The credit card issuing sector entails the organizations that chiefly engage in giving credit by providing credit cards. Credit card issuance offers the money needed to buy services and goods that will be paid back in full or on installment basis within the stipulated time (Agarwal, Chomsisengphet, Liu, & Souleles, 2015). Credit card banks are also part of this sector. In the United States, MasterCard, Visa, and other payment-solution establishments do not supply credit cards directly. However, they offer the exact payment system employed when making payments by credit card.
Credit Card Issuing Market Size and Growth
The credit card issuing sector is big business, and as of mid-2019, the Credit Card Issuing Market was worth $107.3 billion (IBISWorld, 2019). The industry has approximately 850 businesses; it has experienced annual growth of over three percent from 2014 to 2019. In the US, the establishments that hold the largest portion in the Credit Card Issuing in the include Synchrony Financial, Discover Financial Services, American Express Company, and Capital One Financial Corporation. IBISWorld (2019) provides that the number of employees in the industry is approximately 86,500.
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The Credit Card Issuing sector is projected to continue growing, especially with the rising employment rates and increased disposable income among consumers, which has assisted in expanding the volume and value of credit card acquisitions in the US. Furthermore, the intensification of mobile technology and e-commerce has made more businesses and consumers to sell and shop online comfortable (IBISWorld, 2019). However, increased security concerns and regulation over company-level data are rapidly reducing expenses for industry operators.
Importance and Impact of Interest Rates
The interest rate is one of the key aspects of a credit card. It affects the costs of carrying a balance of one’s credit card, a cost that one would want to eliminate or minimize (Agarwal et al., 2015). The credit card interest rate is expressed as an annual percentage rate or APR. Most cards have a grace period during which customers can pay their credit card balance to avoid paying interest. After the grace period, any credit card balance left will be charged interest in the form of a finance charge. The calculation of finance charges is done depending on one’s credit card terms. Some credit card issuing companies base their calculation of finance balance on average daily credit card balance, the balance at the close of the billing cycle, or the balance at the beginning of the billing cycle (Agarwal et al., 2015). Finances charges may or may not include the purchase made using the credit card.
There are two fundamental types of credit card interest rates, including variable and fixed. Fixed interest rate only changes in particular circumstances, and before the rate is changed, the credit card issuing company must send an advance notice to the customers (Agarwal et al., 2015). On the other hand, variable interest rates are linked to another interest rate (such as prime rate). As such, it changes whenever the index rate change and there is no advance notice provided. Most of the credit card interest rates are variable.
Different types of balances may have different APRs with different rates. For instance, a credit card may have a balance transfer APR, purchase APR, and cash advance APR. The card may also have a penalty APR that is effected once one defaults on their credit card terms such as paying late (Agarwal et al., 2015). The credit card issuing company can also raise the interest rate at particular times like changes are made to a debt management plan, a promotional rate expires, the index rate increases, or when individual defaults on the credit card terms. One can avoid paying interest rates by paying the full balance, as listed in the credit card statement.
US Credit Card Increasing Interest Rates
Presently, the consumers are grappling with the highest credit card balances interest that they have ever had to pay for the last 25 years. Based on the Federal Reserve rates cuts, it does look like it cannot get better (Armstrong, 2019). In May 2019, the average rate on interest-bearing card accounts was more than seventeen percent, which is considered the highest in the quarter-century that central banks have been calculating. Credit card rates increased after being at a low for such a long time following the gradual Federal government’s increase in its benchmark interest rate from late 2015 to the end of 2018 (Armstrong, 2019). However, the credit card issuing companies increased their interest rate at a rate faster than the benchmark set by the Federal government.
According to Armstrong (2019), two factors have been attributed to the aggressive increase in credit card balance involving customers and lawmakers. The first one involved customers because they were not concentrating on the rates that they would pay but on the benefits. The other one involved lawmakers because of the CARD Act 2009. The law was established to protect cardholders from exploitation by limiting the banks’ ability to increase interest rates on existing balances (Armstrong, 2019). As such, the credit card issuing companies cannot change the price once the card is sold to a customer; hence, they have to find other ways to increase what the customer pays, which can include fees on balance transfer, foreign transaction fees, and annual fees.
The future of Credit Card Issuing Industry
The impact of Crypto and Blockchain, as well as Artificial Intelligence, will dominate the future of the credit card supplying sector. These technologies will facilitate the evolution of payment systems, marketing, financial planning, and risk management (Quora, 2019). Fundamentally, the foreseen changes will transform the management of the inflow, accumulation of, and outflow of value in life, geared towards the future greatness of currencies, financial products, legacy institutions, and intermediaries. On the other hand, consumers will want the best tools and interfaced to help manage their payment, saving, spending, and will go for companies that provide them value.
References
Agarwal, S., Chomsisengphet, S., Liu, C., & Souleles, N. S. (2015). Do consumers choose the right credit contracts?. The Review of Corporate Finance Studies , 4 (2), 239-257.
Armstrong, R. (2019, August 9). US Credit Card Interest rates hit a 25-year high. Financial Times . Retrieved from https://www.ft.com/content/47fa19fe-b56e-11e9-bec9-fdcab53d6959
IBISWorld. (2019, Oct). Credit Card Issuing Industry in the US-Market Research Project. IBISWorld. Retrieved from https://www.ibisworld.com/united-states/market-research-reports/credit-card-issuing-industry/
Quora. (2019, Oct 29). What does the future hold for the Credit Card Industry? Forbes. Retrieved from https://www.forbes.com/sites/quora/2019/10/29/what-does-the-future-hold-for-the-credit-card-industry/#346055497da5
