Category Archives: Credit card

Card Volume Growth Slows in 2Q12

EMI Strategic Marketing, Inc. analyzed U.S. card volume data from the latest quarterly financials for the four main card networks (Visa, MasterCard, American Express and Discover).  Our analysis reveals that:

  • Year-over-year (y/y) growth in total U.S. card (credit and debit) volume fell from a relatively robust 9% in 1Q12 to only 3% in 2Q12.  The growth decline was largely due to a 1% fall in Visa card volume.  The other three networks each grew volume 9% y/y, but for both MasterCard and American Express, this represented a lower growth rate than in the previous quarter.  Only Discover accelerated its volume growth rate between 1Q12 and 2Q12.
  • For the four networks, U.S. credit card volume rose 7% y/y, down from 10% in 1Q12.  Each of the networks had lower growth rates in 2Q12 compared to 1Q12.  American Express and Visa both had 9% increases, compared to 4% for MasterCard and Discover.  Recently, issuers have been pushing credit card volume growth through tiered rewards and bonus offers, so the decline in growth will be a concern for the card networks.  However, the growth rate remains well above consumer spending growth levels, so credit card continues to take payments share from other payments methods like cash and checks.
  • U.S. debit card volume was flat y/y, significantly down from an 8% y/y rise in 1Q12.  While MasterCard (+15%) and Discover (PULSE Network volume up 14%) both reported strong growth, Visa’s U.S. debit card volume fell 7%, which it attributed to regulatory impacts.  Visa reported in its 2Q12 earnings conference call that the most recent quarter represented a trough for debit volume and it is experiencing stronger performance in the current quarter.

Quarterly Card Issuer Financials Reveal Positive (and some Negative) Trends

All of the main U.S. credit card issuers have now reported second quarter 2011 financials, which reveal some interesting trends:

Volumes: In recent quarters, card purchase volumes have grown significantly as issuers have focused attention on positioning cards as spending rather than lending tools. Most issuers continued to grow volumes in 2Q12, although in some cases, the rate of growth was lower than in recent quarters. Wells Fargo (+15%), U.S. Bank (+13%), Chase (+12%) and Capital One (+11%, excluding the impact of the HSBC portfolio acquisition) all reported double-digit year-on-year spending increases. American Express, which has typically led the industry in volume growth, reported a y/y rise in spending of 9%, down from 12% in 1Q12. And both Bank of America and Citibank reported no growth in purchase volumes. Issuers will continue to push volume growth in the coming quarters, as they continue to seek to take payments share from cash and checks.

Outstandings: In recent years, issuers reacted to the financial crisis by significantly deleveraging their credit card portfolios. Now there are signs that this process has bottomed out and a number of issuers are growing outstandings. The largest portfolios continue to decline, with Bank of America (-10%), Citibank (-3%) and Chase (-1%) all reporting year-on-year declines in end-of-period outstandings. On the other hand, banks with smaller portfolios reported y/y growth, including SunTrust (+39%), PNC (+10%), Wells Fargo (+7%), U.S. Bank and Fifth Third (both +5%). In addition, American Express (+5%) and Discover (+4%) both grew outstandings. The prospects for outstandings growth in the industry in general in the quarters will be dependent on general economic conditions, as well as the extent to which issuers want to push loan growth in order to grow revenues.

Charge-Off and Delinquency Rates: As issuers reduced outstandings following the financial crisis in 2008, they also set about tackling charge-offs, which spiked spectacularly in 2008 and 2009. Charge-off rates have declined significantly over the past two years, and in many cases are now below normalized levels. There has been a widespread expectation in recent quarters that the sharp declines in charge-off rates would bottom out; however, the most recent quarter continued the pattern of charge-off rate declines. All of the main issuers reduced charge-off rates by more than 100 bps y/y, and only one main issuer (U.S. Bank) reported a q/q increase in its charge-off rate. American Express, Discover and Capital One reported charge-off rates below 3% in 2Q12. Bank of America remains the issuer with the highest charge-off rate (at 5.27% in 2Q12), but it is notable that this rate is down from levels of more than 14% in 2009. There is an expectation that charge-offs will continue to decline in the coming quarter, given that delinquency rates (which are an indicator of future charge-offs) are also continuing to decline. Some issuers are anticipating that credit quality indices will bottom out or even grow, in particular if the issuers relax underwriting standards to grow outstandings. So, a number of leading issuers are increasing their provision for loan losses.

Revenue: This remains the big negative for issuers, with downward pressure on both net interest income (for those issuers who are continuing to experience outstandings declines) and noninterest income (from the ongoing impact of the CARD Act, which makes it more difficult to generate fee income). Issuers with lower outstandings (Bank of America, Citibank and Chase) reported revenue declines, but issuers who grew outstandings in 2Q12 managed to grow revenues. American Express increased revenue 5%, with net interest income rising 6%. Discover grew total revenues 6%, with a 4% decline in noninterest income more than offset by a 10% growth in net interest income. Prospects for revenue growth in the coming quarters will be very much dependent on the ability to grow outstandings, given the limited scope for generating fee income.

How to Generate Critical Mass for Mobile Payments

Mobile payments continue to receive widespread coverage in payments-related media, as various companies pilot and roll out mobile payment products targeted at both consumers and merchants.  In recent weeks:

While these launches are generating a good deal of hype in the industry, and mobile payments are the hot topic in 2012, it is worth noting that researchers assessing consumer and merchant interest in mobile payments are finding that consumer interest in mobile payments is lukewarm at present:

Most consumers are comfortable with established payments methods and feel that they do not have a compelling enough reason to change.  In addition, they have concerns regarding security and privacy.  In addition, most merchants have yet to embrace mobile payments.  The main reason for this is that there is a cost to equipping terminals for mobile payments acceptance, and merchants do not yet see the benefits outweighing costs.

However, with growing smartphone penetration, increased consumer use of mobile phones for shopping, and enhanced mobile payment and acceptance products coming on stream, most observers expect consumer and merchant attitudes to and usage of mobile payments to grow significantly in the coming years.

With this in mind, we have developed the following ten steps to overcome challenges and build a strong mobile payments franchise:

  1. Incorporate mobile payments into a digital wallet.  Although mobile payments on their own have a “buzz” factor as well as enhancing ease and convenience, these attributes on their own will not be enough to encourage widespread adoption of mobile payments.  Some mobile payment providers are looking to leverage power of the smartphone as well as social media apps to develop mobile wallets that will include targeted offer and loyalty program management functionality, in addition to mobile payments.
  2. Identify and target segments who are more willing to try new technologies and alternative payments.  In addition, develop strategies for other segments along the product-adoption curve.
  3. Conduct consumer and merchant research. Focus on identifying what these audiences would look for in a mobile wallet or in mobile acceptance tools, what offers and incentives would drive usage, as well as what factors reduce the likelihood to adopt mobile payments.
  4. Clearly articulate key selling points (over both existing payment methods and other mobile payments products), and incorporate these into all communications.
  5. Establish a partnership strategy that seeks to harmonize the different objectives and concerns of each stakeholder in a mobile payments consortium. (This is particularly important as there is widespread recognition that no one company can go it alone in the embryonic mobile payments space.)
  6. Develop local marketing plans, as mobile payments will tend to be rolled out initially in select markets rather than on a nationwide level.
  7. Conduct mobile payments pilots in select markets to assess and enhance the user experience, evaluate different offers and incentives, and test different media and messaging
  8. Create compelling incentives for consumers and merchants to trial mobile payments.
  9. Build referral programs to encourage initial mobile payments users to recruit friends and family.
  10. Once it has been launched, continually enhance your mobile payment solution to continue to meet changing customer needs, as well as to maintain a competitive advantage.