Credit Card Issuers Experiencing Loan Growth Across FICO Spectrum…But Face Rising Charge-Offs

Most leading U.S. credit card issuers reported relatively strong y/y growth in outstandings in the first quarter of 2018.

Breaking these growth rates out by FICO Score segment, we see that issuers generated growth across multiple FICO Score categories.

  • There are important differences in the FICO composition of card portfolios.  The <660 FICO Score segment accounted for 34% of Capital One’s portfolio, a much higher percentage than other issuers, such as Fifth Third (3%), Chase (7%), KeyBank (11%), Citi (16%) and Discover (19%).
  • Among the largest issuers, one of the most notable trends was strong growth in the low-prime/sub-prime and super-prime segments, but low/no growth in their prime portfolio.  Bank of America grew its sub-prime (<620) outstandings by 6% and its super-prime (>720) increased 8%.  However, its loan portfolio held by consumers with FICO scores between 620 and 739 only increased by 2%.
  • Most regional bank card issuers (such as PNC, SunTrust and Regions) reported strong growth in their sub-prime and near-prime portfolios.  Fifth Third’s <660 FICO Score portfolio rose 43%, but this category only accounts for 3% of the bank’s credit card portfolio, so growth was from a very low base.

As issuers enjoy strong growth in their credit card outstandings—especially for sub-prime and near-prime consumer segments—it is worth noting that charge-offs are also on the increase.  Most issuers reported double-digit y/y basis-point growth in their credit card net charge-off rates.  Four of the 12 issuers below now have charge-off rates of more than 4%, and only one (American Express) has a charge-off rate of less than 3%.

So, while issuers want to grow credit card loans across the FICO Score spectrum, they need to ensure that various functions are all calibrated to ensure that cardholder delinquencies and charge-offs remain at manageable levels.  These functions include:

  • Underwriting
  • Marketing: targeting, offer development, and messaging
  • Pricing: fees and APRs need to be set at levels that balance cardholder ability to pay with an appropriate margin to offset potentially higher charge offs
  • Customer support: onboarding, financial education, as well as early engagement in cases where cardholders experience payment challenges

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).

Marketing Suggestions for Banks Looking to (re)Engage with Small Businesses

According to the FDIC, small business lending rose 5.3% between end-2Q15 and end-2Q16.  Since falling to a post-Financial Crisis low of $279 billion in the third quarter of 2012, small business loans have risen 18%—to $328 billion—at the end of June 2016.

change_in_small-biz_loans_1Q11-2Q16

In the light of this steady loan growth, many banks are refocusing attention on the small business market.  But how can banks—many of which virtually abandoned the small business credit market following the 2008 Financial Crisis—rebuild awareness, trust and engagement with small business owners?  The following are five marketing approaches for banks to consider in (re)building their small business banking franchise:

  1. Develop a small business brand.  In recent years, several leading banks generated significant small business awareness by developing a dedicated small business brand.  For some, these brands cover the bank’s entire small business operations.  Capital One created the Spark Business brand for its small business solutions, and has launched a number of Spark-branded products and services, the most recent of which is the Spark 401(k) service.  Another option is to develop a branded small business portal, and extend that branding into the bank’s small business social media presence.  Wells Fargo created the Wells Fargo Works for Small Business portal, and applied this brand to social media platforms, including a dedicated blog and @WellsFargo Works Twitter handle.
  2. Target small business segments.  Banks’ commercial banking units tend to target firms based on size and industry sector, as these are seen to have distinct financial needs.  In targeting small businesses, banks are better served by focusing on small business life stages, or by targeting underserved segments, such as women-owned businesses.  KeyBank has established Key4Women, a nationwide community of women in business.
  3. Create content of interest to small businesses.  Banks can build trust and engagement with small businesses by developing and distributing information, news, and advice relevant to small business owners.  This content should be focused on addressing common business challenges, and should ideally be brief and easy to scan (to reflect today’s content consumption patterns).  Two recent good examples of small business-focused content are five tips from First Republic on how to run a better business, and tips from Capital One on buying or leasing office space.  And banks should explore a range of content types, such as case studies, articles and blog posts, webinars, videos and succinct reports/white papers.
  4. Raise awareness through small business surveys.  Many leading banks are conducting small business surveys, which aim to both raise awareness and promote their understanding of small business concerns and needs.  Many of these surveys are carried out on a quarterly or annual basis, and feature recurring metrics (e.g., Wells Fargo/Gallup Small Business Index and Capital One’s Small Business Confidence Score).  Banks also seek to tackle other small business-related topics either in these recurring surveys or in standalone surveys (examples of the latter include TD Bank’s Small Business EMV Survey and Bank of America’s Women Business Owners Spotlight).
  5. Develop a local presence.  There are a number of ways for banks to establish a local presence:
    1. Partner with key influencers (such as chambers of commerce)
    2. Market branch presence. Small businesses tend to have heavier branch usage than consumers, and banks can leverage this branch affinity by promoting small business solutions (including technology tools) in branches, deploying branch-based small business specialists, and hosting small business events.
    3. Promote small business-focused community groups or programs.   In August 2016, Webster Bank announced a partnership with the University of Connecticut and Connecticut Innovations to establish a $1.5 million UConn Innovation Fund for new business startups.

Before developing and implementing these small business initiatives, banks should conduct research to understand how and how well they are perceived by small business owners, and to identify deficiencies in their product and service capabilities relative to competitors.  Banks should also gain insights from key internal stakeholders to assess its ability to address these issues using existing resources.  These analyses support investment decision making, and inform small business banking program development and implementation.