Reasons for Optimism in Credit Card Issuer 3Q13 Financials; What are the Marketing Implications?

November 27, 2013

The leading U.S. credit card issuers continued to exhibit trends that have become established in recent quarters, but there were also some signs of change:

Outstandings: Average credit card outstandings continued to decline y/y, with the big four issuers (Chase, Bank of America, Citibank and Capital One) reporting portfolio decreases. However, both credit card “monolines” (American Express and Discover) and some regional bank card issuers reported relatively strong growth. Even among the big three issuers, there were indications of growth: Chase reported a 6% y/y rise in new accounts (1.7 million); and Bank of America new accounts rose from 850,000 in 3Q12 to more than 1 million in 3Q13.

Volume: Reflecting the change in the industry in recent years from a lend-centric to a spend-centric model, most issuers reported strong y/y volume growth. Wells Fargo volume rose 14%, as new accounts grew 11% and credit card penetration of its retail bank households increased to 35%. And it is looking to further propel volume growth with its recently-launched rewards program. Bank of America and Chase also translated strong new account generation into double-digit volume growth. Discover had relatively low volume growth of 3%, but is aiming to increase volume and outstandings at the same rate.

Credit quality: charge-off rates continue to decline for most issuers. Of the 12 issuers who provided charge-off rate data, 10 have rates below 4%, and three issuers (American Express, Chase and Discover) have rates below 3%. As a result, provisions for loan losses continued to fall for most issuers, which boosted profitability. For 30+ day delinquency rates, issuers reported y/y declines, but q/q increases.

We expect that, as the economic recovery continues, consumer confidence will grow, as will their willingness to take on credit card debt. This may lead to increases in charge-off rates from these historically low levels, but issuers will feel that the resulting growth in noninterest and net interest income will more than offset any rises in provisions for loan losses and noninterest expenses, such as marketing costs.

However, as issuers look to ramp up credit card marketing, they need to factor in the fundamental changes in consumer perceptions and usage of their credit cards. These changes impact various elements of the marketing mix, including:

Positioning: Following the financial crisis, issuers shifted away from positioning credit cards as easy ways to access credit, and towards credit cards as an efficient payments method. As consumer demand for credit recovers, issuers may need to adapt positioning once again to have a balance between a lend-centric and spend-centric focus.
Product: Issuers continue to target more affluent cardholders, so they will need to have a card portfolio that is appropriate for this market. This explains why both Wells Fargo and U.S. Bank recently entered into card-issuing deals with American Express.
Pricing: As the CARD Act places many restrictions on issuers’ ability to change APRs, we expect that there will not be huge price competition in APRs, but rather the focus will be on lengthy zero-rate introductory offers, in particular on balance transfers.
Loyalty: Issuers will continue to enhance rewards programs (and accompanying offers) to drive activation, retention and ongoing spending. To maintain control over costs, issuers are looking to develop more merchant-funded programs, and this trend may gain traction as issuers develop mobile wallets that will enable consumers to manage loyalty programs on their smartphones as well as receive specific merchant offers at the point of sale.
Channel: There has been much coverage of the fact that branches are rapidly losing share for everyday banking transactions. Many banks are looking to redefine the role of the branch, in particular to leverage its potential as a key sales channel. Wells Fargo recently reported that 80% of new card accounts are opened in its branches. The online channel has also become a key credit card sales channel: Chase reported that 53% of new credit card accounts were acquired online in 3Q13.

Trends Impacting Credit Card Marketing

September 19, 2013

A review of various bank and credit card issuer presentations at the recent Barclays Global Financial Services conference revealed a number of trends that could have a significant impact on how credit cards are being marketed.

Priority is cross-selling existing customers. Regional banks that have recently re-acquired their branded credit card portfolios (such as KeyBank and Huntington) are following the lead of Wells Fargo model, in cross-selling credit cards to existing customers (35% of Wells Fargo’s retail households have a Wells Fargo credit card).
- Regions Bank—which acquired its card portfolio two years ago—reported that its credit card penetration rate is now 13%, and it has ambitions to grow this to 20%. In addition, even issuers with a national credit card franchise are concentrating efforts on their own customer bases.
- U.S. Bank is increasingly focused on deepening customer relationships and has increased card penetration to 34%.
- And Bank of America claimed that 60% of new cards issued in the second quarter of 2013 were to existing customers.
The online channel is now the most popular method for new account production. The popularity of the online channel for new cardholder acquisition is largely driven by its lower cost-per-acquisition relative to other channels, such as direct mail. It is also a by-product of consumers’ increased comfort with using electronic channels to manage their finances.
- American Express reported that more than 50% of card acquisition comes through online channels.
- 71% of Bank of America’s new U.S. consumers credit card accounts came from branch and online channels in 2Q13, compared to 57% in 2Q11.
- And these examples are consistent with recent data from Chase, who reported in 2Q13 that 53% of credit card accounts were acquired online.
Card issuance is growing.
- Bank of America claimed that its card issuance is at its highest level since 2008.
- This mirrors recent data from Experian, which found that overall bank card origination volume (based on credit issued) jumped 21% y/y to $69 billion in 2Q12, the highest level since the fourth quarter of 2008.
Credit quality remains strong. Most issuers do not see any significant reversal in the continued downward trajectory in credit card charge-off and delinquency rates.
- Discover does not envisage significant upward movement in its loss rates over the next 12 months.
- Chase attributed part of the improvement in its credit-quality metrics to a shift in its customer mix toward higher-income consumers.
The competitive battle is centered on rewards. Although most issuers now offer attractive teaser rates on their main cards, issuers are looking to differentiate and create a competitive advantage through their rewards programs.
- Discover said that “rewards is the new competitive landscape” and this realization influenced the launch of its Discover It card.
- U.S. Bank is looking to differentiate by taking its rewards program in-house, claiming that this will enable it improve redemption value, enhance the customer experience and customize rewards.

Credit Card Issuers Focus on Affluent Segments

August 14, 2013

The recently-announced credit card issuing deal between Wells Fargo and American Express highlights issuers’ focus on targeting the affluent market. Over the past two years, Wells Fargo has been successful in increasing credit card penetration of its retail bank households from 27% to 35%. To grow penetration further, the bank has realized that its needs a broader credit card portfolio to meet the needs and usage patterns of customer segments. It has revamped some of its cards and offers, but still lacks a high-end card. The deal with American Express will serve to fill this gap.

The changes in credit card outstandings by FICO segment for different issuers in the two-year period between end-June 2011 and end-June 2013 clearly illustrate the growing importance of affluent consumers to issuers’ credit card portfolios:

Issuers are now turning their attention to outstandings growth (see our recent blog on 2Q13 credit card metrics), with even the three largest issuers (Chase, Bank of America and Citi) all reporting that the extended period of outstandings decline is coming to an end. However, the scars from the financial crisis will linger, and issuers remain reluctant to extent credit to consumers with low FICO scores (these consumers are increasing being offered alternative payment products, such as secured and prepaid cards).

So, EMI expects that most issuers will be looking to build outstandings from consumers with higher FICOs (generally above 680). In this increasingly competitive environment, the following are 5 ways that credit card issuers can effectively market to the affluent consumer segment:

Leverage market and competitive research to develop products and features that are tailored to affluent customer needs and behaviors, and that compete strongly against competitive offerings.
Build card positioning and acquisition offers around spending rather than borrowing. Given their spending patterns, more affluent customers are more likely to respond to spend-based incentives (e.g., bonus points, tiered rewards programs) rather than aggressive introductory or go-to interest rates.
Develop marketing for the entire customer lifecycle. The traditional focus in the card sector has been on new cardholder acquisition, which has frequently resulted in other stages of the lifecycle being neglected. Issuers should develop a series of communications and offers based on other key stages of the customer lifecycle, such as the first 90 days (activation opportunity) and card expirations (retention and upsell opportunities).
Analyze customer spending data to develop usage stimulation offers for cardholders with no/low usage.
Develop synergies with other bank units that also serve affluent clients. Traditionally, credit card operations were operations as a separate silo with a bank’s organization. More recently, bank have overhauled their structures and strategies with customers, rather than products, the central focus. And hitherto disparate units (such as credit card and wealth management) are starting to come together to develop synergies in areas like product bundle development, cross-sell campaigns, and two-way referral arrangements.