Credit Card Issuers Focusing Growth on Different FICO Score Segments

May 24, 2016

The Wall Street Journal recently reported that credit card outstandings may reach the $1 trillion threshold in 2016, for the first time since before the 2008 Financial Crisis. This is mainly due to overall economic growth and the rise in employment. Issuers are now increasing their focus on growing outstandings by making aggressive acquisition-and-activation offers (American Express is currently offering a bonus of up to $300 on its Blue Cash Everyday Card), promoting lengthy introductory offers, and increasing credit lines for existing cardholders.

A big question for issuers is, should they concentrate efforts on particular FICO score segments, or seek to drive growth across the FICO score spectrum? In the aftermath of the Financial Crisis and the resulting huge spike in charge-off rates, many leading issuers narrowed their focus, concentrating on the high-FICO score affluent segments, and ignoring subprime and low-prime consumers. However, as the economy has continued to recover, at appears that some issuers have renewed interest in the lower-FICO score categories.

EMI’s analysis of leading issuers’ 1Q16 SEC filings reveals that issuers are following different approaches:

1. Growing outstandings across all FICO score segments. Regional bank card issuers like Wells Fargo and Regions have relatively strong growth across all FICO score segments. It is notable that the <600 subprime segment accounts for 9% of Wells Fargo’s outstandings, a higher percentage than for other issuers. Wells Fargo issues a subprime card and recently incorporated a free FICO score into its mobile banking app.

2. Generating stronger outstandings growth in low-FICO score segments. Capital One, Discover and SunTrust all have markedly strong growth rates in outstandings for low-FICO segments. 35% of Capital One’s outstandings come from the <660 FICO segment, whereas this segment accounts for only 18% of Discover’s outstandings. Discover grew <660 outstandings by 12% (to $10.0 billion), and it is worth noting that Discover launched the Discover it Secured Card in January 2016. SunTrust grew its <620 FICO portfolio by 39%, although this was coming from a low base of just $45 million.

3. Continuing to focus outstandings growth on higher FICO score segments. The three largest issuers—Chase, Citi and Bank of America—all continue to experience declines in outstandings in their lower FICO score segments, which is offset by growth in higher FICO score categories. Regional bank card issuer PNC also follows this pattern.

As issuers look to continue to grow outstandings (and appear to be willing to let charge-off rates rise from their current low levels), they will need to develop approaches to target the different FICO score segments, including:

Ensuring they have products in place to target different FICO score—and demographic—segments.
Developing messaging, pricing, acquisition/activation offers and ongoing incentives to both attract new cardholders and encourage existing cardholders to increase their spending and borrowing
Creating tools (such as free FICO scores) to educate consumers on understanding how their credit scores are determined and how they can practice good credit management

Multiple Motivations Drive Credit Card Issuers to Introduce New Plastic in 2016

May 11, 2016

The first four months of 2016 have seen a steady stream of new credit cards entering the market. Issuers have a range of different objectives for introducing these new cards, including:

Filling gaps in the issuer’s product portfolio

PNC lacked a travel rewards card, so launched the Premier Traveler Visa Signature Card in April 2016. The card features an earn rate of 2 miles per dollar, offers a choice of mileage redemption options, and carries an $85 annual fee (waived the first year). The card also promotes a 30,000 bonus miles offer, and an introductory offer on balance transfers (most other travel cards have purchase-only introductory offers)
TD Bank launched the TD Cash Visa Signature Credit Card, which features an unlimited 2% cashback on dining, 1% on other purchases, a $100 cashback bonus, and no foreign transaction fees.

Discover introduced the Discover it Secured Card, which both expands the it suite and enables Discover to target higher-risk borrowers. Applicants for this secured card must deposit at least $200 to open an account. Unlike many other secured cards, the Discover it Secured Card offers 1-2% cashback on spending. It does not carry an annual fees, but does have an APR of 23.24%.

Launching enhanced versions of existing products

Chase’s new Freedom Unlimited Card has many of the same features as Chase Freedom (APR, introductory offer, bonus offer, fees). However, the new card offers unlimited 1.5% cashback on all purchases (Chase Freedom had featured 5% on up to $1,500 spent in categories that changed quarterly).

American Express launched SimplyCash Business Plus, an enhanced version of its main small business cashback credit card, SimplyCash Business. SimplyCash Plus Business Credit Card features charge card-like functionality, which allows cardholders to exceed their credit limit for specific large purchases. However, these purchases must be fully paid for at the end of the billing cycle.
Wells Fargo introduced the Wells Fargo Propel American Express Card, the third in a series of Propel cards. The card offers 3 points per dollar on gas, as well as 2 points per dollar at restaurants. Cardholders who hold qualifying Wells Fargo checking or savings account receive a 10% points bonus.

Introducing new co-branded or private-label cards following new partnerships

Citi announced the launch of the Costco Anywhere Visa Card, following Costco’s well-publicized decision to split from American Express. The new card features 4% on gas spending (on up to $7,000 in gas spend), 3% on travel and at restaurants, 2% on Costco purchases, and 1% on other purchases.
Barclaycard launched a suite of three JetBlue MasterCard credit cards (two consumer and one business), following JetBlue’s decision to switch from American Express. All three cards feature no foreign transaction fees, in-flight savings, and a higher earn rate on JetBlue spending.

American Express introduced two new co-branded cards from Charles Schwab, the American Express Platinum Card for Schwab, and the Schwab Investor Credit Card from American Express.

As issuers look to grow their card volumes and outstandings, they will need to regularly revisit their card portfolios to determine if they are meeting customers ever-changing payment needs and preferences. Issuers should be prepared to act quickly to change elements of their card portfolio, e.g., adding new cards, enhancing existing cards, and even eliminating some cards. And these product portfolio decisions should be supported by other card-related decisions, on pricing (interest rates and fees), incentives (bonus offers and introductory rates), ongoing rewards (earn rates and redemption options), and value-added features.

Positive 4Q15 Performance for Leading Credit Card Issuers

February 5, 2016

In recent weeks, the leading U.S. credit card issuers reported relatively robust 4Q15 financials. The following are some key trends that EMI identified in these results:

Most leading issuers increased net income in the recent quarter, as increases in revenues (both net interest income and noninterest income) more than offset rises in both noninterest expenses and provisions for loan losses.

Growth in average outstandings was led by regional bank card issuers, as well as Capital One and Wells Fargo.

SunTrust led all leading issuers with an increase of 20% to pass the $1 billion threshold, and it recently launched a new consumer card suite in order to continue this momentum.
Wells Fargo’s 11% growth represented a decline from a 14% y/y rise in 3Q15. Although it continued to grow its credit penetration rate (to 43.4% of retail bank households) the rate of increase has slowed over the past year.
The largest issuers (Chase, Bank of America, Citi) continue to report anemic loan growth or declines as they continue to deal with legacy issues.
American Express had the largest decline (-4% y/y), but this was due to the loss of the Costco portfolio.

In spite of their lack of outstandings growth, the leading issuers reported strong new account generation.

Citi is ramping up new account acquisition for its core products (which account for 80% of its U.S.-branded card portfolio), with active accounts growing 13% y/y.
Like Citi, American Express has ramped up new card acquisition, and its 2.1 million new accounts in the fourth quarter were well above its historic average.
Bank of America grew new accounts 6% y/y to 1.26 billion in 4Q15.

Issuers are focusing on new channels to drive new account acquisition, in order to reduce acquisition costs, as well as reflect changing consumer behavior.

72% of new Chase card accounts in the fourth quarter came through the online channel.
Synchrony reported a 73% y/y rise in applications through the mobile channel.

Although adversely impacted by sharply lower fuel prices, issuers continued to report steady growth in volume in 4Q15. It was notable that, for most issuers, the growth rate was virtually unchanged between 3Q15 and 4Q15. One of the factors driving continued volume growth is the rise in active accounts. Citi reported a 13% rise in active accounts for its core products, Synchrony grew active accounts 5%

Charge-off rates remain at historic lows, with continued y/y declines. However, most issuers reported rises in the charge-off rate from 3Q15. 30+ day delinquency rates also remain very low with little sign of upward movement. Therefore, we expect charge-off rates to remain at or near these very low levels in the coming quarters. Chase expects its charge-off rate to be around 2.5% in 2016, close to its current level of 2.42%. However, it is notable that all of the leading issuers increased their provision for loan losses, led by Capital One (+24% y/y) and American Express (+10%).

In the coming year, we expect that issuers will be looking to new card launches to fill gaps in their product portfolios and drive growth in underpenetrated and/or high-growth segments. The following recent card launches are indicative of this trend:

Wells Fargo Propel American Express Card
Barclaycard CashForward World MasterCard
TD Bank Cash Visa Signature Card
Discover it Secured Card
American Express SimplyCash Plus Business
U.S. Bank Business Edge Cash Rewards World Elite MasterCard

In addition, the top issuers will try to translate the recent rise in new account generation into steady loan growth. Issuers in general will be looking to drive both volume and loan growth through initiatives targeting various stages of the cardholder life cycle: acquisition and activation, retention and ongoing usage. At the same time, they will continue to hope that charge-off and delinquency rates remain close to historic lows.