumer goods companies, and also in consumer data reports. With this improved confidence, it also appears that consumers are increasing their willingness to take on debt, mostly in the form of credit cards, to the benefit of banks.
How Banks Are Promoting Credit Cards
With these factors converging, banks are upping their issuance of credit cards to borrowers of all types and also expanding their credit card products to allow for greater credit card issuance to subprime borrowers. This effort has been positive for banks, which have increased credit card returns on assets by 50 basis points over the last year, primarily as a result of more aggressive credit card product issuance. According to Wall Street Journal sources, banks issued 60 million credit cards in 2015, up significantly from 2014.
Overall, banks are primarily increasing their credit card focus to the benefit of their profitability, with two main initiatives. First, as borrowing capacity is already at high levels for high-credit quality consumers, banks have significantly expanded their issuance to subprime borrowers, mainly in the form of secured cards that allow subprime borrowers greater access to credit with less risk for banks through secured collateral requirements. According to the Wall Street Journal’s sources, approximately 10.6 million general-purpose credit cards were issued to subprime borrowers in 2015, a 25% increase from 2014.
Along with adding secured cards, banks are also significantly increasing their focus on credit card rewards, including increased membership benefits and cash-back incentives. These added incentives are making credit cards much more appealing to consumers.
Shifting Banking Product Portfolios
Overall, 2016 data is showing that banks are shifting their lending away from loans and toward credits cards to the benefit of their profitability. This could likely cause an increased level of defaults in the banking industry. However, because of banks' increased caution and alternative credit offerings through secured products, it seems this trend could take hold despite subtle potential increases in default rates. As such, it seems that the diversification of banking product portfolios could be significantly changing for the long term.