How Profitable Will the Customer Be?

If you ever wondered just how profitable credit card lending can be, take a look at what a savvy business will pay for the chance to lend money to people already in financial trouble.

According to Nilson Reports, HSBC just sold its subprime credit card operations (338,000 accounts) in the UK to SAV Credit for $796,000,000.  SAV paid an average of $2,355 per account.

After the customer has repaid the loan in full, SAV needs to make enough money on each account to cover the cost of funds, the cost of mailings and advertising, the cost to answer the call center queries and stay after the late payers, and the cost of the executives and overhead--and they still need to make another $2,355 per account just to break even.

Of course, if a few people default or die, then their share of the $2,355 needs to be made up by someone else in the pool--pushing the minimum needed return on the other accounts toward a handsome $3000 or so.  And with high turnover rates in the credit card industry generally and high default rates in the subprime market in particular, SAV can't count on having all 338,000 customers for a year or longer.  SAV must be counting on even higher returns from the smaller number of families who stay on as paying customers.

What can we infer about SAV's business model?  They must look at each subprime family as another goose that will lay golden eggs for years to come.

Comments

[Felix]

Elizabeth, are you quite sure that the $796 million is over and above the balances on those credit cards? I assumed that it included those assets.

[Elizabeth Warren]

I was told that the credit card receivables (the outstanding balances) had already been pledged/sold off. The person was someone who should know, so I assumed that was true--in other words, I was sure until I read your comment. The news reports don't focus on this issue, which is frustrating.