Category Archives: Credit card

Google launches Google Wallet; what are its growth prospects?

Google and its partners (Sprint, MasterCard, Citi and First Data) officially launched the Google Wallet mobile payments app yesterday.

At the same time, Google licensed Visa’s PayWave contactless payment technology.  And both American Express and Discover signed on as Google partners.  With these companies now on board, Google is starting to build a strong partner ecosystem.  In so doing, Google Wallet competing with other emerging mobile payment systems (such as Visa’s own Digital Wallet as well as the Isis consortium), in getting the strong array of partners in place.

Building a partner ecosystem will certainly help to strengthen the various mobile payment offerings.  However, the emerging mobile payments sector will need to overcome a range of key hurdles in the coming years.  Two of the most significant hurdles are:

  • Merchant acceptance: only a very small percentage of merchant payment terminals can currently process mobile paymment transactions.  Mobile payment providers will need to focus initially on spend categories and merchants that are most amenable to mobile payments, and over time expand to other merchant categories.
  • Consumer adoption: Cash and cards are established and relatively convenient forms of payment, and will be very difficult to dislodge.  Mobile payment providers will need to build awareness of mobile payments as a spending category, and communicate mobile payments’ key advantages over establish payment methods (e.g., speed, convenience, as well as the ability to receive special offers at the point of sale).  In addition to marketing the categories, individual mobile payment providers will also have to differentiate their own offering from direct competitors.

With these hurdles in mind, it is notable that American Banker this week quoted a MasterCard executive as referring to Google Wallet as a “five-to-ten year effort, not a one-year effort.”

Small business credit card issuers are ratcheting up rewards

In July, EMI posted a blog on leading small business credit card issuers making large bonus point offers to encourage small business customers to activate and continue to spend on their business cards.  Some of these leading small business card issuers are turning their attention to revamping rewards structures for their leading cards.  Yesterday, Bank of America announced the introduction of a new version of its Cash Rewards for Business MasterCard.  It has added 2% cash back on spending at restaurants, in addition to the previous rewards of 3% on purchases at office supplies, gas and computer network services, as well as 1% on other purchases.

Other issuers that have enhanced their small business rewards card programs include:

  • Capital One: launched the No Hassle Cash Premier Card, featuring 2% cash back, as well as a bonus of up to $150 (this card does come with a $59 annual fee)
  • American Express: introduced a new version of its Business Gold Rewards Card, with triple points on airfare, double points on advertising, gas and shipping, and 1 point per dollar on everything else.  It previously offered a flat 1 point per dollar reward.  The card also features a 50,000 point bonus (for spending $10,000 on the card within the first 150 days).  The annual fee for this card has risen from $125 to $175 (both American Express and Capital One are evidently betting that small businesses will be willing to pay an annual fee in exchange for these higher rewards)
  • Chase: launched new earnings structures for Chase Ink Classic and Ink Cash: 5 points per dollar/5% cash back on first $25,000 in annual spend on office supplies, telecommunication services and cable services; 2 points per dollar/2% cash back on first $25,000 in annual spend on fuel and lodging; and 1 point per dollar/1% on all other purchase

The growth of bonus offers and bonus rewards illustrates the extent to which the leading small business credit card issuers are competing to capture a share of small business card spending.  There is significant growth potential in this market, as cards still account for a small share of overall small business spending.

And there are recent signs of life in the overall small business card market, which has been in the doldrums since the start of financial crisis.  Last week, American Banker reported on FDIC data that shows big banks starting to grow loans of $100,000 of less (which are largely made up of small business cards).

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.