Yesterday, the Federal Reserve published a new proposed debit card interchange rate of at least 21 cents (would be 24 cents on an average $38 transaction), with this rate to come into effect from October. Is this a good for banks? This depends on where the banks are starting from? They now enjoy an average debit card transaction fee of 44 cents, so this is a significant decline. On the other hand, the Fed had previously proposed cutting the fee to 12 cents, so this new proposed fee structure is nearly double that.
Eeven with the latest rate proposal, banks will lose significant interchange income. Some banks have already reacted by ending free checking and debit rewards. We believe that there could be a re-emergence of debit rewards programs, albeit with different structures and pricing. So what we may see are:
- Debit rewards programs that carry program fees, but with waivers for “high-value” customers
- Inclusion of debit spend in relationship rewards programs
- Continued focus on developing new rewards programs that are at least partially funded by merchants
In working with clients, we often encounter marketing organizations that have been snakebitten by ineffectual research to the point that they no longer see the value in conducting it at all. Why is it so hard to produce valuable research?
One reason is that many don’t understand that the most natural and effective starting point for research is with a strategic problem. They think of research as a box to check rather than as a tool that can help them optimize their performance. Or, they think of research only as a tool for certain situations—focus groups for brand work, surveys for customer satisfaction measurement etc.
To be sure, there is an art to identifying and articulating strategic problems in a way that enable research support. It is the step that lies between identifying an issue—a product or sales region not making their numbers, a marketing program not generating the projected number of leads—and a proposed solution where this art can most effectively be practiced. In reality, however, most organizations simply want to make changes and move on. They don’t bother to ask the questions which are critical to producing effective, strategically vital research. The answers to questions like the following, delivered through well-designed research, play a central role in strategic and tactical decision-making:
- Do customers in the underperforming sales region have different attitudes than those in other regions?
- Did customers not know about the new product or were they simply not interested?
- Are prospects responding more strongly to competitors’ lead generation efforts and if so, why?
Conducting research is not a panacea—it won’t give you all the answers and it’s not worth the investment in all situations—but it can and should help more than it does. Organizations just need to stop and ask the right questions.
Discover Financial posted second quarter 2011 financials this morning. As Discover reports quarterly financials a month before other leading card issuers, we look to its financials to get an early read on broader trends in the credit card industry
The following summarizes some key credit card metrics in Discover 2Q11 financials:
- Charge-off rate: continued to improve, with a decline of 95 bps in the quarter to 5.01%
- Delinquency rate: the 30+ day delinquency rate fell 80 bps to 2.79% (Discover reported this as an all-time low)
- End-of-period loans: fell 1% y/y, but this decline is tailing off (y/y was was 3% in 1Q11)
- Volume: Discover Card sales volume rose 9% y/y, while total Discover Card volume grew 11%
Discover does not break out revenue and provision for loan loss figures for its credit card operations, but rather reports them for the total company.
- Net interest income: rose 4% y/y, with a 1% rise in interest income, and a 6% fall in interest expense
- Other income: increased 6% y/y, driven in part by a 16% rise in loan fee income
- Provision for loan losses: fell 76% y/y to $176MM
In summary, we are seeing a continuation of recent trends: improvement in credit quality metrics; spending but no loan growth; and profitability driven by lower provisions for loan losses, rather than revenue growth.
However, with charge-off rates now close to 5% and 30+ day delinquency rates at an all-time low, Discover is shifting its focus to growing outstandings. It reported that the decline in outstandings is bottoming out, and it anticipates growth in the coming quarters. And to push this growth, Discover grew marketing spend 27% y/y in 2Q11.
However, issuers’ interest in growing outstandings is limited by continued weak consumer demand. This is leading to some issuers to looking to acquire card portfolios (e.g., Capital One’s recent private-label portfolio acquisitions, and its bid for HSBC’s U.S. card portfolio), or refocusing attention on acquiring non-card loan portfolios (note Discover’s own recent acquisitions of Tree.com’s Home Loan Center, as well as its earlier acquisition of The Student Loan Corporation from Citigroup).