Tight
Thoughts on credit card profitability.
Credit cards are often considered the primary entry point for consumer financing, especially for fintechs and non-traditional financial companies aiming to compete in this space.
In most cases, new market entrants tend to incur losses—a phenomenon typically attributed to the “training” of sophisticated risk models, significant marketing expenditures, and high customer acquisition costs (CAC). These efforts are justified by the expectation of future profitability as CAC stabilizes, risk models reduce the probability of default, and the growing customer network enables the introduction of additional financial products, such as payroll and personal loans.
But how profitable are credit cards as a standalone product? And what insights can we draw from the regulatory data published by commercial banks?
For non-traditional finance companies, we recommend revisiting our deep dive from a few months ago on Liverpool’s credit card business.
Over the past 12 months, credit card income accounted for just 8% of total loan-related revenues for commercial banks in the country. This figure marks a record low since the CNBV began publishing data on the subject.
This is particularly surprising given that credit card portfolios (as a percentage of total loans) have remained relatively stable over the past seven years. However, the “revenue share” has declined by more than five percentage points during the same period.
This decline is largely driven by a significant contraction in commissions as a key revenue source for credit card products. To illustrate the impact, commissions charged to credit card holders made up nearly 17% of total credit card revenues for banks in 2017—a figure that has now fallen to just under 11%.
In our previous article exploring competitiveness in the credit card market, we highlighted that many banks have stopped charging annuity fees to consumers. Additionally, the market has consistently grown more competitive in recent years.
We believe this “overcrowding” has forced banks to reduce commissions as a strategy to attract and retain customers, with the hope of eventually compensating for these lost revenues through interest generated on issued credit cards.
Notice how in 2017, commissions from credit cards only lagged tariffs on other loans by a margin of 10%; a gap hat has now widened to more than 30%.
On the other hand, credit card loan loss provisions—i.e., the amount banks allocate from their balance sheets each month to cover expected losses—remained near all-time highs in September.
This marks the third consecutive month in which expected losses for credit card debt have exceeded the MXN $6 billion threshold, a first since the CNBV began publishing data on this metric.
For reference, between 2020 and 2022, we only observed two months with over MXN $6 billion in loan loss provisions for the commercial banking system.
This trend could be partially explained by the remarkable overall growth of credit card portfolios in recent years and regulatory changes within the banking sector. However, recent data suggests that provisions have been increasing at a significantly faster pace than loan balances.
According to CNBV data, since the start of 2023, provisions for expected losses on credit card products have been growing at an average monthly rate of 2.1%—nearly double the growth rate of the credit card portfolio itself.
To put this in perspective, a 2.1% monthly average growth rate translates to an annual expansion of over 28%, which is 13 percentage points higher than the annualized portfolio growth rate of 15%.
Now that we’ve explored the key trends in the credit card market, what can we infer about the product’s profitability? And how have these trends impacted some of the major banks operating in this space?
To address these questions, we estimated an “adjusted net interest margin (NIM)” specifically for credit cards. For details on our methodology, we’ve included a spreadsheet at the end of the article, available exclusively to our paid subscribers.
Here’s what we discovered: