Time for U.S. Credit Card Issuers To Shift Focus to Lower FICOs?

September 5, 2014

One of the themes in leading credit card issuers’ 2Q14 financials was the expectation of a return to steady outstandings growth. Even those top issuers who continued to report y/y outstandings declines—such as Bank of America and Capital One—indicated that growth is on the way. In the aftermath of the financial crisis, issuers pulled back from the prime and sub-prime FICO segments and concentrated their business growth initiatives on the superprime segment. As issuers now look to generate outstandings growth, one of the strategies open to them is to target the lower FICO segments. However, EMI analysis shows that issuers continue to focus on the higher FICO categories. The chart below shows that, for most issuers, lower FICO segments’ share of total consumer credit card outstandings continues to decline.

Even though issuers use different FICO categories, the chart enables us to compare the FICO composition of credit card portfolios between different issuers.

Consumers with credit scores of less than 680 accounted for 32% of Wells Fargo’s outstandings at the end of 2Q14, compared to only 18% of Bank of America’s outstandings. This may help explain why Wells Fargo’s average credit card outstandings rose 10% y/y in 2Q14, compared to a 2% decline for Bank of America.
Similarly, 17% of Discover’s outstandings are held by consumers with FICOs of <660, compared to just 5% of Chase outstandings. Discover reported 6% y/y growth in outstandings in 2Q14, compared to just 1% growth for Chase.

Looking over a longer period (2Q11-2Q14), we see a consistent pattern of the lower FICO segments losing share of consumer credit card outstandings. For Chase, consumers with FICOs of less than 660 accounted for 14% of outstandings at the end of 2Q14, compared to 20% at the end of 2Q11. However, for some issuers, the share decline in lower FICO segments has not been very dramatic. For example, FICOs of <640 accounted for 17% of outstandings at the end of 2Q14, a share loss of just two percentage points since 2Q11.

As consumer confidence returns, issuers expect to grow outstandings in the coming quarters. However, to achieve their goals, they will need to develop strategies for a broader FICO range. In addition to continuing to target more affluent consumers, issuers will need to develop strategies, products, pricing and messaging to reconnect with prime, lower-prime and sub-prime consumer segments.

Positive Signs in Leading Credit Card Issuers’ 2Q14 Financials

August 5, 2014

The 2Q14 financials for leading U.S. credit card issuers had a number of positive elements, notably a return to outstandings growth, along with continued strong performance in volume and credit quality metrics.

Outstandings

In a recent EMI blog post, we suggested that the extended series of declines in credit card outstandings had bottomed out. The latest quarterly performance metrics for the leading U.S. credit card issuers provides more evidence of this turnaround: EMI’s analysis of 13 leading U.S. card issuers found a 1% year-on-year (y/y) growth rate in average outstandings in 2Q14.

Growth was led by SunTrust, which grew outstandings 19% y/y, albeit from a low base. Wells Fargo continued its strong outstandings growth rate, with a 10% y/y increase as Wells Fargo credit card penetration of retail banking households reached 39% (from 35% in 2Q13). The top four issuers—Chase, Bank of America, Capital One and Citi—once again acted as a brake on overall industry growth. However, even these four issuers are seeing positive signs. Chase’s new account production rose 40%. Capital One reported a 1% rise in end-of-period outstandings, as it returned to growth earlier than anticipated, driven by a combination of rewards, non-high-balance revolvers, and credit line increases. Even though Citi reported a 3% y/y decline, it attributed this to continued run-off in promotional rate balances, whereas full-rate balances have grown for five consecutive quarters.

Volume

In the absence of credit card outstandings growth in recent years, issuers have focused on volume growth. This growth continued and even accelerated in the most recent quarter (for the eight leading issuers reporting card volume, y/y volume growth rose from 7% in 1Q14 to 9% in 2Q14). Issuers attributed this growth to a combination of new account growth and increases in average cardholder spending.

Six of the eight issuers in the above chart had stronger y/y volume growth in 2Q14 compared to 1Q14. As in previous quarters, Wells Fargo and Chase led the industry. Wells Fargo benefited from both account growth as well as a 14% rise in average spending per account, as more cardholders moved their Wells Fargo card to top of wallet. Capital One reported an 11% growth rate, but claimed that if private-label cards were excluded, its growth rate was 16%, driven by continued marketing and customer experience initiatives.

Credit Quality

With charge-off and delinquency rates below historic norms for many issuers, one would expect that a push for outstandings growth would lead to upward pressure on these rates. However, this has not been the case, and issuers continued to report significant y/y and q/q declines in charge-off rates in 2Q14.

Of the 12 leading issuers reporting credit-card charge-off data, 10 reported double-digit y/y declines. The two main “monolines”—American Express and Discover—continued to have the lowest rates, but SunTrust and Chase now also have charge-off rates below 3%.

Implications

These positive metrics are clear signs that the credit card industry’s recovery from the 2008 financial crisis and resulting Great Recession, is gaining momentum. For issuers looking to capture a share of this growth, the following are some areas they should consider:

Cross-sell and upsell existing customers. There has been much coverage in the industry of Wells Fargo’s continued growth in its credit card penetration rate, which has fueled strong outstandings and volume growth. Regional bank card issuers also tend to follow this cross-sell model, although most of these lack Wells Fargo’s cross-sell expertise and experience. However, leading issuers are now taking a growing interest in cross-selling existing customers; for example, Bank of America reported that 65% of its new credit cards issued in 2Q14 were to existing bank clients. Issuers should also commit to regularly assessing existing cardholder qualification for card “upgrades”, and then make appropriate upsell offers.
Invest in multiple credit card sales channels. For many years, direct mail was the overwhelmingly dominant channel for new account generation. However, a number of factors are leading to a change in the credit card sales channel mix, including:
- A general decline in direct mail as a marketing channel, driven by both lower response and the emergence of lower-cost channels.
- Increased customer usage of online and mobile banking channels, and increased bank industry recognition of the sales potential of these channels. 54% of new Chase credit card accounts in 2Q14 were acquired online.
- The reduced usage of bank branches for everyday transaction processing has led to a redefinition of their role, with banks now looking to realize branches’ potential as sales channels. Wells Fargo recently reported that 83% of its general-purpose credit cards were sold in its Community Banking stores.
Develop offers to drive desired cardholder behavior. Issuers need to have a series of offers available to drive specific cardholder actions at different stages of the customer life cycle (e.g., activation within 90 days of acquisition; retention during the card expiration period; card usage and referrals on an ongoing basis), which ultimately help optimize customer lifetime value.
Continue to focus on rewards. Issuers are increasingly aware that rewards products and programs are integral to achieving retention and growth objectives, so there is a need to continually assess how key program elements—such as earn rates (basic and bonus) and user experience—stack up against competitors.
Invest in credit card brands. It is notable in recent years that many credit card issuers are creating and supporting card brands, both to generate build stronger customer awareness, as well as acting as a point of differentiation from competitors. These new brands apply to both:
- Individual cards (e.g., Santander Bank’s Bravo and Sphere cards, and Huntington’s Voice card)
- Card portfolios; this is especially prevalent in the small business sector, with issuers like Chase (Ink), Capital One (Spark Business) and U.S. Bank (Business Edge) all branding their small business card portfolios.

Has the decline in card outstandings bottomed out?

June 19, 2014

A recent American Banker article discussed a credit card rebound, referring to data from the Federal Reserve that showed strong growth in revolving consumer credit in April 2014. This supports findings in a recent EMI blog (“Four Takeaways from Credit Card Issuer 1Q14 Financials“), which found signs of an improvement in credit card outstandings for the leading issuers.

The FDIC has recently published bank data for the first quarter of 2014. EMI’s analysis of this data provides further evidence that the decline in credit card outstandings is bottoming out.

Credit card outstandings fell 0.3% between end-1Q13 to end-1Q14. This marked an improvement from a decline of 0.7% between end-2012 and end-2013.
The overall decline is due to the outstandings performance of the four largest issuers (Chase, Bank of America, Citi, and Capital One) who together accounted for 63% of total industry outstandings at the end of March 2014. These four leaders reported a 2% y/y decline in outstandings.
Outside of these four issuers, outstandings for the rest of the industry rose 3% y/y. Growth in outstandings is led by a number of sectors, as summarized in the following table:

Furthermore, even though the leading issuers have been dragging down overall outstandings performance for a number of years, there are indications that these declines are bottoming out, and loan portfolios are even poised to grow in the coming quarters:

Chase credit card outstandings were virtually unchanged between end-1Q13 and end-1Q14. At its 2014 Investor Day, Chase reported growth in its core card loan portfolio (excluding its run-off portfolio), although its focus has been on growing volume rather than loans
Bank of America reported a 1% decline in card outstandings, but expects this decline in bottom out this year. Card issuance is strong at more than 1 million new accounts in 1Q14 (compared to a quarterly average of about just over 800,000 in 2012)
Capital One reported that its domestic card loan portfolio fell 3% y/y in 1Q14, mainly due to its run-off portfolio. However, it reported that it was seeing loan growth in some key consumer segments, such as transactors. And in a recent Morgan Stanley conference, Capital One claimed that it expects loan growth in July, earlier than anticipated.

So, how can issuers best prepare for outstandings growth? The following are three quick tips:

Set realistic expectations. Don’t expect a return to the outstandings levels that prevailed prior to the 2008 financial crisis and resulting recession. Consumer attitudes to credit card have changed since then, as they see credit cards less as an easy source of credit (evidenced by high monthly payment rates) and more as an effective payment tool (seen in the continued strong volume growth rates)
Prepare the groundwork for future growth. Rather than driving up loan growth (and potential charge-off rates) through overly aggressive pricing offers, issuers should concentrate on the basics: providing a robust product suite with value-added features to meet cardholder spending and borrowing needs; building flexible reward programs; and setting pricing based on appropriate levels of risk and reward.
Focus efforts on existing customers. Traditionally, credit card issuers have focused their marketing on new customer acquisition. Now, a new generation of credit card issuers (led by Wells Fargo and followed by regionals banks that have recently started to issue cards in-house) are growing their portfolios by cross-selling credit cards to existing bank clients. In addition, simple card acquisition is not enough; issuers need to develop communications and offers to drive activation, retention, preference and increased usage, thereby optimizing customer lifetime value.