Federal Reserve research finds credit card net interchange revenues are negative

By Warren Hrung
ABA Data Bank

The Federal Reserve recently published new research that examines the main sources of credit card profitability based on FR-Y-14M data from January 2014 to December 2021. The research finds that around 80 percent of profits comes from interest income, around 15 percent comes from usage fees (for example, late fees, foreign exchange fees), around 7 percent comes from other factors such as balance transfers and miscellaneous fees, while net interchange revenues are slightly negative.

The research distinguishes non-usage fee sources of revenue based on the transaction function and the credit function. The transaction function allows the user to make purchases without cash, while the credit function allows the user to borrow funds and pay interest on any balances carried over from month to month.

The net transaction margin, or NTM, has declined over time because interchange fees (the network fee paid by the merchant’s bank to the cardholder’s bank) have been more than offset by increasing rewards expenses. In fact, NTM has been negative since 2016. The net credit margin from the interest on revolving balances has been increasing in recent years when loan loss provisions are excluded, suggesting the origination of credit cards to riskier borrowers who pay higher interest rates.

The research also illustrates the seasonality of revolving balances, as the share of revolving balances typically rises around the winter holidays and then subsides. But in 2021, the share plummeted due to borrowers paying down their balances at high rates.

Finally, the authors show that accounts with revolving balances pay the bulk of interest charges and the majority of credit card usage fees. Therefore, most of credit card revenues comes from revolving accounts.

Warren Hrung is SVP and head of banking and financial services research at ABA.