Low FICO Score Categories Drive Loan Growth for Leading Credit Card Issuers

In a March 2017 blog post, EMI highlighted growth in credit card outstandings across the credit spectrum for leading credit card issuers.  Our recent analysis of 3Q17 10Q SEC filings for these companies shows that this trend is continuing.

The top three issuers—Bank of America, Chase, and Citigroup—reported growth across all FICO Score segments, with strongest growth coming in the lowest segment.  In the aftermath of the Financial Crisis, issuers pulled back on lending to low-prime and sub-prime consumers.  With the return to steady economic growth in recent years—and with issuers now believing that they have more robust underwriting and pricing systems—issuers are now refocusing on consumers in lower FICO Score categories.

Assets at both Capital One and Discover skew heavily towards credit card loans.  Discover generated 9% y/y rise in credit card outstandings, led by 16% rise in loans to consumers with a <600 FICO Score.  Capital One bucked the overall trend, with lower growth for its <660 FICO Score segment.  However, it should be taken into account that this segment accounts for 35% of its total credit card outstandings (vs. 15% at Chase, 16% at Citi, and 19% at Discover), so it has less scope for strong growth.

The leading regional bank card issuers—who focus on cross-selling credit cards to existing bank clients—reported a similar pattern.  SunTrust has continued its very strong growth trajectory, with overall growth of 16% led by the <620 category.  Regions followed a similar pattern, with 7% overall growth in outstandings driven by a 35% rise in the subprime (<620) segment. PNC had strong growth across the credit spectrum.  Fifth Third had strong growth in the <660 segment, but from a very low base.  The y/y decline in outstandings in its 720+ category resulted in Fifth Third overall credit card outstandings remaining unchanged.  Wells Fargo’s overall growth rate (+4% y/y) has slowed considerably in recent quarters.  It generated steady growth across most categories, with the exception of the 600-680 FICO range.

10 Credit Card Trends to Watch in 2015

As the credit card industry moves into 2015, economic growth and improved consumer confidence are fueling credit card industry optimism.  Here are ten trends that we believe will significantly shape the industry in the coming year.

  1. Outstandings growth will gain momentum.  As EMI reported in a recent blog, end-of-period outstandings at the end of 3Q14 were up 0.9% y/y.  Up to now, the strong growth by “monolines” and regional bank card issuers has been offset by the low growth or even declines among the top four issuers: Chase, Bank of America, Capital One and Citi.  However, even among this top-four segment, there are now signs of growth; Capital One grew average outstandings 2.6% y/y in 3Q14, while Chase reported growth of 1.8%.
  2. Focus on volume growth will continue.  Even as issuers shift their focus somewhat to outstandings growth, recent results from the main card networks—Visa, MasterCard, American Express and Discover—show that card volume growth remains robust.  This should continue in next few years; according to a recent issue of The Nilson Report, credit card’s share of consumer payment volume is expected to grow from 28% in 2013 to 36% in 2018.
  3. Card rates will rise.  Given issuers’ overwhelming dependence on variable-rate pricing, APRs should rise in 2015 in line with changes to the federal funds rate.  Other factors that may create upward pressure on APRs include the targeting of lower-FICO segments as well as ongoing enriching of rewards programs.  Issuers will continue to promote wide APR ranges rather than a single rate; this gives maximum flexibility is assigning the optimal price to match the perceived risk of default.  Given issuer focus on growing outstandings, expect to see growth in 0% introductory rates on both purchases and balance transfers.
  4. Charge-off rates may rise modestly…from historic lows.  Leading credit card issuers have expressed surprise at the scale and duration of the decline in charge-off rates in recent years.  The expectation is that, as issuers relax underwriting standards and grow credit lines, charge-off rates will rise towards more normal levels.  However, it is worth noting that 30+ day delinquency rates also remain very low, so it is also likely that charge-off rates will continue to bounce along the bottom for the first half of 2015.  Some leading issuers reported strong y/y growth in provision for loan losses in 3Q14 (e.g., American Express +16%, Capital One +17% and Discover +17%), but this appears to be mostly driven by anticipated growth in outstandings rather than an expectation that charge-off rates will rise significantly.
  5. Rewards will remain a key competitive battleground.  In 2014, Issuers once again upped the competitive ante among rewards cards, with a spate of new launches (e.g., Citi Double Cash, American Express EveryDay, Wells Fargo Propel).  And issuers’ twin objectives of growing card volume and reducing churn mean that rewards programs should continue to be a key focus for issuers in 2015.  Issuers will need to look beyond the earn rate in order to build or maintain a competitive advantage in this area; Discover recently eased restrictions on CashBack redemptions, informed by research that found that consumers value redemption experience and flexibility as much as a higher earn rate.
  6. New payment form factors will gain traction.  Two new payment methods will be followed with great interest in 2015: EMV cards and Apple Pay.  In advance of the October 2015 shift in liability for fraudulent transactions, issuers are rolling out EMV cards (70% of U.S. credit cards are expected to have chips by the end of the year) and merchants are upgrading terminals to handle EMV transactions (47% of terminals expected to be EMV-enabled by the end of 2015).  In addition, most issuers have entered into partnerships with Apple to offer ApplePay to their customers.  As with EMV, consumer and merchant acceptance will be key to Apple Pay’s growth prospects.  Issuers willingness to embrace these new forms of payment is encapsulated in a recent statement by American Express CEO Ken Chenault at a recent financial services conference: “..credit cards could be displaced…I really don’t care from a form factor standpoint because we’re agnostic. So plastic could go away. I could care less, could go away tomorrow.”
  7. Issuers will ramp up online and mobile marketing and sales.  As online (and mobile) banking has now achieved critical mass, issuers are increasingly incorporating cross-sell offers into consumers’ online banking sessions to benefit from fact that online average acquisition costs are significantly lower than traditional channels, such as direct mail.  Some leading issuers (e.g., Chase, American Express and Capital One) have also made significant investments in digital marketing, driven by both the lower acquisition costs as well as the ability to measure ROI.  The shift to online channels for new account production is being led by Chase, which reported that 54% of new card accounts were generated online in the first 9 months of 2014.
  8. Bank card issuers will increase focus on selling cards through their branch channel.  Regional banks are focused on increasing credit card penetration of existing clients.  They are also looking for products to focus on to realize branches’ potential as sales channels.   For inspiration they look to Wells Fargo, which has reported steady growth in credit card penetration of retail banking households (40% in 3Q14 vs. 27% in 1Q11).  The bank also reported that its branches accounted for 83% of card production in 2013.
  9. Issuers will continue to push bonus offers.  A number of factors that we have already discussed should ensure that bonus offers will remain high in 2015:
    1. The continued importance of rewards programs, with bonus offers playing a key role in driving new customer acquisition and activation
    2. Issuers are very unlikely to lower APRs in 2015, so bonus offers will be the main way to attract new cardholder awareness and interest
    3. The decline in average acquisition costs from using online and branch channels means that issuers can afford to offer strong bonus offers while maintaining profitability.
  10. Near-prime and sub-prime market will grow. In 2014, Wells Fargo and U.S. Bank both introduced American Express-branded cards with strong rewards and high annual fees, targeting superprime FICO segments.  However, there is a growing sense that this market is now saturated.  As issuers look for growth, they will be tempted to relax underwriting standards to reach prime and near-prime FICOs.  Issuers are less likely to target the sub-prime card market; this market is more likely to be targeted by newly-launched specialist sub-prime issuers, such as Fenway Summer’s FS Card Inc.

Has the decline in card outstandings bottomed out?

A recent American Banker article discussed a credit card rebound, referring to data from the Federal Reserve that showed strong growth in revolving consumer credit in April 2014.  This supports findings in a recent EMI blog (“Four Takeaways from Credit Card Issuer 1Q14 Financials“), which found signs of an improvement in credit card outstandings for the leading issuers.

The FDIC has recently published bank data for the first quarter of 2014.  EMI’s analysis of this data provides further evidence that the decline in credit card outstandings is bottoming out.

  • Credit card outstandings fell 0.3% between end-1Q13 to end-1Q14.  This marked an improvement from a decline of 0.7% between end-2012 and end-2013.
  • The overall decline is due to the outstandings performance of the four largest issuers (Chase, Bank of America, Citi, and Capital One) who together accounted for 63% of total industry outstandings at the end of March 2014.  These four leaders reported a 2% y/y decline in outstandings.
  • Outside of these four issuers, outstandings for the rest of the industry rose 3% y/y.  Growth in outstandings is led by a number of sectors, as summarized in the following table:


Furthermore, even though the leading issuers have been dragging down overall outstandings performance for a number of years, there are indications that these declines are bottoming out, and loan portfolios are even poised to grow in the coming quarters:

  • Chase credit card outstandings were virtually unchanged between end-1Q13 and end-1Q14.  At its 2014 Investor Day, Chase reported growth in its core card loan portfolio (excluding its run-off portfolio), although its focus has been on growing volume rather than loans
  • Bank of America reported a 1% decline in card outstandings, but expects this decline in bottom out this year.  Card issuance is strong at more than 1 million new accounts in 1Q14 (compared to a quarterly average of about just over 800,000 in 2012)
  • Capital One reported that its domestic card loan portfolio fell 3% y/y in 1Q14, mainly due to its run-off portfolio.  However, it reported that it was seeing loan growth in some key consumer segments, such as transactors.  And in a recent Morgan Stanley conference, Capital One claimed that it expects loan growth in July, earlier than anticipated.

So, how can issuers best prepare for outstandings growth?  The following are three quick tips:

  1. Set realistic expectations.  Don’t expect a return to the outstandings levels that prevailed prior to the 2008 financial crisis and resulting recession.  Consumer attitudes to credit card have changed since then, as they see credit cards less as an easy source of credit (evidenced by high monthly payment rates) and more as an effective payment tool (seen in the continued strong volume growth rates)
  2. Prepare the groundwork for future growth.  Rather than driving up loan growth (and potential charge-off rates) through overly aggressive pricing offers, issuers should concentrate on the basics: providing a robust product suite with value-added features to meet cardholder spending and borrowing needs; building flexible reward programs; and setting pricing based on appropriate levels of risk and reward.
  3. Focus efforts on existing customers.  Traditionally, credit card issuers have focused their marketing on new customer acquisition.  Now, a new generation of credit card issuers (led by Wells Fargo and followed by regionals banks that have recently started to issue cards in-house) are growing their portfolios by cross-selling credit cards to existing bank clients.  In addition, simple card acquisition is not enough; issuers need to develop communications and offers to drive activation, retention, preference and increased usage, thereby optimizing customer lifetime value.