Large banks typically have operating advantages against smaller ones. Large banks can securitize debt and reinvest. Large banks tend to be more risk-tolerant, and can usually lend their way out of a collection problem. Here’s a story about an Australian bank who just threw in the towel on its credit card business, reported by the Australian Financial Review:
- Announcing a 32.8 per cent fall in net profit laden with a $14.4 million, non-recurring impairment loss on its credit card business, ME sought to justify its “decision to stop its investment in a new credit card platform and associated new credit card products” on the basis that, “among other factors, it was not economically feasible to continue due to the expectation the credit card market is undergoing significant disruption”.
Let’s break this down. ME Bank is an Australian online bank with AUD$27 billion in assets. It classifies as a direct bank often referred to as a branchless or internet-only bank. Recent credit loses caused a $14 million loss, and now the bank is backing out of credit cards. As the article mentions, it is not just the credit card losses, and installment loans have shifted good business away from the credit card operation.
The Sydney Morning Herald dug more in-depth on the credit card/installment loan issue:
- “We think there is a massive structural change going on in the credit card market and we don’t think that is where we want to invest,” Mr McPhee said.
- ME had planned to introduce more credit card products and in particular rewards cards, on top of its one current low rate card. But Mr McPhee said the increase in buy now, pay later products, such as Afterpay and Zip, meant it was no longer a feasible option.
- “If you think about it from a business strategy context we have got finite resources, it’s a pretty crowded space, and we are seeing a decline in usage because of the buy now, pay later market,” Mr McPhee said.
- The company was halfway through the project when it decided to discontinue resulting in a $14.4 million impairment after tax.
- On an underlying basis, which removes one-offs such as the credit card losses and IT costs, the company’s full-year profit after tax was $99.8 million up 3 per cent on the previous year.
And, Mozo, a consumer-oriented news source in Australia notes:
- ME Bank has abandoned its plans to expand its credit card range, with growing frenzy around Australia’s buy now, pay later sector being cited as a key driver of this decision.
- Last September, ME’s CEO Jamie McPhee announced that the bank would be rolling out more credit card products – in particular, rewards cards – on top of its current low-rate ME frank Credit Card.
- However those plans have since been dropped, with McPhee saying that ME’s investment in credit cards was no longer feasible in light of the rapid spread of buy now, pay later services, including fintechs Afterpay and Zip.
- In fact, statistics from Afterpay earlier this year revealed fewer Aussie millennials are now using credit cards to shop and spend – only 41% own plastic, compared to 58% in 2002.
Here’s the takeaway: In Mercator’s recent coverage on the installment lending market, we noted that several large card companies, particularly American Express, Chase and Citi have their variations of installment lending, but this is not a new strategy. You can accomplish the same result by over-paying the minimum due.
Will this begin a movement for small issuers to exit the card business? It remains to be seen, but when you compare profit potential and market presence, it is hard for small-town bank to compete with a global credit card lender.
The answer is straightforward: Economies of scale drive the credit card business.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
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