Author Archives: mronan

What will happen in the U.S. credit card industry in 2013: 10 potential trends

As it enters 2013, the credit card sector is looking to continue its slow-but-steady recovery following the financial crisis in 2008-09. The following are a series of industry trends that we expect to see over the next 12 months:

  1. Outstandings growth, but not for top three issuers. Economic recovery and returning consumer confidence should result in consumers increasing their demand for credit. However, the lingering scars from the financial crisis for both banks and consumers will temper this demand.  The top three credit card issuers (Chase, Bank of America and Citi) have scaled back their portfolios dramatically in recent years. These issuers claim that this period of retrenchment is coming to an end, but they are highly unlikely to grow their portfolios significantly in 2013.  Instead, outstandings growth will come from issuers like:
    • Discover: recently reported 6% y/y growth in outstandings and plans to continue to push lending growth
    • Wells Fargo: grew average outstandings 9% y/y in 4Q12, as it continues to grow credit card penetration of its retail banking households (from 27% in 1Q11 to 33% in 4Q12)
    • Other regional banks, such as SunTrust, Fifth Third and PNC: who all reported strong y/y outstandings growth in 3Q12 (albeit from relatively low bases), and who (like Wells Fargo) are focused on cross-selling credit cards to existing customers
  2. Push for loan growth to lead to (some) price competition. In recent years, credit card APRs have been relatively high. Even as competition returned to the affluent card market in 2011 and 2012, there was little or no evidence of APRs moving downwards, with issuers competing instead with bonus points and tiered rewards programs. 2013 may bring some downward pressure on APRs, but issuers will continue to focus on both bonus offers and low introductory rates on purchases and/or balance transfers.
  3. Lower rate of volume growth. Over the past two years, in the absence of loan growth, issuers have been focusing on growing volume, but there are recent signs that the rate of growth is slowing down. American Express recently announced 8% volume growth in 4Q12, down from 11% in 4Q11 and 15% in 4Q10. Issuers will continue to target volume growth in 2013, but will be looking for volume and loan growth to be more in synch than in recent years.
  4. Return of revenue growth. With the expected return to some outstandings growth, net interest income should grow significantly in 2013, in particular with interest expense remaining low. Noninterest income will benefit from continued volume growth, but this will be partially offset by many issuers pulling back on marketing payment protection products, which featured prominently in a number of issuer settlements in the past year.
  5. Charge-offs and delinquency rates to return to a more “normalized” pattern. For many leading issuers, charge-off rates are below historic levels. As issuers begin to target outstandings growth, they will be willing to accept small increases in the charge-off rate. Some issuers are reporting q/q growth in delinquency rates, indicating a return to seasonal patterns that have been largely absent in recent years.
  6. Pressure to reduce rewards program costs. Issuers’ desire to grow purchase volume among more affluent cardholders in recent years has led to a significant focus on their rewards programs, with the development of tiered rewards, as well as aggressively positioned bonus offers. There are a number of factors that may lead issuers to scale back these rewards-based offers in 2013, including:
    • The continuing need to control costs;
    • The desire for a more even balance between outstandings and volume growth; and
    • The opportunity to develop more merchant-funded offers, in particular as merchants seek to capture consumer spend as it moves to online channels.
  7. Growth of personalized offers. Advances in data analytics create opportunities for issuers to develop targeted offers based on cardholder demographics, preferences and spending behavior. In addition, the emergence of mobile payments creates the potential to incorporate customer location into offer targeting.
  8. Emergence of mobile payments. Both mobile wallets and mobile payments have garnered a lot of attention over the past year, although there is a long way to go before they properly emerge as accepted payment methods. However, in 2013, there will be a number of critical steps taken in the continued evolution of mobile payments, including:
    • Launch of more mobile devices with more payment capabilities
    • Continued growth of mobile person-to-person payments and mobile Internet shopping
    • Deployment of more merchant terminals capable of accepting mobile transactions
    • Progress towards national rollout by Isis and Google Wallet consortia
    • Testing of standalone mobile payments apps by issuers (last week, U.S. Bank announced an iPhone payments pilot for new FlexPerks Travel Rewards Visa Signature cardholders)
  9. Fundamental shift in credit card positioning.  Prior to the financial crisis, credit cards were perceived by consumers (and positioned by issuers) as an easy way to access credit.  In recent years, as consumers cut card debt but continued to grow purchase volume, they have developed a more balanced perception of the credit card as both an efficient payments tool and flexible source of credit.
  10. Focus on nontraditional sales and service channels. Issuers will direct more of their marketing budgets to nontraditional customer acquisition channels, such as online and branch, which also have much lower cost-per-acquisition than direct mail. In addition, issuers will continue to develop new service functionality for both online and mobile channels.

U.S. banks are reducing, repositioning branches

An EMI analysis of recently-published quarterly bank data by the FDIC found that U.S. banks are continuing to reduce branch numbers.

U.S. branches are very heavily concentrated in a limited number of banks:

  • Just 50 banks (<1% of all banks) hold more than than half of all branches (51%).
  • More than 6,100 banks (93% of all banks) have five or fewer branches.  And, of these, more than 1,400 branches have just one branch.

Bank branch numbers change based on bank merger-and-acquisition activity, purchase and sale of portions of branch networks, as well as organic growth.

  • Over the past year, the vast majority of banks (83%) did not change branch numbers.
  • 548 banks (8% of all banks) grew their networks by a total of 2,359 branches.  PNC had the largest growth (+421 branches), largely due to its acquisition of RBS Bank as well as an Atlanta branch network from Flagstar Bank.  Chase also had strong growth (+185 branches), driven by organic growth in key expansion markets like California and Florida.
  • 609 banks (9% of the total) reduced their branch networks by a total of 3,092 branches.  Aside from bank sales/closures, the bank with the largest decline was Bank of America, which is in the process of cutting its branch numbers by 10-15%.

Even following the reduction in branch numbers, there are almost 98,000 bank branches in the U.S., so clearly the branch channel is not going away anytime soon.  However, more and more customers are gravitating to self-service electronic channels for their everyday banking needs, so a reassessment of branches’ traditional role is needed.  At the same time, branches have untapped potential as sales, advice and marketing channels.  The following are some key areas that banks need to focus on to both right-size their branch networks and equip these branches to realize their full sales, service and marketing potential:

  • Network density.  Banks will need to determine optimal branch density in key markets, in order to maintain a significant physical presence, and deter competitive market entry, while avoiding significant overlap between branch catchment areas.
  • Branch size. Less traffic in branches will necessitate smaller branches in some markets.  Some banks are already creating a variety of branch formats to reflect different market opportunities (as defined by market profiling that covers information like the number/projected growth of people and businesses within a radius of the branch, the bank’s overall strength in the market, as well as competitive intensity).
  • Branch design.  The design and layout should reflect branches’ new sales and advisory role, with less space for teller counters, and a layout more conducive to staff-customer face-to-face interaction.  Recognizing that branches play an important branding and PR role for the banks, many banks are redesigning branches to convey a more customer-friendly image and promote connections with the local community.
  • Staffing. Again, the changing role of the branch will mean that there will a reduced need for tellers with a greater role for specialists, such as mortgage bankers, investment advisors and small business bankers.  Staff training and support tools will need to reflect their new roles in the branch.
  • Technology and channel integration. As banks change the design and staffing of branches, they are incorporating technology to showcase new products and services, connect with remote staff (e.g., using videoconferencing in the branch to connect to financial advisors), and promote other bank channels (Bank of America is using QR codes in teller counters to enable customers to download its mobile banking app.)

FDIC Credit Card Data: Slight Rise in Loans, Continued Decline in Charge Offs

The latest U.S. bank data published by the FDIC reveals that the protracted decline in credit card outstandings may be coming to an end, charge-off rates are continuing to fall, and credit card line utilization rates are relatively unchanged.

  • Between end-3Q11 and end-3Q12, credit card outstandings rose by 0.2%.  This small increase follows a steady series of y/y declines in the years following the financial crisis.  The largest three issuers (Chase, Bank of America and Citibank), which still account for more than half of outstandings, reported a 7% y/y decline, as charge-offs and portfolio sales continue to outstrip new loan growth.  On the other hand, large regional banks (see note at the bottom of the blog) increased outstandings 6% y/y, led by TD Bank (+22%) and SunTrust (+19%).  Looking into 2013, it is likely that outstandings will grow modestly as regional banks and, to a lesser extent, “monolines” pursue loan growth, and as the top three issuers move towards the end of their portfolio deleveraging.  However, much will depend on the demand for credit.  This demand is significantly influenced by macroeconomic trends and consumer confidence, both of which are fragile at present.

  • Credit cards lines fell 2% in the year to end-3Q12.  The top three issuers reduced card lines by 6% while regional banks increased lines by 8%.  Movements in credit cards lines tend to match outstandings very closely.  In 3Q12, credit card utilization (credit card outstandings as percentage of credit card lines) was 21.5%, and this measure has remained in the 20.5%-22.5% range in recent years.  This consistent credit card utilization ratio implies that if issuers increase credit card lines, outstandings growth will follow.  The following table highlights some regional banks that have grown credit card lines over the past year at double-digit rates:

  • Credit card issuers continue to benefit from reductions in charge-offs, which fell 31% in the year to end-3Q12.  The average charge-off rate fell 174 basis points (bps) y/y and 12 bps on a linked-quarter basis, to 4.04% in 3Q12.  Charge-off rates are now at or below historic averages for many leading issuers, and are not expected to fall much further.  In fact, as issuers look to build outstandings and grow revenues in 2013, there may be some upward pressure on charge-off rates, depending on how aggressively issuers open the lending spigot.

(Note: Regional bank category includes the following banks: Bank of the West, BB&T, BBVA Compass, BMO Harris , Fifth Third, PNC, RBS Citizens, Regions, SunTrust, TD Bank, U.S. Bank, and Wells Fargo.)