Credit Card Issuers Looking to Grow Loans Across the Credit Spectrum

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.

credit_score_4Q16_big4

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.

credit_score_4Q16_discover

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.

credit_score_4Q16_wells_fargo

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.

credit_score_4Q16_regional_issuers

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).

Four Channel Trends in Leading Bank 4Q15 Financials

The largest U.S. banks have been publishing their quarterly and full-year financials over the past two weeks.  Within these reports, we can discern a number of channel-related trends.  These trends have a direct impact on how banks interact with their customer base in terms of providing everyday banking and value-added services as well as cross-selling additional products and services.

We’ve listed these key channel trends below:

  • Banks are continuing to reduce their branch networks.  According to SNL Financial, the total U.S. branch network fell by 1,614 branches and is now at 92,997, a decline of 1.7%.  These declines are driven by banks’ desire to cut costs, as well as from a recognition that greater usage of self-service channels for everyday banking transactions may enable banks to reduce bank density.  The following chart looks at net changes in branch numbers for leading banks with more than 500 branches:

net_change_in_branch_numbers_4Q14-4Q15

Citibank reported that it plans to close an additional 50 branches in the first quarter of 2016 as it exits certain markets (including Boston) and will concentrate its branch presence in six key metro markets.  It is worth noting that in other markets where Citibank has cut its branch presence, it claims to have retained over 50% of deposits through its online and mobile channels.

  • Banks are overhauling branch design and staffing.  Not only are banks reducing their overall branch numbers, they are changing how branches are designed and staffed.   In its 4Q15 earnings conference call, SunTrust mentioned that it is relocating to new, smaller branch locations in Richmond and Raleigh, which will reduce its square footage in these markets by half.  Overall, it has reduced its branch footprint by 2.5 million square feet over the past four years.  PNC reported that 375 of its 2,600 branches have been converted to its Universal Banker model, and it plans to convert an additional 100 branches in 2016.
  • Mobile banking is maintaining its strong growth trajectory.  According to Javelin Strategy & Research, 30% of U.S. adults used a mobile banking service weekly in 2015.  Reflecting this trend, leading banks continue to show double-digit y/y growth in mobile banking users (Chase +20% to 22.8 million; Bank of America +13% to 18.7 million; and Wells Fargo +15% to 16.2 million).  These customers are also using mobile banking for a greater variety of transactions.  For example, Bank of America reported that mobile banking’s share of total deposit transactions rose steadily from 4% in 4Q12 to 15% in 4Q15.
  • Online banking usage remains strong…and is growing.  While mobile banking garners most of the headline in financial trade press, online banking remains a key customer service channel, and some leading banks continue to register strong growth rates in online banking users.  This is likely due to a number of factors, including overall account growth, increased customer comfort with using online banking, new online banking functionality, as well as lingering concerns over mobile banking security.  The following table compares 2015 online and mobile banking users and growth rates for Chase, Bank of America and Wells Fargo:

online_mobile_banking_comparison

We expect that as banks continue their migration towards self-service channels for a growing number of everyday banking transactions, banks will continue to scale back their branch networks.  This will involve reducing branch density in particular markets, as well as exiting markets where they lack a critical mass or where their branches are underperforming.  However, banks in general want to maintain a physical presence in markets, so they can leverage the power of the branch as both a sales channel and a branding beacon.

In addition, banks need to provide a consistent user experience across their online and mobile channels.  In the short term, banks will continue to provide more functionality in the online channel, as consumers build trust in using their mobile devices for more complex financial transactions.  But the distinctions between online and mobile channels are blurring, and banks are already starting to refer to “digital channels” to encompass desktop, tablet and mobile channels.  Even the traditional delineations between “online” and “offline” channels are breaking down, as banks showcase their digital services in branches, and as digital channels include functions to enable customers make in-branch appointments.

 

7 Ways Banks Are Adapting Branch Networks to New Realities

According to the FDIC, there were just over 94,000 domestic bank branches at the end of June 2015: a net reduction of almost 1,400 branches from end-June 2014, and a decline of more than 6,000 branches since the U.S. passed the 100,000 branch threshold in mid-2009.

domestic_branches_2Q05-2Q15

The recent decrease in the number of branches is being driven by a number of factors, including banks’ focus on cutting costs in recent years.  In addition, the emergence and strong growth of online and mobile banking usage has led to consumers significantly reducing their use of branches for transaction processing.  So how are banks adapting their branch networks to this changing channel environment?  An analysis of presentations by leading U.S. banks at the recent Barclays Global Financial Services Conference identified a number of ways that banks are restructuring, repositioning, redesigning and restaffing their branches to ensure that this channel survives and thrives into the future.

  • Continuing to pursue branch consolidation.  While banks continue to emphasize their commitment to the branch channel in general, they have cut their overall number of branches in recent years, and will continue to do so.  At the Barclays conference, KeyBank reported that it had cut its branch network by 10% in the past three years, and envisages a further ongoing reduction at a rate of 2-3% per year.
  • Selling off (and acquiring) branch networks.  Most leading banks believe they need to have critical mass in particular markets.  If they feel that they cannot achieve this goal, they may decide to exit the market entirely.  Citi is exiting a number of markets, as it seeks to focus on just 6 major metro markets.  Fifth Third recently announced that it is ending its branch presence in Pennsylvania.  These branch sell-offs create opportunities for other banks who want to grow their presence in those markets (BB&T acquired Citi’s branch network in Texas, and F.N.B is  buying Fifth Third’s 17 branches in Pittsburgh).
  • Developing a hub-and-spoke approach.  Rather than having a dense network of similarly-sized branches, some banks are looking to establish a hub-and-spoke approach in specific markets.  This approach typically features a flagship branch as well as a reduced number of small branches.  At the Barclays conference, Synovus claimed that it was applying a hub-and-spoke system.  Other banks with flagship branches include Bank of America and Citibank, which now has flagship branches in four of its six target U.S. metro markets.
  • Redesigning and re-staffing branches.  As the branch channel’s primary role shifts from transaction processing to sales and service, leading banks are overhauling store layouts and are replacing tellers with product experts.  In addition to closing or consolidating 400 branches in recent years, PNC reported that it has converted 300 branches to its universal banking model (featuring concierge stations and reformatted teller stations).  In addition to providing enhanced sales and services to branch visitors, PNC claims that these branches cost 45% less than traditional branches.  In terms of staffing, Bank of America reported that it has added nearly 1,200 financial solutions advisers and small business bankers over the past two years.
  • Growing in-store branch networks.  Banks like Huntington and U.S. Bank have significant in-store or on-campus branch networks, and remain committed to this channel.  Huntington Bank recently announced that it was adding 43 in-store branches in Michigan via its relationship with Meijer Stores.
  • Incorporating new functionality into online and mobile banking services to drive branch traffic. Bank of America reported that its clients used the bank’s online and mobile apps to schedule an average of 14,000 branch appointments per week in August 2015.  And in September 2015, Bank of America announced online and mobile banking enhancements, which included enabling clients to make same-day financial center appointments.
  • Applying guerrilla marketing tactics.  Banks are becoming more creative in how they establish a physical presence to better interact with clients and prospects.  Leveraging its relationship with the Green Bay Packers, Associated Bank has set up a virtual branch in the parking lot of Lambeau Field to target tailgaters.

While the overall number of branches is likely to continue to decline, most banks appreciate the key role that branches play in sales, service and branding, and remain committed to the channel.  However, banks will continue to adjust branch density, design, layout, staffing and integration with other channels, in order to control costs and adapt to new consumer preferences and behaviors in how they interact with their banks.