Author Archives: mronan

How do card issuers prepare for an emerging payments future?

First Data recently reported 10.6% y/y growth in U.S. credit card volume, up from 9% in 2Q11 and 8.2% in 1Q11.   As the economy takes some (often faltering) steps towards recovery, there is significant opportunity for credit card issuers to build on this strong momentum, and win share from other payment methods, particularly cash and checks.

However, the payments industry is on the cusp of significant change, as technological innovation is leading to the emergence of new payment methods.  Much industry coverage this year has focused on the introduction of both online online person-to-person (P-to-P) and mobile (online and at point-of-sale) payments.

So, how should issuers respond to this emerging payments landscape?  Some are developing new types of plastic (e.g., integrated debit/credit cards like the Fifth Third Duo Card; prepaid cards; smart cards).  And issuers are also investing in non-card payment methods, with many launched online P2P services this year, and some starting to get involved in mobile payments consortia (e.g., Citibank in Google Wallet; Capital One and Chase said to be talking to Isis).

In addition to developing new products, there are four other areas that issuers should focus on, in order to position themselves to take advantage of emerging payments opportunities.  These are:

  • Strategy: create an overall payments strategy that that provides a blueprint to guide investment in both existing and emerging payments solutions.  The strategy should focus on developing a long-term migration plan that encourages the customer base to use emerging payments, while also optimizing returns from existing payment products
  • Structure: develop a dedicated unit to oversee emerging payments investments and working to build organization-wide understanding of—and commitment to—an emerging payments future
  • Intelligence: generate and leverage intelligence on emerging payment technologies, competitor initiatives, and the voice of the customer
  • Partnerships: build on the growing consensus that no one can go it alone in the emerging payments landscape to develop relationships with various stakeholders in the emerging payments space (e.g., card brands, IT companies, payment processors), stay at the cutting edge of developments, and be poised to benefit if and when certain emerging payments gain real traction

Credit card issuers show renewed interest in private-label cards

In recent months, some leading credit card issuers have shown a growing interest in creating or growing private-label credit card portfolios:

  • Capital One announced the acquisition of HSBC’s $30 million card portfolio in August 2011.  This follows its April 2011 purchase of Kohl’s private-label portfolio.  In reporting 3Q11 financials, Capital One indicated that it would be interested in acquiring more private-label portfolios.
  • This week, the Wall Street Journal reported that Wells Fargo is actively exploring whether to issue private label cards
  • In reporting 3Q11 financials, Citigroup announced that it would be moving its private-label card portfolio from Citi Holdings (it asset-disposal unit) to Citicorp.  And it recent renewed its private-label card issuing deals with Shell, Sunoco and Sears.
  • TD Bank has recently entered into a number of deals to issue cards for: Cartier; Furniture First; and Bailey, Banks and Biddle.

There are a number of reasons for issuers’ renewed interest in this market:

  • Credit quality metrics have improved significantly in recent quarters, for both own-branded and private-label cards, with very strong declines in charge-off and delinquency rates.  For example, the net credit loss rate for Citi’s Retail Partner Cards portfolio fell from 12.24% in 3Q10 to 7.51% in 3Q11.  During the same period, the portfolio’s delinquency rate fell from 7.94% to 5.70%.
  • With loan-to-deposit ratios now well below 100% for many leading banks, and with continued pressure on net interest margins, banks are looking to grow loans in new categories
  • Given the recent growth in commercial and corporate lending, banks are also seeking to cement relationships with large corporate clients
  • The CARD Act has impacted revenues and profitability from issuers’ own-branded card operations.  As a result, some issuers are looking to build scale to their card operations by investing in various card categories

In building their private-label card portfolios, issuers need to understand how the marketing of credit card has changed in recent years.  Today, credit card marketing is more focused on encouraging cardholders to allocate a greater share of their everyday spending to cards, rather than cash or checks.   And even though outstandings are showing some tentative signs of growth, issuers are not aggressively chasing loan growth with aggressive interest rates and low underwriting standards.  In building their private-label portfolios, issuers need to apply these learnings and take the longer-term view, in order to avoid the mistakes of the past.

Credit card issuers focused on new customer acquisition; should not ignore portfolio management

Leading U.S. credit card issuers have been focused on growing cardholder spending volume in recent quarters (click here for our recent blog on strong growth in credit card volume for leading issuers), but there has yet to be an appreciable rise in outstandings. This is due to cardholders’ desire to reduce their debts, as well as residual reluctance on the part of issuers to open the lending spigot following the financial crisis.

However, we do note that several leading card issuers are ramping up their new customer acquisition efforts:

  • Bank of America grew new U.S. credit card accounts 17% between 2Q11 and 3Q11
  • Chase grew proprietary cards 20% y/y in first 9 months of 2011
  • Capital One card origination levels doubled between 3Q10 and 3Q11

Some of these issuers reduced their customer bases significantly in recent years, so this growth is in fact returning customer numbers to what the issuers would perceive to be normal levels.  The issuers have also focused customer acquisition efforts on certain segments of the market–such as affluents and small business–that they expect will be strong performers in the coming years.

Having concentrated on customer acquisition, it is vital that credit card issuers now also establish portfolio management strategies to maximize customer lifetime value. Effective portfolio management plans focus on three areas:

  • Activation (onboarding efforts, incentives to drive initial card usage)
  • Retention (communications and incentives around anniversaries, processes for handling cardholder complaints, and winback programs)
  • Relationship optimization (periodic special offers based on customer value and/or life events, targeted cross-sell/upsell offers, and consistent user experience across all customer touchpoints)