Author Archives: mronan

Banks Reducing Marketing Intensity

An analysis of 4Q13 and full-year 2013 financial results for the leading U.S. banks reveals that most are continuing to reduce their marketing spend.  This is being driven by both economic uncertainty as well as banks’ long-term desire to cut costs and maintain profitability as they struggle to generate revenue growth.

  • Of the 12 banks studied, 8 reduced marketing spend between 2012 and 2013, with 5 of these cutting budgets by more than 10%.

  • Taking a longer term view, 8 of the 12 banks increased their marketing expenditure between 2008—when the financial crisis hit—and 2013.

At first glance, this would imply that banks have ramping up their marketing spend in recent years.  However, many of these banks have changed dramatically during this period, mainly through acquisition.  For example, Wells Fargo acquired Wachovia, Chase bought Wamu, and PNC purchased both National City and RBC Bank.  So, to ensure that we are comparing like-with-like, we need to look at “marketing intensity”, which we define as the ratio of marketing spend to net revenue.

  • In 2013, there was a broad disparity in intensity for the various bank categories: highest marketing intensity (>8% of revenues) for branchless monolines, which have no branch networks and which are overwhelming focused on selling credit cards; lowest intensity for regionals (<2% of revenues); and megabanks tend to spend 2-3% of revenues on marketing, with the notable exception of Wells Fargo.  Capital One is a monoline/branch bank hybrid, with a branch network but also a continued high dependency on credit cards; this is reflected in the 6% of revenue it devotes to marketing, higher than traditional branch banks, but lower than monolines.

  • So, even though 8 of the 12 banks increased their marketing expenditure between 2008 and 2013, during this period, 9 of the 12 banks reduced their marketing intensity levels.  It is notable that the two “banks” with the highest marketing intensity—American Express and Discover—have both increased in intensity over the past five years.  On the other hand, the largest decline was recorded by Capital One, which has been transforming itself from its credit card monoline to full-service bank.

As there are now signs that economic recovery is gaining strength, increases in consumer and business confidence should translate into a greater demand for financial revenues and opportunities for banks to grow revenues.  However, the need for increased marketing investment to capture business growth will be battling against banks’ cost-cutting culture that has become in recent years.

Leading U.S. Credit Card Issuers Continue to Shy Away from Lower FICO Segments

The leading U.S. credit card issuers continue to benefit from historically low charge-off rates, but they have struggled to shift the needle in terms of revenue growth.  This is mainly due to anemic outstandings growth, as consumers remain reluctant to borrow, and issuers continue to have strict underwriting criteria.

There are now signs that issuers are looking to build their credit card loan portfolios.  Issuers like Discover, Wells Fargo and SunTrust reported strong y/y growth in end-of-period credit card loans.  And although outstandings for the three leading issuers—Chase, Bank of America and Citi—continued to decline, they have indicated that they expect their portfolios to grow in the coming quarters.

As issuers look to drive outstandings growth, they will need to change underwriting criteria that has resulted in the composition of portfolios switching significantly towards higher FICOs.  And our analysis of the most recent issuer data shows a continuation of this trend.

The following graphic presents changes in outstandings by FICO segment for leading issuers between end-3Q12 and end-3Q13, separated into three issuer categories: big three; fast-growth second-tied issuers; and regional bank card issuers.  We see that most issuers continue to focus growth efforts on the higher FICO segments.

As issuers look to catalyze credit card portfolio growth, they need to focus marketing investments on a broad range of consumer segments.  Issuers must continue to optimize relationships with affluent consumers, through cross-sell campaigns, loyalty programs, as well as targeted offers to drive acquisition, retention and ongoing usage.  They also need to re-engage with lower FICO segments, with new products and pricing, more flexible underwriting, information and advice to help cardholder manage debt, as well as programs to enable secured cardholders qualify over time to be upgraded to an unsecured credit card.  And for all consumer segments, issuers need to develop a balanced positioning of credit cards as effective tools for both making payments and accessing credit.

Reasons for Optimism in Credit Card Issuer 3Q13 Financials; What are the Marketing Implications?

The leading U.S. credit card issuers continued to exhibit trends that have become established in recent quarters, but there were also some signs of change:

  • Outstandings: Average credit card outstandings continued to decline y/y, with the big four issuers (Chase, Bank of America, Citibank and Capital One) reporting portfolio decreases.  However, both credit card “monolines” (American Express and Discover) and some regional bank card issuers reported relatively strong growth.  Even among the big three issuers, there were indications of growth: Chase reported a 6% y/y rise in new accounts (1.7 million); and Bank of America new accounts rose from 850,000 in 3Q12 to more than 1 million in 3Q13.

  • Volume: Reflecting the change in the industry in recent years from a lend-centric to a spend-centric model, most issuers reported strong y/y volume growth.  Wells Fargo volume rose 14%, as new accounts grew 11% and  credit card penetration of its retail bank households increased to 35%.  And it is looking to further propel volume growth with its recently-launched rewards program.  Bank of America and Chase also translated strong new account generation into double-digit volume growth.  Discover had relatively low volume growth of 3%, but is aiming to increase volume and outstandings at the same rate.

  • Credit quality: charge-off rates continue to decline for most issuers.  Of the 12 issuers who provided charge-off rate data, 10 have rates below 4%, and three issuers (American Express, Chase and Discover) have rates below 3%.  As a result, provisions for loan losses continued to fall for most issuers, which boosted profitability.  For 30+ day delinquency rates, issuers reported y/y declines, but q/q increases.

We expect that, as the economic recovery continues, consumer confidence will grow, as will their willingness to take on credit card debt.  This may lead to increases in charge-off rates from these historically low levels, but issuers will feel that the resulting growth in noninterest and net interest income will more than offset any rises in provisions for loan losses and noninterest expenses, such as marketing costs.

However, as issuers look to ramp up credit card marketing, they need to factor in the fundamental changes in consumer perceptions and usage of their credit cards.  These changes impact various elements of the marketing mix, including:

  • Positioning: Following the financial crisis, issuers shifted away from positioning credit cards as easy ways to access credit, and towards credit cards as an efficient payments method.  As consumer demand for credit recovers, issuers may need to adapt positioning once again to have a balance between a lend-centric and spend-centric focus.
  • Product: Issuers continue to target more affluent cardholders, so they will need to have a card portfolio that is appropriate for this market.  This explains why both Wells Fargo and U.S. Bank recently entered into card-issuing deals with American Express.
  • Pricing: As the CARD Act places many restrictions on issuers’ ability to change APRs, we expect that there will not be huge price competition in APRs, but rather the focus will be on lengthy zero-rate introductory offers, in particular on balance transfers.
  • Loyalty: Issuers will continue to enhance rewards programs (and accompanying offers) to drive activation, retention and ongoing spending.  To maintain control over costs, issuers are looking to develop more merchant-funded programs, and this trend may gain traction as issuers develop mobile wallets that will enable consumers to manage loyalty programs on their smartphones as well as receive specific merchant offers at the point of sale.
  • Channel: There has been much coverage of the fact that branches are rapidly losing share for everyday banking transactions.  Many banks are looking to redefine the role of the branch, in particular to leverage its potential as a key sales channel.  Wells Fargo recently reported that 80% of new card accounts are opened in its branches.  The online channel has also become a key credit card sales channel: Chase reported that 53% of new credit card accounts were acquired online in 3Q13.