Bank’s vertical industry focus bears fruit

August 16, 2013

Over the past three years, the commercial sector has been the primary focus for bank loan growth efforts. In 2010 and 2011, strong commercial loan growth rates were generated as the economy recovered from the 2008-2009 financial crisis and subsequent recession. The commercial lending market started to get more competitive (as evident in declining yields), so many banks have turned to vertical industries to maintain and even accelerate commercial loan growth rates.

The following table summarizes vertical industry performance for some of the leading U.S. banks:

The following are 10 quick steps for banks to market effectively to specific vertical industries:

Size the opportunity (industry size and growth rate)
Profile the industry, covering growth prospects, key opportunities and threats, financial usage and needs, as well as the typical financial decision-making process
Identify high-potential sub-sectors (with strong growth potential and unmet financial services needs)
Identify industry clusters in particular geographies within in the bank’s footprint
Analyze competitor industry-targeting initiatives
Assess the bank’s current ability to meet customer’s financial needs; develop and implement strategies to fill product/service gaps in-house or via partnerships
Develop a marketing plan around industry-specific media, such as trade publications, associations, events, and social media channels
Deploy dedicated industry banking teams
Create customized collateral and sales tools to support these teams
Publish industry-specific content (videos, webinars, case studies, articles, newsletters, reports)

Credit Card Issuers Focus on Affluent Segments

August 14, 2013

The recently-announced credit card issuing deal between Wells Fargo and American Express highlights issuers’ focus on targeting the affluent market. Over the past two years, Wells Fargo has been successful in increasing credit card penetration of its retail bank households from 27% to 35%. To grow penetration further, the bank has realized that its needs a broader credit card portfolio to meet the needs and usage patterns of customer segments. It has revamped some of its cards and offers, but still lacks a high-end card. The deal with American Express will serve to fill this gap.

The changes in credit card outstandings by FICO segment for different issuers in the two-year period between end-June 2011 and end-June 2013 clearly illustrate the growing importance of affluent consumers to issuers’ credit card portfolios:

Issuers are now turning their attention to outstandings growth (see our recent blog on 2Q13 credit card metrics), with even the three largest issuers (Chase, Bank of America and Citi) all reporting that the extended period of outstandings decline is coming to an end. However, the scars from the financial crisis will linger, and issuers remain reluctant to extent credit to consumers with low FICO scores (these consumers are increasing being offered alternative payment products, such as secured and prepaid cards).

So, EMI expects that most issuers will be looking to build outstandings from consumers with higher FICOs (generally above 680). In this increasingly competitive environment, the following are 5 ways that credit card issuers can effectively market to the affluent consumer segment:

Leverage market and competitive research to develop products and features that are tailored to affluent customer needs and behaviors, and that compete strongly against competitive offerings.
Build card positioning and acquisition offers around spending rather than borrowing. Given their spending patterns, more affluent customers are more likely to respond to spend-based incentives (e.g., bonus points, tiered rewards programs) rather than aggressive introductory or go-to interest rates.
Develop marketing for the entire customer lifecycle. The traditional focus in the card sector has been on new cardholder acquisition, which has frequently resulted in other stages of the lifecycle being neglected. Issuers should develop a series of communications and offers based on other key stages of the customer lifecycle, such as the first 90 days (activation opportunity) and card expirations (retention and upsell opportunities).
Analyze customer spending data to develop usage stimulation offers for cardholders with no/low usage.
Develop synergies with other bank units that also serve affluent clients. Traditionally, credit card operations were operations as a separate silo with a bank’s organization. More recently, bank have overhauled their structures and strategies with customers, rather than products, the central focus. And hitherto disparate units (such as credit card and wealth management) are starting to come together to develop synergies in areas like product bundle development, cross-sell campaigns, and two-way referral arrangements.

Trends and Implications from Credit Card Issuers’ 2Q13 Results

July 24, 2013

After analyzing the 2Q13 financial results for the leading U.S. credit card issuers, EMI has identified some common themes and emerging trends.

Outstandings: At first glance, the continued decline in outstandings for the top issuers is consistent with trends we have seen in recent years. However, some of these issuers stated their belief that this extended sequence of declines is coming to an end. Chase claimed that its credit card outstandings have reach an inflection point and it expects growth in the coming quarters. Bank of America also emphasized signs of recent outstandings growth, and claimed that card issuance was at its highest level since 2008. During the quarter, strongest growth rates were reported by monolines and regional banks, but these smaller issuers may face renewed competition from the top issuers in the coming quarters. Some issuers reported yield declines in 2Q13, with Discover attributing a 24 basis point yield decline over the past year to an increase in promotional rate balances and a decline in higher rate balances.

Volume: Many of the leading issuers improved their card volume growth rates in the second quarter, as the economy continued to recovery, and as consumers responded to rewards-based promotions. In the coming quarters, expect issuers to continue to promote their rewards programs (in particular to attract more affluent cardholders), while increasing their focus on introductory offers and APRs as they seek to grow loans.

Revenue: In recent years, credit card revenue growth has been anemic, as issuers have struggled with loan growth, and have had to adjust to new fee structures following the CARD Act. However, the latest financials provided some encouraging news. American Express grew net interest income 6% y/y (benefitting from a 4% rise in outstandings) while its noninterest income rose 5% (driven by an 8% rise in volume). Discover generated even stronger growth in both net interest income (+9%) and noninterest income (+14%). Given the fundamental changes to the card industry in recent years, expect issuers to continue to seek balanced overall revenue growth between net interest income and noninterest income, and avoid an over-dependence on either aggressive lending or fees to meet their revenue targets.
Charge-Off and Delinquency Rates: Issuers continue to benefit from declines in charge-off rates. Of the 11 leading issuers who reported charge-off rates, 8 reported y/y declines, while one issuer was unchanged. Two issuers (American Express and Discover) had charge-off rates below 3%, while 5 other issuers (Chase, Citi, Fifth Third, PNC and Wells Fargo) had rates below 4%. In addition, 30+ day delinquency rates also continue to decline, with 8 of 9 issuers reporting y/y declines (the exception was Capital One, due to its acquisition of the HSBC portfolio).

Looking ahead, to the extent that issuers focus on outstandings growth (with more aggressive introductory offers on balance transfers, lower APRs and more relaxed underwriting standards), both charge-off and delinquency rates should rise from their current low levels. However, recent trends in outstandings and volume indicate that consumers increasingly see their credit cards as an efficient, convenient and more rewarding payment method, and less simply as an easy source of credit. Whether this is a temporary phenomenon in the aftermath of the financial crisis or a long-term change has profound consequences for how credit cards are positioned, promoted and priced.