Which issuers will drive credit card growth?

September 17, 2012

Although banks are reporting overall loan growth, credit card outstandings have continued to decline, with the FDIC reporting that card loans fell 1% y/y to $664 billion at the end of June 2012. EMI analysis of FDIC bank data reveals a number of insights into the dynamics of the U.S. credit card industry.

Relatively few U.S. banks have credit card loans:

1,265 banks had outstanding card loans at the end of 2Q12 (19% of total banks)
375 banks had more than $1 million in card loans (6% of total banks). Of these banks, 53 had more than $100 million in card loans, and only 23 have have more than $1 billion in outstandings
Of the 1,265 banks with card loans, 643 reported y/y growth at end-2Q12, while 622 reported declines.
Only 4% of the 6,009 U.S. banks with less than $1 billion in total assets have card loans of more than $1 million. Typically, banks need critical mass in order to justify the investment to create and maintain an in-house card operation.

The three largest credit card issuers are deleveraging:

Although card loans overall declined 1% in the year to end-2Q12, when the three largest issuers (Chase, Bank of America and Citi) are excluded, U.S. credit card loans rose 9%.
Bank of America credit cards loans fell 17% y/y, and Citi was down 5%. As charge-off rates for both banks are high relative to other leading issuers, and as they are looking to sell off some non-core card assets, we expect card loans for these banks to continue to decline.
Chase bucked the trend among the top three issuers, with no change y/y. It reported a net charge-off rate of 4.03% in 1Q12 (excluding the effect of a change in charge-off policy), and it expects the rate to fall to approx. 3.75% in 3Q12. This puts Chase in a good position to grow card loans as the economy recovers.

Outside of the top three card issuers, there are signs of growth in credit card lending. The following three issuer categories are expected to drive credit card loan growth in the coming quarters:

Other national banks: Wells Fargo (grew card loans 7% y/y to end-2Q12) and U.S. Bank (+5%) have extensive retail banking footprints, and are looking to grow outstandings by cross-selling cards to existing customers.
Large regional banks: Banks such as PNC (+10% in card loans), SunTrust (+39%), Fifth Third(+5%) and TD Bank (+21%) are looking for card loan growth through customer cross-sell. Many of these banks recently reacquired their card portfolios, in order to diversify revenue streams and provide a broader in-house set of financial solutions to their customers. The ability of these banks to bring card-issuing in house may also encourage other regional banks to follow suit.
Current/former monolines: Capital One (card loans up 51%, although this is mainly due to the acquisition of the HSBC card portfolio), American Express (+8%) and Discover (+4%) have the operational infrastructure as well as the sales and marketing know-how to ramp up card lending as the economy recovers.

10 marketing tips to optimize credit cardholder lifetime value

September 13, 2012

U.S. credit card issuers are struggling to generate revenue growth, which has been hit by both the decline in outstandings and the impact of the CARD Act and Durbin Amendment on noninterest income. At the same time, issuers are reluctant to invest in aggressive new cardholder acquisition campaigns, as they want to avoid the free-for-all that occurred in the mid 2000’s which led directly to the spike in charge-offs when the financial crisis hit in 2008. As a result, issuers are increasing their focus on optimizing relationships with existing cardholders.

The following are 10 tips for credit card issuers to get the most from relationships with existing credit cardholders:

Build a comprehensive communications strategy: Identify all opportunities for the cardholder to engage with the issuer, and build integrated communications and offers around these “moments of truth.” These include:

Predictable events (such as monthly statements or card expiration dates)
Cardholder use of issuer channels (such as visits to bank branches or use of the issuers’s website and/social media platforms)
Key life events (such as an upcoming marriage or a child about to go to college)

Create an onboarding program: The first 90 days is crucial to the credit card relationships, so issuers should establish a set series of communications during this period to welcome the new cardholder, highlight key card benefits and handle any problems the cardholder may have.
Provide targeted activation incentives: Rather than offer a bonus following the cardholder’s first purchase, require rewards cardholders to meet a minimum spend threshold within a certain period in order to build habitual use.
Recognize anniversaries: Some issuers offer anniversary bonuses, but there should also be a plan in place to communicate with cardholders in advance of the anniversaries. The communications should center on:

Thanking the cardholder for their business
Highlighting card benefits
Making special offers (usage, cross-sell and upsell)
Providing a forum for cardholders to surface issues

Reward relationships: Incentivize and reward multiple product ownership by cardholders with points, special offers and discounts, preferred pricing, and priority customer service.
Analyze data: Issuers are belatedly recognizing the value in analyzing cardholder spending patterns. The intelligence gleaned from this analysis in turn informs decisioning on both offer and messaging development.
Develop multi-channel customer service functionality: Issuers should reflect cardholders’ diverse channel usage patterns in providing customer service.

Social media: create a dedicated Twitter card handle(s) and/or incorporate card service into the bank-wide customer service Twitter handle (it is also notable that some leading banks now have dedicated social media customer service reps).
Issuer website: create FAQs, online forms, and click-to-chat functionality
Phone: differentiate live customer service for different customer segments

Survey cardholders: Rather than waiting for cardholders to provide feedback on needs/concerns and then reacting, anticipate upcoming trends in these areas by conducting regular customer surveys, and then applying the learnings from these surveys into marketing strategies and programs.
Provide financial management resources: Issuers should publish information and develop resources to enable cardholder to better track and control their spending patterns. This also has the effect of positioning the issuers as a financial partner.
Establish a winback program: An effective winback campaign should focus time and resources on cardholders who are worth winning back, and should involve a combination of direct mail/email and outbound calling. The call center agents or branch staff tasked with making the winback calls should also be trained on how to identify the reasons the cardholder left, and receive systems support on the most appropriate winback offer to make.

Continued improvement in credit quality metrics for leading bank card issuers

September 10, 2012

All of the leading bank card issuers reported continued improvement in key credit quality metrics for their credit card portfolios in 1Q11, as seen in the following charts.

As a result of these improvement, banks have slashed their provision for credit losses, which has significant boosted profitability.

However, banks’ credit card outstandings are continuing to decline. In reporting financials, a number of banks reported that they expect outstandings to grow in the second half of the year, and in arecent months, we have seen signs of more aggressive acquisition activity (such as growing direct mail volume and re-appearance of lengthly 0% balance transfer offers). However, banks will certainly be very cautious in their efforts to grow lending in the coming quarters, as they seek to avoid any repitition of the over-exhuberant lending climate taht prevailed in the middle of the last decade.