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Get out of credit cards quick

Back in the HKCEC (Hong Kong Conference and Exhibition Centre) and it’s walk, walk, walk.

I reckon I've already walked 12 kilmotres since arriving yesterday and probably will average 10k per day.

This is because the HKCEC is HUGE.

Three floors of exhibition space and, wall-to-wall, about a kilometre between entry and exit.

No wonder 5,000 people can seem to disappear the minute you walk in as, looking around the exhibiton areas, it’s not that busy. And yet it is. It’s just that everyone disappears inside this gargantuan centre onece they walk through the door.

After various meetings with exhibitors I just sat through the first session delivered by McKinsey.

McKinsey seem to be all over SIBOS this year, and maybe that's a reflection of their partnership with SWIFT … or is that slicing and dicing?

Anyways, McKinsey confirmed that payments is still a good business.

I thought so!

According to McKinsey’s numbers, payments represent $900 billion of revenues for banks in 2007 and about $300 billion of profit. In other words, over a quarter of all bank revenue and a hefty chunk of their profits comes from the fee and interest income on current accounts and cards.

This does vary dramatically by region however, with the USA heavily dependent upon credit cards for their revenues. Over 40% of bank revenues in the USA are made from credit cards, or $128.6 billion of their $281.6 billion revenues.

In Europe by contrast, $145.11 billion of the $274.7 billion revenues are from income made on personal current accounts. Asia has similar numbers – $114.6 billion of $236.7 billion revenues – but these are from corporate current accounts.

The impact of the crisis has mainly been on consumer finance during 2007 through 2008 in Western Europe, excluding the UK, with revenues down 67%; Eastern Europe was down 178% and Africa 102%.

In the same timeframe, American corporate banking was hardest hit, down 61%, similarly with the UK (down 59%) and Japan (down 89%).

As a result, the UK was worst hit by the changing credit conditions in 2007 through 2008, with bank profitability down 92% overall and Japan a close second, declining 71%.

But that’s only half the story, as during 2008-2009 it’s far worse.

Consumer finance profits were down by 266% in the USA during 2008-09, down 328% in Western Europe (excluding the UK), 114% in Asia and 80% in Latin America. The total picture shows revenues from consumer finance down 444% worldwide between 2008 and 2009.

Similarly, corporate banking income reduced by 287% in USA, 138% in the UK, 183% in Western Europe, 141% in Eastern Europe, 55% in China and 51% in Latin America.

The USA and Eastern Europe were the worst territories hit by the crisis and dramatic tightening of fee and interest income overall.

Next year, it changes as there’s nothing to lose anymore. Hence, McKinsey predict that banks will regain $150 billion in lost profits as a result, with Western Europe having the best position in the comeback stakes.

What was really interesting is that McKinsey predict USA credit card losses to be about 10% or more this year and pre-tax Return On Assets for the issuers to be down from 3% 2008 to -1% in 2009.

This is because of a major move away from credit card usage in the USA to debit cards. As a result credit card profit per household will move from $160 in 2008 to -$143 in 2009, -$172 in 2010 and -$65 in 2011, before returning to breakeven in 2012 and a profitable line of business from 2013 onwards.

The key message therefore is that credit cards is not a good business to be in if you’re in the US markets right now.

I’m sure that Capital One, MBNA and their brethren are delighted to hear it.

About Chris M Skinner

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here…

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  • Visa reports this data:
    August, U.S. aggregate payments volume -1% vs the prior year period.
    U.S. credit payments volume was -10% and debit payments vol was +7%.
    Compared to the July period end, U.S. credit payments volume was down slightly from -9%, while debit payments volume improved from +4%.
    August cross border payments volume on a constant dollar basis was -7% over the prior year period and down slightly compared to the July period end of -6%.
    August processed transactions grew +9% globally, a slight improvement over the July period end of +8%.