Author Archives: mronan

Treat growth projections with caution

Recently, there has been a lot of coverage on the emerging mobile commerce sector, with various stakeholders launching trials and developing initiatives to develop a strong market position. In addition, there have also been numerous projections on the expected growth of this market in the coming years. Some of these projections are quite reasoned, but others are more outlandish, and appear to expect that in a few short years, mobile commerce will displace cash, checks and plastic.

These exaggerated growth projections garner headlines for the research firms as well as companies sponsoring the research.  However, in many cases, the reality tends to fall short of the projection.  For example, future projections of card spending made in 2005-2006 were not realized, as the industry was hit by a largely unanticipated financial crisis and economic recession in 2008-2009.

Growth projections typically suffer from a number of deficiencies.  One of the main problems is that researchers start their research by thinking of themselves as the average consumer, which then leads to biases in the research process. In addition, researchers often tend to take an overly-optimistic “blue sky” view, which does not factor in forces that can compromise the growth trajectory. One of the most powerful of these factors is inertia. Consumers typically need to have a compelling reason/motivation to change behavior, and will not automatically adapt behavior just because a new technology hits the market.

It should also be noted that the industry and general business press tend to use these projections from these research firms/analysts/sponsoring firms to fill column inches, without checking back to see if previous projections by those same firms were actually accurate predictors.

Getting back to mobile commerce, there is indeed reason to believe that the rapid penetration of the smartphone and consumers’ increased comfort with mobile apps augur well for strong growth in the mobile commerce market. However, we also need a sober assessment of some of the factors that may impact that growth; in addition to inertia, these include security and privacy concerns, regulatory developments, merchant acceptance, general economic growth, emergence/evolution of competing payments methods, and the need to develop a business model that will satisfy all stakeholders.

Credit card issuers continue to focus on spending rather than lending

Leading U.S. credit card issuers reported consistent trends in their second quarter 2011 financials.

  • Declines in charge-off and delinquency rates.  Each of the leading issuers reported very strong declines in net charge-off rates, with three (Capital One, PNC and Wells Fargo) reported declines of more than 100 basis points from the previous quarter.  Most of the leading issuers now have charge-off rates below 6%, with American Express unsurprisingly having by far the lowest rate, at 3.2%.  There is a similar trend for 30+ and 90+ day delinquency rates, with all issuers reporting strong y/y and q/q declines.

  • Growth in spending volume.  All of the leading issuers that published data on credit card purchase volume reported year-on-year growth (quarter-on-quarter trends are not very useful due to the seasonal nature of spending).  Although the American Express U.S. Cards unit has by far the largest spending volume among leading issuers, it also has the strong y/y growth rate in 2Q11, at 13%.  Chase, Discover and U.S. Bank all reported 9% y/y growth rates.  Citihad relatively low growth, at 1.5%, but it is worth noting that, unlike other issuers, Citi’s card spend continued to decline in 2010.  It reported growth in 1Q11 (of 0.3%) for the first time since the second quarter of 2008.
  • Falling outstandings.  As yet, the improved credit quality metrics and rising purchase volumes have not translated into increased credit card outstandings.  This appears to be a result of cardholder deleveraging (increasing payment rates to reduce their card debt).  The following charts summarize the change in outstandings between 1Q11 and 2Q11, as well as the cumulative change since the start of 2009.

At least two of these three trends appear set to continue in the coming quarters.  Most issuers expect charge-off and delinquency rates to decline in 3Q11.  In addition, most issuers are aggressively promoting increased card spend, so we are seeing large bonus point offers for initial purchases, incentives to continue to use cards, and bonus rewards for spending in particular categories (where credit card has traditionally had low payment share).  There may be a change in the downward trend in card outstandings, but this will be mainly dependent on a shift in customer perceptions of the health of both the economy and their own finances.