Credit Card Issuers: Adjusting to the “New Normal”

June 5, 2020

The impact that the COVID-19 pandemic has had on our society and economy is huge, and the effects are likely to persist for some time to come. This blog looks at some of the most important changes affecting the credit card sector, how issuers have responded to these challenges in the short term, and what they need to do as the economy starts to reopen and they look to get the sector back on an even keel.

Spending

The trend. The pandemic has led to significant changes in consumption patterns. Overall spending fell as the lockdowns took effect. Spending in categories like travel and entertainment registered huge declines, which were partially offset by increases in everyday spending categories like grocery. There were also changes in purchase methods. As a result of stay-at-home limitations, digital commerce growth rose strongly. And at the point of sale, consumers moved decisively away from cash and embraced contactless payments. According to Mastercard research from the end of April, 51% of Americans are now using some form of contactless payment. The switch to contactless is likely to persist: according to the 2020 American Express Digital Payments Survey, 58% of consumers who have used contactless say they are more likely to use contactless payments now than before the coronavirus outbreak.

The response. Issuers initially responded to the change in spending patterns by:

Changing bonus earning categories to encourage consumers with travel-centric cards to use these cards for everyday spending. Chase introduced higher earn rates for grocery spending on its Sapphire Cards and most of its travel-oriented co-branded cards.
Extending the eligible period to meet a spending threshold and qualify for activation bonuses on new cards. American Express and Citi extended this period by three months.

Next steps.

Issuers need to ensure that contactless payment functionality is available on all of their credit cards.
Card networks and issuers should increase the spending limit for contactless payments. Note that this has already taken place in most European countries in response to the pandemic.
Issuers should switch from chip-and-signature to chip-and-PIN. A recent Mastercard survey found that 72% of consumers would prefer to avoid signatures.

Borrowing

The trend. The economy retrenched in recent months, and cardholder borrowing has fallen, due to both decreased spending and a desire to reduce debt. This was evident in issuers’ credit card outstandings for the first quarter. EMI analysis of 22 leading issuers found a 4.4% y/y rise in average credit card outstandings in 1Q20. However, the y/y rise in end-of-period outstandings was just 1.7%, indicating a pull back in balances towards the end of the quarter.

In terms of key credit quality metrics, there was no dramatic upsurge in delinquency or charge-off rates, but these metrics take time to register and many consumers have taken advantage of payment relief programs. According to TransUnion, 3.2% of card accounts were in financial hardship programs in April, up from less than 0.01% in March.

The response. At the onset of the pandemic in mid-March, most issuers were quick to introduce payment relief programs (mainly deferrals on minimum payments and waivers on late fees) and they also engaged in the following activities:

Dramatically raised their provisions for loan losses in their 1Q20 financials.
Scaled back credit card solicitations. Bank of America reported that card loan origination fell 55% between February and the first two weeks of April.
Tightened underwriting. In its 1Q20 financials, Discover reported that it significantly tightened underwriting and pulled back on credit line increases and balance transfer offers.
Cut credit limits. According to an April 2020 CompareCards survey, 25% of credit cardholders said that their credit limits were cut involuntarily, or that their cards were closed in the previous 30 days.

Next steps.

In the near term, issuers will likely need to continue existing actions, such as extending relief programs. However, as the economy returns to some degree of normality, issuers will scale back or end relief programs, inevitably leading to increased delinquencies and charge-offs.
Issuers should redeploy staff to engage directly with cardholders on their repayment plans.
Issuers should develop information/advice for consumers on how to improve their debt management and make the materials easily available by publishing on various media.

Channel Usage

The trend. Because the pandemic has forced banks to close many branches, there has been a significant rise in digital channel usage for financial needs. More consumers are trying digital channels for the first time, and existing users are depending on digital channels for a broader array of financial activities. This migration to digital channels is likely to persist.

The response. Issuers actively directed cardholders to digital channels for their customer service needs.

Next steps. To consolidate the recent gains made in digital channel usage by credit cardholders, issuers should:

Accelerate the promotion of digital channel benefits on websites, in social media and in monthly statements.
Ensure that digital channels are providing a positive user experience.
Expand digital channel functionality.
Promote human channels for cardholders who need to engage directly with the issuer.

7 Communications Tips for Banks in Developing an Effective COVID-19 Response for Small Business Clients

April 22, 2020

Now that Congress and the Administration have agreed on a $310 billion deal to replenish the Paycheck Protection Program (PPP), banks are scrambling to help small businesses apply for this additional funding. At the same time, banks are providing information to small business clients on direct reliefs and channel availability, as well as tips to deal with the COVID-19 pandemic.

The enormity of the challenge facing small businesses and the economy as a whole defies description. No communication can overcome this burden. But silence is not an option and messaging matters. It’s critical to communicate effectively with small business clients during this pandemic.

Develop a multi-faceted response. The PPP is vital for many small business owners, but many banks have only been providing information on how to apply for PPP. This means they are missing other opportunities to engage with and help small business owners, many of whom are struggling with day-to-day operational issues. Consider offering additional information on supports available to small businesses, and advice on how to navigate through the pandemic.

Best practice: PNC has developed a range of content to help small businesses deal with the crisis, including “Four Ways Small Businesses Can Navigate During Times of Uncertainty” and “What to Do When Cash Flow Slows.”

Create a connection. Messaging on coronavirus response must be both clear and empathetic. This is particularly important in headlines and topline statements on how the bank is supporting its small business clients.

Best practices: Citizens Bank and KeyBank both use the theme of “We’re in this together” for their coronavirus information.

Communicate information clearly. To ensure that small business clients are directed to key information and not overwhelmed by detail, focus on strong copywriting and editing, as well as using layout and navigation tools to help readers quickly find what they need.

Best practice: Santander Bank uses red type, spacing, headings, and bullet points to effectively organize its COVID-19 response information.
Best practice: TD Bank uses tabs on its website to direct small businesses to information on its own customer assistance program, SBA PPP Loans, and other relief options.

Provide guides and tools. Many banks have developed tools (such as online forms, FAQs, guides and checklists) to aid small businesses in understanding support and options available to them,and to apply for funding

Best practice: Huntington Bank has published a series of FAQs to address various aspects of the PPP program, including general questions, eligibility and application information.
Best practice: Umpqua Bank integrated a well-designed application form into its CARES Act Paycheck Protection Program information page.

Consolidate all information into a single resource center. Develop standalone portals or resource centers to retain all coronavirus-related information in a single location. This enables you to maintain a consistent tone in coronavirus messaging, avoid any client confusion, and better manage the process of providing updates.

Best practice: Citizens Bank operates a dedicated COVID-19 Resource Center, with links to services and resources, details on financial hardship relief assistance and a message from the bank’s CEO.

Embrace multiple communications channels. Use the numerous channels – branch, phone, website, social media – at your disposal to provide updates and directly engage with small business clients.

Best practice: PNC directs clients to dedicated toll-free numbers for different product categories; some numbers are operational 24×7.

Update information regularly. Many banks provided initial information on their COVID-19 response, but they have not provided regular and comprehensive updates, a critical failing in this extremely dynamic environment.

Best practice: Bank of the West publishes regular updates in videos featuring the bank’s CMO Ben Stuart.

Steady Growth in Marketing Spend and Marketing Ratios for Top U.S. Banks in 2019

March 27, 2020

EMI’s annual analysis of marketing expenditure for 25 leading U.S. banks reveals that they grew marketing spending by 7% in 2019 to $15.4 billion. This rate was down from the 13% growth between 2017 and 2018.

The banks’ marketing ratio (defined as advertising and marketing spend as a percentage of net revenue) has risen steadily in recent years, growing 18 basis points (bps) to 2.92% in 2018, and by an additional 21 bps to 3.13% in 2019.

The chart below summarizes marketing ratios, marketing budgets and y/y change in marketing spending for these 25 banks.

The following are some additional takeaways from our bank marketing spend analysis:

16 of the 25 banks increased their marketing spending in 2019, with 5 increasing their budgets by more than 10%.
6 banks invested more than $1 billion in advertising and marketing. Wells Fargo joined this group for the first time in 2019, with marketing spending rising by 26%, driven in large part by the launch of the ‘This is Wells Fargo’ integrated marketing campaign in January 2019 . It has invested strongly in advertising in recent years as it seeks to rebuild its reputation following the fallout from fake account and mortgage mishandling scandals.
11 banks increased their marketing ratios in 2019, with 6 of these growing the ratios by more than 10 basis points. The largest rise was reported by Bank of America, whose 15% increase in its marketing spend led to a 38 bps rise in its marketing ratio (to 2.3%).
Banks that do not have branch networks and have national credit card franchises (American Express and Discover) had the highest marketing ratios. Capital One’s credit card bank charter – Capital One Bank (USA), National Association – had a marketing ratio of 10.3% in 2019, while its retail banking charter – Capital One, National Association – had a ratio (3.2%) more in line with peer regional banks.

It is almost impossible to project bank marketing spending for 2020, given the impact of the coronavirus pandemic on the U.S. economy in general, and the banking sector in particular. In the short term, marketing budgets will trend downwards as bank revenues are impacted by decreased economic activity. However, unlike the 2018-09 Financial Crisis, the country’s fundamentals were strong heading into this disruption, which increases optimism that the economy can recover quickly once the pandemic abates. This may lead to a robust bank marketing spending in the second half of 2020. What is more clear is banks will continue to shift their marketing budgets from traditional media (e.g., TV and print) to digital and other nontraditional media.