E-Commerce Credit Card Processing Banks

At present, 16 financial institutions with assets above $200 million meet the definition of an e-commerce credit card processing bank. These banks make up roughly 65.5 percent of the outstanding credit card balances of all commercial banks or in assets underlying the securities that are backed by such balances.

Financial institutions with assets exceeding $200 million have reported in 2005 net earnings of 2.85 percent of their outstanding balances adjusted for securitization, before taxes. Returns for large e-commerce credit card processing banks declined by 0.7 percent from 2004. This is about the same rate of return as in 1998, but it is lower than in the following years.

Even though profitability for the large e-commerce credit card processing banks has vacillated over the years, earnings have been constantly higher than the returns on all commercial bank activities. For instance, for all commercial financial institutions, the average return on all of their assets was 1.94 percent in 2005, well below the returns on credit card operations in that year.

One difficulty that occurs when assessing changes in profitability over the years is that the sample of e-commerce credit card processing banks also changes over time. So overall changes in profits reflect both changes in operations and changes in the sample. To estimate the effects of the sample changes, the profits of the banks featured in the 2005 sample was evaluated over the period from 1986 to 2005. Even though the rate of reported profitability for the constant sample of banks is somewhat different from the return on assets, the overall profitability pattern remains practically the same. For 2005, returns declined by about 21 percent compared to 2004.

Changes from 2005 in returns to e-commerce credit card processing operations can be better represented by examining how individual items changed among the credit card banks in the 2005 sample. Both income from interest and expense increased, roughly offsetting one another. Much of the decline in the average return are the result of rising operating expenses. Provisions for loan losses and charge-offs both rose somewhat. Net interest margin declined less than 1 percent in 2005, but non-interest expenses rose by about 9 percent. Charge-offs rose by about 8 percent.

Thousands of financial institutions offer payment cards to consumers. Before the early 1990s, e-commerce credit card processing banks competed mostly by waiving annual fees and offering various credit card program improvements. Later, however, competition in interest rates has become much more prominent. Many issuers, including most of the largest ones, have dropped interest rates on many of their account offerings to under the 18 to 19 percent levels maintained for most of the 1980s and early 1990s.