Category Archives: Payments

Credit card issuers focused on new customer acquisition; should not ignore portfolio management

Leading U.S. credit card issuers have been focused on growing cardholder spending volume in recent quarters (click here for our recent blog on strong growth in credit card volume for leading issuers), but there has yet to be an appreciable rise in outstandings. This is due to cardholders’ desire to reduce their debts, as well as residual reluctance on the part of issuers to open the lending spigot following the financial crisis.

However, we do note that several leading card issuers are ramping up their new customer acquisition efforts:

  • Bank of America grew new U.S. credit card accounts 17% between 2Q11 and 3Q11
  • Chase grew proprietary cards 20% y/y in first 9 months of 2011
  • Capital One card origination levels doubled between 3Q10 and 3Q11

Some of these issuers reduced their customer bases significantly in recent years, so this growth is in fact returning customer numbers to what the issuers would perceive to be normal levels.  The issuers have also focused customer acquisition efforts on certain segments of the market–such as affluents and small business–that they expect will be strong performers in the coming years.

Having concentrated on customer acquisition, it is vital that credit card issuers now also establish portfolio management strategies to maximize customer lifetime value. Effective portfolio management plans focus on three areas:

  • Activation (onboarding efforts, incentives to drive initial card usage)
  • Retention (communications and incentives around anniversaries, processes for handling cardholder complaints, and winback programs)
  • Relationship optimization (periodic special offers based on customer value and/or life events, targeted cross-sell/upsell offers, and consistent user experience across all customer touchpoints)

Visa U.S. credit card volume growing faster than debit card

Visa Inc. published its 4Q11 and full-year 2011 financials and related data yesterday, which included a good deal of information on payment volume trends.  One of the most notable trends was the relative growth rates of U.S. credit card and debit card volume over the past five quarters.  These two growth rates reached an inflection point in the most recent quarter, with the credit card year-on-year growth rate moving ahead of debit card.

It is notable that the patterns of acceleration of credit card volume growth and deceleration of debit card volume growth have been in place for some time.  Forces that have contributed to these trends include:

  • Banks’ imposition of debit card fees and elimination of debit rewards, largely due to new debit interchange structures
  • Consumers and small businesses changing their perceptions of the credit card, not just as a means to access credit, but also as efficient and convenient payment vehicle (credit card volume growth is much stronger than outstandings growth)
  • Issuers aggressively promoting credit card spending with large bonus offers

Credit quality continues to improve for leading U.S. card issuers

The leading U.S. credit card issuers continue to report strong improvements in their net charge-off rates.

  • Of the 11 issuers analyzed, eight had 3Q11 net charge-off rates below 5%.  Four had rates below 4%, with American Express leading the industry, at 2.6%
  • Over the past 12 months, eight issuers reduced rates by more than three percentage points (300 basis points)
  • Seven issuers reported rate declines of more than 100 bps between 2Q11 and 3Q11

Issuers also reported strong year-on-year improvements in 30+ day delinquency rates, although the quarterly trend indicates that these declines may be bottoming out. 

  • Five of the seven issuers analyzed had 30+ day delinquency rates below 3%
  • Six of the seven issuers reported triple-digit y/y declines in delinquency rates. The largest decline was reported by Bank of America (178 bps), which still has the highest delinquency rate among these seven issuers
  • Between 2Q11 and 3Q11, delinquency rates for two issuers (American Express U.S. Card and U.S. Bank) were unchanged.  Capital One’s 30+ day delinquency rate rose 32 bps in the most recent quarter

The strong declines in charge-off and delinquency rates have enabled issuers to significantly reduce their provisions for credit losses, which have boosted profitability.  However, with delinquency rate declines leveling off, it is expected that reductions in charge-off rates and loss provisions will also abate in the coming quarter.

Therefore, issuers will increasingly look towards revenue growth drivers to maintain and grow profitability.  On the one hand, they will seek to continue to encourage cardholders to increase spending on their cards, which drives up noninterest income.  In addition, with charge-off rates now at relatively low levels, and with revenue growth remaining anemic, credit card issuers may be more inclined in the coming quarters to seek to build card outstandings and drive net interest income, perhaps through a combination of easing underwriting standards, offering strong introductory offers on balance transfers, and even reducing APRs.