China's Credit Card Profitability Analysis

In recent years, the rapid development of China's credit card Industry has greatly improved national economic development and people's living standard. But almost all banks lose money, apart from a very few banks like China Merchants Bank and Guangdong Development Bank announce that they make profit. It has seriously prohibited the continuous and healthy development of our credit card Industry. Starting from this point, the article firstly analyzes the main factors that affect credit card's revenue by using cost-benefit theory and market competition theory, and then it comes out that the main reasons are the lack of valid credit card, high marketing cost and risk cost. The lack of valid credit card is due to the low rate of revolving credit usage, low commission rate from merchants and annual fee waiver policy; while the high marketing and risk costs are because of vicious competition between banks and loose qualification examination of applicants.Based on the above analysis, the article sets up revenue function model. By using least squares estimation and ridge regression estimation methods and combining historical data from China Merchants Bank, we carry out regression analysis on model. During regression analysis, we use SPSS statistical software to get the least squares regression equation, and then make significance tests. By discovering that the independent variables, including credit card insurance volume, consumption volume and revolving credit balance, exist multi-collinearity, we further use ridge regression estimation method to eliminate the multi-collinearity influence on the regression equation. After determining the ridge parameters, we make out the ridge regression equation of revenue function. Finally by the methodology of empirical analysis, we confirm that credit card insurance volume, consumption volume and revolving credit balance are the three main factors that affect credit card revenue and also their respective degrees of influence.According to the regression analysis results, we suggest to expand the insurance volume on valid credit card; appropriately implement annual fee waiver policy; greatly improve the utilization of revolving credit; control marketing cost and applicants' qualification examination. We hope this article can help improve the profitability of credit card industry and also encourage continuous and healthy development.