Tag Archives: Capital One

U.S. Issuers Continue to Push Small Business Card Spending With Bonus Offers

In spite of the stuttering economic recovery, leading U.S. card issuers appear united in their belief that there is significant growth potential in small business cards. Given the anemic small business loan demand as well as continued strict underwriting standards from issuers, issuer focus continues to be on driving small business spending rather than outstandings.  This is illustrated most clearly in the bonus points/miles/cashback offers for making initial purchases on new cards as well as for signing up for a number of services.

  • Chase is offering bonuses on each of its three Chase Ink cards: up to $250 on Ink Cash; up to 25,000 bonus points on Ink Classic; and up to 50,000 points on its Ink Bold charge card.
  • Capital One has professed that it does not typically compete with strong bonus offers or introductory rates, but it is offering 10,000 miles on the Spark Miles credit card.  This card is targeted at heavy spenders, and features an earn rate of two miles per dollar, but it also carries an annual fee of $59.  Capital One is also offering 30,000 points for customers who sign up for Capital One Personal Checking account, Small Business Rewards Checking account and Spark Business credit card.
  • SunTrust is offering 25,000 points on its Delta SkyMiles Business Check Card.  This card has a rewards earn rate of 1 mile per 2 dollars, and comes with a $120 annual fee.
  • Citibank, who pulled back significantly from the small business space between 2008 and 2010, recently launched the CitiBusiness ThankYou Card, featuring 15,000 bonus ThankYou Points after spending $3,000 in the first 3 months.

These offers can be effective in driving new small business cardholder and acquisition.  However, to optimize customer lifetime value, issuers also need to develop initiatives that anticipate and capture opportunities at various stages of the customer lifecycle.  These initiatives include onboarding campaigns, anniversary communications and offers, ongoing usage incentives, upsell and cross-sell initiatives, winback programs and referral offers.

Credit Metrics for U.S. Card Issuers Continue to Improve

A study of recently-published financials for the leading U.S. credit card issuers reveals that their charge-off rates continue to decline, and that this trend looks set to continue in the coming quarters.

The following table summarizes 1Q12 managed credit card charge-off rates for 11 of the leading U.S. card issuers.  Ten of the eleven issuers reported year-on-year charge-off rate declines of more than 200 bps. The exception was American Express, which had the lowest rate.  The largest decline came from SunTrust, whose rate fell from 8.68% in 1Q11 to 4.83% in 1Q12. Seven of the eleven reported quarterly declines in their charge-off rates.

Of course, many industry observers are questioning when and at what level charge-off rate declines will bottom out.  Trends in 30+ day delinquency rates typically are a predictor of trends in charge-offs, and it is notable that of the seven issuers who published 30+ day delinquency rate data in the most recent quarter, all reported both year-on-year and quarterly declines.

Therefore, we should expect charge-off rates to continue to decline in the coming quarters. However, some issuers are now at or below historic averages (for example, Discover claimed that its charge-off and delinquency rates are at 25-year lows), so will have less scope for further declines.  In addition, these low charge-off rates may encourage some issuers to loosen underwriting criteria in order to grow loans, which can generate some upward pressure on charge-off rates.  Card portfolio acquisitions and disposals can also have an impact on charge-off rates; Capital One reported in its quarterly financials that it expects the acquisition of the HSBC card portfolio to raise charge-off rates by 75 bps.

Credit card issuers show renewed interest in private-label cards

In recent months, some leading credit card issuers have shown a growing interest in creating or growing private-label credit card portfolios:

  • Capital One announced the acquisition of HSBC’s $30 million card portfolio in August 2011.  This follows its April 2011 purchase of Kohl’s private-label portfolio.  In reporting 3Q11 financials, Capital One indicated that it would be interested in acquiring more private-label portfolios.
  • This week, the Wall Street Journal reported that Wells Fargo is actively exploring whether to issue private label cards
  • In reporting 3Q11 financials, Citigroup announced that it would be moving its private-label card portfolio from Citi Holdings (it asset-disposal unit) to Citicorp.  And it recent renewed its private-label card issuing deals with Shell, Sunoco and Sears.
  • TD Bank has recently entered into a number of deals to issue cards for: Cartier; Furniture First; and Bailey, Banks and Biddle.

There are a number of reasons for issuers’ renewed interest in this market:

  • Credit quality metrics have improved significantly in recent quarters, for both own-branded and private-label cards, with very strong declines in charge-off and delinquency rates.  For example, the net credit loss rate for Citi’s Retail Partner Cards portfolio fell from 12.24% in 3Q10 to 7.51% in 3Q11.  During the same period, the portfolio’s delinquency rate fell from 7.94% to 5.70%.
  • With loan-to-deposit ratios now well below 100% for many leading banks, and with continued pressure on net interest margins, banks are looking to grow loans in new categories
  • Given the recent growth in commercial and corporate lending, banks are also seeking to cement relationships with large corporate clients
  • The CARD Act has impacted revenues and profitability from issuers’ own-branded card operations.  As a result, some issuers are looking to build scale to their card operations by investing in various card categories

In building their private-label card portfolios, issuers need to understand how the marketing of credit card has changed in recent years.  Today, credit card marketing is more focused on encouraging cardholders to allocate a greater share of their everyday spending to cards, rather than cash or checks.   And even though outstandings are showing some tentative signs of growth, issuers are not aggressively chasing loan growth with aggressive interest rates and low underwriting standards.  In building their private-label portfolios, issuers need to apply these learnings and take the longer-term view, in order to avoid the mistakes of the past.