Category Archives: Credit card

Key Takeaways from Credit Card Issuers’ 3Q21 Financials

We have come to the end of the financial reporting season for the main U.S. banks, and the following trends are showing up in four key credit card metrics:

  • Outstandings
  • Volume
  • Charge-off rates
  • New account production

Leading issuers report y/y growth in outstandings. In recent quarters, issuers have reported strong y/y declines in outstandings, due to low economy activity and high repayment rates. In the most recent quarter, however, many issuers are now reporting y/y loan growth, led by American Express (+6%) and Capital One (+4%). This growth should continue in the coming quarters as payment rates moderate (in part due to the ending of federal COVID support payments).

Strong growth in credit card volume continues. All of the leading issuers who include volume data in their quarterly financials reported y/y growth rates of at least 20%, driven by the increase in economic activity, recent account growth and the ongoing transition to electronic payments. Many issuers are reporting that spending levels are well above 2019 levels. In addition, issuers are now reporting strong growth in categories where spending plummeted in 2020 during the COVID-19 pandemic, particularly travel & entertainment (T&E). American Express reported a 124% y/y rise in T&E spending in 3Q21, although this was still 29% below the 3Q19 level. Discover reported that 3Q21 travel spending was 1% higher than the same period in 2019. American Express has also reported that spending growth is being driven by younger consumers: its Gen Z and Millennial customers generated y/y spending growth of 38% between 3Q19 and 3Q21, vs. a 6% decline for Baby Boomers.

Charge-off rates have fallen to historic lows but may be bottoming out. Net charge-off rates for most leading issuers are now less than 2%, due to high payment rates and bank supports for consumers in arrears during the pandemic. Some issuers – such as Capital One – reported modest quarterly increases in delinquency rates in recent months, an indication that the decline in charge-off rates should bottom out in the coming quarter.

Issuers have started to ramp up new credit card acquisition activity.Wells Fargo and Bank of America more than doubled new accounts between 3Q20 and 3Q21, as production returned to pre-pandemic levels. Moreover, issuers appear to be committed to investing marketing dollars to drive further acquisition and usage. Capital One has ramped up its marketing spend by 79% y/y in the first 9 months of 2021 and expects to continue this investment in the fourth quarter.

Credit Card Issuers: Adjusting to the “New Normal”

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.

10 Key Takeaways from the Latest Crop of Consumer Credit Cards

Leading U.S. credit card issuers continued to roll out new credit cards, as they look to attract new clients, cross-sell and upsell existing clients, and win a greater share of clients’ spending.  

The following are the common trends or standout elements that we identified among these new cards.  (Note that the table at the end of this blog provides a comparison of features/benefits of 10 cards that were introduced over the past 12 months.)

  1. Introductory offers are focused on generating balance transfer volume.  7 of the 10 cards have 0% introductory offers on either purchases and balance transfers or balance transfers only.  6 of these 7 introductory offers have a duration of at least 12 months.
  2. Go-to APRs continue to be prime-based and operate in a broad range.  The APR range of many of the new credit cards is at least 7 percentage points.  Two cards (American Express Cash Magnet®, and Wells Fargo Propel® American Express) have an APR range of 11 percentage points.
  3. Some cards offer a high earn rate on all purchases.  One approach to using rewards to attract and retain cardholders as well as drive more spending is to have an earn rate of more than 1% on all purchases.  The Citizens Bank Cash Back Plus® World Mastercard® stands out with an earn rate of 1.8% on all purchases with no limit and no annual fee.  The Barclaycard Arrival® Plus World Elite Mastercard® offers 2 miles per dollar on all spending, but carries an $89 annual fee (waived first year).
  4. Issuers continue to offer tiered earning structures.  To drive card preference and grow spending in categories where cards have traditionally had a low share, many new cards continue to use tiered rewards structures, with higher earning on categories like travel, gas, dining and groceries.  It is worth noting that these bonus earn rates do not come with monthly or annual spending caps.
  5. Acquisition-and-activation bonus offers persist.  Issuers continue to promote bonus points/miles/cash back for activating the card and meeting a minimum spend requirement within an initial period (typically three months).  Higher-end cards that carry an annual fee also tend to have higher bonus levels.  Wells Fargo Propel American Express Card is looking to differentiate itself from competitors with a dual bonus structure: acquisition-and-activation bonus of 30,000 points and an additional 20,000 points for reaching a spending threshold in the first 12 months.
  6. Cards are offering redemption bonuses.  Some issuers are looking at rewards redemption as an opportunity to engender loyalty and preference.  Cards are offering bonuses:
  7. Most cards have no annual fees, but the cards that do carry an annual fee provide more features, higher earn levels and larger bonuses.  Annual fees tend to be waived the first year, although Navy Federal Credit Union’s Visa Signature® Flagship Rewards card has a $49 annual fee and no waiver. 
  8. Most cards apply a fee on balance transfers, usually a rate of 3% with a minimum of $5 or $10.  Navy FCU’s Visa Signature Flagship Rewards has no BT fees.  For its SavorOne℠ Rewards Card, Capital One imposes a fee of 3% during the card’s 15 month introductory period.  After this introductory period, there is no fee on balance transfers.
  9. Like BTs, most cash advances come with a fee (of 3% or 5%, with minimums of $5 or $10).  Again, Navy FCU stands out with no fee on cash advances.
  10. No foreign transactions fees are quickly becoming the norm, even on non-travel-based cards.