Banks with credit card businesses are currently charging an annual interest rate of 19.24 percent on purchases. If you use their card for cash advances, the interest rate you pay is 29.99 percent. If I remember my medieval history, 30% is higher than the usury Jews charged that led to pogroms and is higher than the percentage of serf labor to which feudal lords had claim.
I got to wondering what percentage of banks’s profits came from credit card interest and bank fees. In other words, does it pay banks to finance new investment in plant and equipment when they can get 20% or 30% from lending to hard pressed Americans living on their credit card?
I did a search, and there is not the information you would suspect. I did learn that credit card companies make more money from interest on unpaid accounts than from transaction fees on purchases. Interest charges on outstanding balances are paid by the card user. Transaction fees on purchasers were formerly paid by merchants. However, today many merchants have shifted these charges to their customers. When you use your credit card today, you, not the merchant, face the transaction charges.
I learned that although credit cards only account for 4.5% of banks’ total balance sheets, they generated 16.6% of banks’ interest income during 2010-2023.
In 2022 the Consumer Financial Protection Bureau reported that credit card companies charged consumers more than $25 billion in fees, especially for late payment, and that these fees represent 16% of aggregate profit of the credit card businesses.
So, the former paradigm of a bank receiving deposits from depositors, for which it paid interest, then lending the deposits to corporations at a higher interest is no longer the paradigm. Today the paradigm is that banks rip off consumers and do not lend for the expansion of productive capacity.
The collapse caused by the massive loans involved with subprime derivatives that brought the collapse of 2008 now threatens a repeat with what seems to be an AI bubble that is unsustainable, if Michael Burry of The Great Short is again correct while no one listens.
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