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.

Five Ways to Reinvent Bank Branches

Recent banking industry news continues to highlight growth in self-service channel usage, and an ongoing shift away from branch channels.

  • The latest data from the FDIC shows that there were 96,684 domestic branches at the end of March 2014, a net decline of 672 branches from the end of March 2013.  While the y/y decline is less than 1%, the number of branches has been steadily declining in recent years.
  • In a recent presentation, Regions reported that branch transactions fell 8% in 2013, while mobile banking interactions rose 59%.
  • A report by Bernstein Research found that Fifth Third could close nearly 600 branches, based on their deposit levels and proximity to other branches.
  • Bank of America has continued selling off portions of its branch network, with recent sales of 13 Tennessee branches to First Horizon, as well as 13 branches in Michigan to Huntington Bank.

These trends point to a need for a significant reinvention of the branch channel if it is to remain relevant for consumers, and strategically important for banks.  Here are five areas that banks can focus on in order to achieve this:

  1. Avoid both inertia and “following the crowd.”  There is a danger that banks avoid making necessary changes to their branch networks because of internal resistance and a cultural predilection to carry on as before.  Equally, banks may be inclined to close a significant portion of their branches because they perceive that it the prevailing industry trend.  Both of these tendencies should be avoided.  Decisions on branch numbers, density, design, staffing and support should be based on strategic analysis of market trends, competitive threats and overall company objectives.
  2. Don’t make branch decisions based solely on cost.  Branches represent a significant cost for banks, and with declining branch usage as consumers gravitate to other channels for everyday banking transactions, the tendency will be to cut branches.  However, this is a narrow view that does not take into account the sales, service and branding roles that branches play.  Although Regions reported an 8% decline in branch transactions in 2013, it also claimed that 80% of sales came through the branch.  And while Bernstein Research claimed that Fifth Third could close 47% of its branches, a Fifth Third spokesperson said that the branch remains the most visible brand identifier in their communities.
  3. Test different branch formats.  Some of the leading U.S. banks have been piloting different branch formats in their markets.  In February 2014, Capital One opened a new Capital One 360 Cafe in Boston (these cafes raise awareness of Capital One’s online bank unit).  In May, PNC opened a pop-up branch in Chicago, and SunTrust opened an innovation branch in Atlanta.  And banks like Bank of America and Citibank have opened flagship (or “destination”) branches.  Banks are looking at these new branch formats not only to assess how they resonate with different customer segments, but also to determine optimal staffing levels and the impact of these branches on overall branch density within markets.
  4. Overhaul branch staffing.  Changes in average branch size and format, as well as in the role of the branch, have important implications for branch staffing.  Smaller branches require fewer staff, and staff activities will shift from handling everyday transactions to selling and providing specialized service and advice.  This has important implications for recruiting, training, compensation, support and internal communications, and banks need an integrated branch personnel strategy with input from multiple functions within the bank, including HR, sales, service, marketing and product.
  5. Leverage branches to build beachheads in new markets. Traditionally, branches have marked a bank’s footprint within defined geographies.  Now, some banks are moving beyond these geographic constraints to open branches in out-of-footprint markets to focus on specific segments (such as commercial, private banking and wealth management clients).  BBVA Compass has been opening loan-production offices along the East Coast.  BMO Harris opened a corporate banking office in Atlanta, well away from its traditional Midwest footprint.  As these branches do not target the mass market, product expertise and service quality are more important factors that having strong branch density in a market.