Most of the leading U.S. credit card issuers—portfolios of more than $500 million— reported y/y growth in their average credit card outstandings in the first quarter of 2017.
However, all of these issuers are also experiencing significant growth in credit card net charge-offs (gross charge-offs minus recoveries). Of the 19 issuers:
- 10 reported y/y charge-off increases of more than 20%.
- For 17, charge-off rises outpaced outstandings growth.
These recent significant increases in charge offs follow an extended period of declining charge-off rates in the aftermath of the 2008-9 Financial Crisis. During the 2010-2015 period, issuers tightened up their credit card underwriting considerably, and consumers moved away from racking up high levels of credit card debt. According to the FDIC, the credit card net charge-off rate fell from a recessionary high of more than 13% in 1Q10 to less than 3% in 3Q15. Since then, the rate rose slightly—to 3.16% in 4Q16—but still well below levels seen prior to the Financial Crisis. And five of the issuers in the chart above (Chase, Bank of America, Discover, BB&T and SunTrust) still had net charge-off rates of less than 3% in 1Q17.
Even though current charge-off rates are low by historic averages, issuers must be careful not to allow charge-off momentum to grow to a problematic level. One area of potential concern: many leading credit card issuers are reporting strongest outstandings growth for their low FICO Score segments, which tend to have significantly higher credit risk profiles.
Of course, when focusing on growing credit card loans, issuers accept that charge offs will rise. However, they can help to ensure that these charge offs remain at a manageable level by:
- Maintaining underwriting discipline
- Avoiding a race to the bottom in credit card pricing; it’s notable that, according to CreditCards.com, the average credit card APR reached a record high of 15.80%)
- Providing content and tools to educate consumers on how to use credit cards responsibly
- Continuing to market credit cards as both payment tools and sources of credit
In recent weeks, a range of leading national and regional banks have carried out small business surveys, many of which were timed to coincide with 2017 National Small Business Week (April 30-May 6). These include new surveys from Citizens Bank (Small Business Pulse) and Fifth Third Bank.
These surveys are designed to:
- Generate brand awareness among small business owners
- Underline the bank’s commitment to this market
- Position the bank as a thought leader in the small business space
- Promote the bank’s small business solutions
The following are six approaches that banks are using to leverage small business surveys to drive engagement with their small business clients and prospects:
- Establish a branded index. Many banks measure small business optimism via an index. This enables them to both track this metric over time, as well as generate general business press attention. Citizens recently-published survey includes the Citizens Business Pulse Index, which is its measure of the small business climate. Other indexes include the Wells Fargo/Gallup Small Business Index and the Capital One Small Business Growth Index.
- Create a recurring survey. Many of the leading banks now conduct surveys on a quarterly, biannual or annual basis, which enables them to track small business metrics over time. Capital One has been tracking a Small Business Confidence Score consistently since 2008.
- Survey topics of interest. Most surveys focus on small business optimism and outlook. However, surveys also look to differentiate by covering other issues that should be of interest to small businesses. The U.S. Bank Small Business Annual Survey studies small business owners’ personal satisfaction as well as the desired attributes they want from their business bank.
- Use infographics to summarize survey findings. Presenting key findings from the survey (which will typically include a series of statistics) in a visually-appealing format allows readers to quick grasp important points the bank wants to make. Wells Fargo published a lengthy survey report, but it also created a one-page infographic that summarizes key takeaways.
- Version the survey for target markets. Bank of America creates versions of its Business Advantage Small Business Owner Report for 10 target markets (Atlanta; Boston; Chicago; Dallas/Fort Worth; Houston; Los Angeles; New York; Miami; San Francisco; and Washington, D.C.). Similarly, PNC publishes its Spring Economic Outlook Survey findings for 10 regional markets.
- Position the bank (subtly) as a small business solutions provider. Fifth Third’s recent small business survey included findings on funding growth, while also positioning the bank as “committed to the development of small businesses throughout the Bank’s footprint.“
An analysis of 10-K SEC filings by EMI Strategic Marketing has found that leading credit card issuers are looking to grow outstandings across a wider range of FICO Score segments.
In the aftermath of the Financial Crisis and Great Recession, issuers narrowed their focus, moving away from lower FICO Score segment, and concentrating their efforts on prime and superprime consumers. In recent years, issuers have reduced charge-off rates to very low levels. With the steady growth in the economy and rising consumer confidence, issuers see an opportunity to grow their credit card outstandings and many are willing to take on more risk in order to achieve the desired growth.
The four largest credit card issuers—Chase, Bank of America, Citibank and Capital One—all reported growth in each of their FICO Score categories in 2016. Three of these issuers (the exception was Citi) had strongest growth in their lowest credit score segment. Citibank had double-digit growth in large part due to the acquisition of the Costco portfolio from American Express, and this acquisition influenced the relative growth rate of different credit score segments. Note that 36% of Capital One’s outstandings are held by consumers with credit scores below 660, compared to only 14% of Chase’s and 15% of Citibank’s (Citi-Branded Cards unit) outstandings.
Leading monoline credit card issuer Discover followed a similar pattern, with stronger growth for the <660 FICO Score segment, which accounted for 18% of total outstandings at the end of 2016.
Among the regional bank card issuers, Wells Fargo reported very strong growth (+19%) in the <600 segment, and consistent growth across most other segments. However, it had a 7% decline in the 800+ segment, as it does not appear to have an affluent credit card that can compete effectively with American Express, Chase (which launched Sapphire Reserve in 2016) and Citibank.
Other regional bank card issuers are also looking to drive growth across the credit spectrum. SunTrust, KeyBank and Regions have some of the strongest credit card loan growth rates in the industry, with very strong growth at the lower end of the spectrum. In contrast, PNC had strongest growth in the 650+ FICO Score segments.
The following are some key considerations for issuers looking to grow outstandings across the credit spectrum:
- Compare the FICO composition of the issuer’s credit card portfolio to its peers. Assess the organization’s appetite to expand into new credit score segments.
- Understand the financial needs, characteristics and behaviors of different credit score segments
- Have products, offers and pricing in place for a range of consumer segments.
- Invest in new marketing channels (and develop messaging) to reach different segments
- Partner with other bank units that have strong connections with particular segments (e.g., wealth management and consumer financing units) in order to drive cross-sell to underserved segments
- Ensure that company underwriting reflecting company objectives (while maintaining underwriting discipline).