Card Networks Report Robust Purchase Volume Growth

With MasterCard and Visa reporting quarterly financials in recent days, we now have a fuller picture of purchase volume trends for the main U.S. card networks.  Each reported relatively strong year-on-year growth in U.S. card spending, led by MasterCard (+13%) and American Express (+12%).

It is notable that Visa and MasterCard are following different paths in growing purchase volume.  Visa, which has been the dominant debit card issuer, is reporting continued slower growth in debit card purchase volume.  This is due to some debit card portfolios switching to MasterCard, as well as the impact of the Durbin Amendment, and has resulted in Visa’s credit card growth outstripping its debit card growth for the past three quarters.

In contrast, MasterCard has reported accelerating U.S. debit card purchase volume growth.  Credit card volume growth has also accelerated, but continues to trail debit card volume.

American Express has consistently recorded double-digit volume growth as it follows its spend-centric approach.  Discover also reported strong growth in 2011, but this has trailed off in recent quarters.

During this period of strong purchase volume growth for both credit cards and debit cards, credit card outstandings have continued to decline, emphasizing the transition in the credit card sector from a lend-centric to spend-centric orientation.  Many leading U.S. credit card issuers are expecting outstandings to grow slightly in the coming quarters, but it is probable that purchase volume growth will continue to outstrip loan growth for the foreseeable future.

Card volume growth should continue to be significantly higher than overall U.S. consumer spending growth, as consumers switch from cash and checks, with particular growth opportunities for cards in categories where they have traditionally had small shares of payment volumes.

In the longer term, card networks and issuers need to plan for new opportunities and challenges created by a changed payments landscape, characterized by demographic shifts, new payments technologies and changing shopping behavior.

Is the Fed’s new debit card interchange rate a good deal for banks?

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

Impact of credit card legislation on the Marketing Mix

Marketing 101 teaches us about four P’s of the Marketing Mix: Product, Price, Place and Promotion, with Positioning thrown in for good measure.  The passage of new credit card legislation means credit card issuers will have to do a refresher course on these elements, in order to figure out how to market credit cards in a radically changed environment.

Positioning: Credit cards have become a tarnished product category in recent years, having been associated by many with the excessive availability of credit. Issuers will need to figure out how to position credit cards as a useful and flexible source of credit. The largest issuers have traditional run their card units as standalone operations, but we also envisage this will change radically, with credit cards increasing integrated with other financial products and services.

Product: The restrictions on issuer’s ability to generate interest and fee income may lead to the emergence of stripped-down cards with fewer features and rewards. In addition, concern over defaults could lead to growth in secured cards as well as a hybrid cards with secured and unsecured components.

Pricing: The card offer is expected to change significantly with annual fees, less attractive introductory offers and higher APRs.

Place: Banks’ desire to go “back to basics” and focus more on a relationship banking approach means that the branch and online banking platform become increasingly important cross-selling tools.

Promotion: Comperemedia reported in DM News that credit card direct mail fell 72% year-over-year in 1Q09. While an economic recovery could lead to some issuers increasing their DM volume, there is little prospect of DM reaching the historic high levels of 2006. According to Cards and Payments, credit card advertising did increase in 2008, but with most issuers cutting back on acquisition activity and reducing  noninterest expenses, we expect a decline in ad spend in 2009.