Introduction to Securitization

CREDIT CARD RECEIVABLES

At first look, credit card receivables seem to be too short term an asset to be amenable to securitization; but not surprisingly credit card issuers have made good use of securitization markets almost everywhere in the world. Credit card receivables are short term, but they are revolved into creation of fresh receivables on a fairly steady basis. If a card user swipes the card, the amount that he or she utilizes is payable within a certain time. However, a credit card is a revolving line of credit. Therefore, they represent a steady stream of cash flows, and are a good candidate for securitization.

Though unsecured, credit card companies make high interest income due to the finance charges, fees, late fees and periodic membership fees. They have put in place systems whereby the card company has a constant watch on the account, and can immediately block a card or reduce its credit for delinquencies. The maximum amount that can be lost on a card is thus controlled. Consequently, over time, card companies have positioned themselves very well to make profit from a very well-diversified base of plastic money users.

For credit card issuers, securitization is one of the very important avenues of sourcing funds, as most traditional financiers have shunned taking funding exposure on credit card receivables. As Mason and Biggs (2002, p. 1) point out:

 

Credit card companies rely on securitization for funding and, if the window to the asset-backed market were ...