Credit Cards a Plastic Profit Machine

At present, an increasing number of consumers have stopped paying credit card bills altogether, amid widespread unemployment and economic duress. While processors' fee revenue is unaffected by that, banks that extended credit could face more than $80 billion in writedowns on receivables and credit-card securities through 2010, according to the Federal Reserve's stress test assumptions. Those companies include big players like Bank of America (BAC Quote), JPMorgan Chase (JPM Quote), Citigroup (C Quote), Wells Fargo (WFC Quote) and Capital One (COF Quote), as well as credit card lenders like AmEx and Discover.

Processors are undoubtedly facing headwinds from a consumer spending slump and broad deleveraging. When times are good, consumers are ready, willing and able to swipe. When times are bad, they tighten up the purse strings and rely on cash, while paying down debt balances.

"Credit card companies make their money in two ways -- in volume and on fees," says Bernard Weinstein, director of the Center for Economic Development and Research and an economics professor at the University of North Texas. "Volume is down because we're in a recession, and as a result of higher fees and charges some people are abandoning credit card use and going back to cash."

Personal spending has been sporadically improving, but is still far from year-ago levels. It also appears driven by bargain-hunting, rather than true underlying demand. A report on Tuesday showing that consumer confidence has plunged to the lowest level this year and far below expectations indicated worse times ahead.

As unemployment sails higher toward double-digit territory, reaching 9.5% in June, delinquencies on credit card payments are rising as well. As one example, Bank of America has reserved over $3 billion against future credit card losses, more than any other type of consumer debt. Net losses on its credit card book scaled up to 11.7% of the loan portfolio last quarter, up from 8.6% the previous period.