Visa Inc. published its 4Q11 and full-year 2011 financials and related data yesterday, which included a good deal of information on payment volume trends. One of the most notable trends was the relative growth rates of U.S. credit card and debit card volume over the past five quarters. These two growth rates reached an inflection point in the most recent quarter, with the credit card year-on-year growth rate moving ahead of debit card.
It is notable that the patterns of acceleration of credit card volume growth and deceleration of debit card volume growth have been in place for some time. Forces that have contributed to these trends include:
Banks’ imposition of debit card fees and elimination of debit rewards, largely due to new debit interchange structures
Consumers and small businesses changing their perceptions of the credit card, not just as a means to access credit, but also as efficient and convenient payment vehicle (credit card volume growth is much stronger than outstandings growth)
Issuers aggressively promoting credit card spending with large bonus offers
The leading U.S. credit card issuers continue to report strong improvements in their net charge-off rates.
Of the 11 issuers analyzed, eight had 3Q11 net charge-off rates below 5%. Four had rates below 4%, with American Express leading the industry, at 2.6%
Over the past 12 months, eight issuers reduced rates by more than three percentage points (300 basis points)
Seven issuers reported rate declines of more than 100 bps between 2Q11 and 3Q11
Issuers also reported strong year-on-year improvements in 30+ day delinquency rates, although the quarterly trend indicates that these declines may be bottoming out.
Five of the seven issuers analyzed had 30+ day delinquency rates below 3%
Six of the seven issuers reported triple-digit y/y declines in delinquency rates. The largest decline was reported by Bank of America (178 bps), which still has the highest delinquency rate among these seven issuers
Between 2Q11 and 3Q11, delinquency rates for two issuers (American Express U.S. Card and U.S. Bank) were unchanged. Capital One’s 30+ day delinquency rate rose 32 bps in the most recent quarter
The strong declines in charge-off and delinquency rates have enabled issuers to significantly reduce their provisions for credit losses, which have boosted profitability. However, with delinquency rate declines leveling off, it is expected that reductions in charge-off rates and loss provisions will also abate in the coming quarter.
Therefore, issuers will increasingly look towards revenue growth drivers to maintain and grow profitability. On the one hand, they will seek to continue to encourage cardholders to increase spending on their cards, which drives up noninterest income. In addition, with charge-off rates now at relatively low levels, and with revenue growth remaining anemic, credit card issuers may be more inclined in the coming quarters to seek to build card outstandings and drive net interest income, perhaps through a combination of easing underwriting standards, offering strong introductory offers on balance transfers, and even reducing APRs.
An analysis of 3Q11 outstanding and volume data for leading U.S. credit card issuers reveals:
Signs of growth in outstandings. For the 11 issuers in the study
Four reported both year-on-year (y/y) and linked-quarter (q/q) growth in average credit card outstandings.
Five reported y/y declines, but q/q increases, indicating a recent transition to growth.
Two issuers had both y/y and q/q declines in outstandings. One is Bank of America, whose high rates of decline are indicative of its particular challenges. The other is Capital One, but it is worth noting that its Domestic Card portfolio includes a run-off installment loan portfolio; excluding this portfolio, Capital One’s credit card outstandings are growing.
Continued strong volume growth (in this case, we just look at y/y growth for comparison purposes, due to the seasonal nature of spending):
Capital One has the strongest y/y growth, but this is part due to its acquisition of the Kohl’s private-label card portfolio. Excluding this acquisition, Capital One still recorded double-digit volume growth.
American Express continues to report very strong volume growth in both consumer and small business spending (growth rate for the latter was 15%).
Volume growth rates continue to outstrip outstandings growth, and is indicative of a fundamental shift in the industry following the financial crisis, away from a lend-centric and towards a spend-centric model. This is seen in the persistently high APRs and relative scarcity of balance transfer introductory offers, but also in the very large bonus points/miles offers to drive both initial and ongoing card purchases.