Card companies keep low rates for themselves
FORTUNE — Interest rates are the lowest they have been in decades. But there’s little indication the customers of lender Capital One Financial (COF) are benefiting. In the company’s most recent quarter, loans made by Capital One, which gets about half its revenue from credit cards, generated nearly $4 billion in interest income. That was $900 million more than a year ago, when interest rates were higher, and the most the company has ever made in any three-month period in the its history.
Fed Chairman Ben Bernanke has said one of the main goals of his recent stimulus efforts is to make borrowing cheaper for businesses, consumers and home buyers. To do so, he has slashed short-term interest rates and promised to keep them low for years to come. More controversially, since 2008, the Fed has purchased over $2.75 trillion in bonds in order to push all manner of borrowing rates down, and promote lending. The Fed recently promised to keep buying bonds until the economy was consistently creating jobs.
In many areas, Bernanke’s efforts do appear to be working. Corporate bonds yields, a measure of businesses’ borrowing costs, are half of what they were a few years ago. Car loans are readily available again. Mortgage rates recently hit a new low of 3.49%. The effective Federal Funds rate, a proxy for what banks can borrow at, has plunged to just 0.14%, from 2% four years ago.
Credit card users, though, have yet to benefit. In fact, in the four years since Bernanke began his bond buying spree, card interest rates have actually gone up, reaching an average of 12.06% in May, according to credit tracking firm Cardhub. That compares to 11.94% just before the financial crisis.
“Why haven’t credit card companies passed along the savings,” says Kathleen Day of the Center for Responsible Lending. “We think regulators should look into it.”
It isn’t clear why card rates haven’t fallen. Based on the banks’ borrowing costs you would expect rates to be lower. Capital One doesn’t disclose the average interest rate it charges its credit card customers. But a pretty good proxy is something the company calls net revenue margin. Four years ago, that rate was 15%. By last quarter, it had risen to 15.7%. In the same time, though, Capital One’s own borrowing costs have fallen by more than two-thirds to a recent 0.91%.
Industry experts say borrowing is only one of the costs credit card companies have to pay. Card companies and banks suffered heavy credit losses during the financial crisis. But those losses are shrinking now, and the signs are that future losses will be lower as well. Delinquency rates have dropped in half in the past year, and are about where they were before the recession.
Another suspect is the Card Act, which was passed in 2009 and makes it harder for banks to charge card customers hidden fees. “It’s a real 12%, instead of a fake 6% that really turns out to be 32% when you add in all the fees,” says Ed Mierzwinski, who is head of consumer issues at the Public Interest Research Group, and a frequent critic of the credit card industry. “Interest rates are higher because the card act is working.”
A Capital One spokeswoman says its credit card rates are in line with competitors. While interest income is up, she said that is due in part to recent acquisitions. But she declined to say how much. She said that the Card Act has forced the industry to move away from “penalty fees and penalty repricing.” But since, according to the spokeswoman, Capital One never charged those fees so it’s not clear why the Card Act would impact the company’s ability to lower rates now.
The real reason rates have remained high could be a lack of competition. The top seven issuers of credit cards control nearly three-quarters of the market. That’s up from just over 60% a decade ago. And with U.S. consumers addicted to credit cards, there is little incentive to lower rates. “The top four or five issuers have a pretty dominant market share,” says Jeff Harte, an analyst at Sandler O’Neill who follows big banks. “Less competition means less price pressure.”
Whatever the reason for stubbornly high rates, the result is that at least for now when it comes to credit cards the main beneficiary of Bernanke’s policies have been banks and not borrowers. At Citigroup, for instance, the net credit margin, which factors in the cost of borrowing and credit losses, for its bank cards is up 24% in the past year. And since credit card debt is the second largest form of borrowing by Americans after mortgages it seems unclear how well Bernanke plan to lower borrowing costs will work unless banks and card companies play along.
“When it comes to credit card rates, there has always been a floor, but no ceiling,” says PRIG’s Mierrzwinski. At least for now, even Bernanke appears to be unable to change that.