Credit Card Issuers: Adjusting to the “New Normal”

June 5, 2020

The impact that the COVID-19 pandemic has had on our society and economy is huge, and the effects are likely to persist for some time to come. This blog looks at some of the most important changes affecting the credit card sector, how issuers have responded to these challenges in the short term, and what they need to do as the economy starts to reopen and they look to get the sector back on an even keel.

Spending

The trend. The pandemic has led to significant changes in consumption patterns. Overall spending fell as the lockdowns took effect. Spending in categories like travel and entertainment registered huge declines, which were partially offset by increases in everyday spending categories like grocery. There were also changes in purchase methods. As a result of stay-at-home limitations, digital commerce growth rose strongly. And at the point of sale, consumers moved decisively away from cash and embraced contactless payments. According to Mastercard research from the end of April, 51% of Americans are now using some form of contactless payment. The switch to contactless is likely to persist: according to the 2020 American Express Digital Payments Survey, 58% of consumers who have used contactless say they are more likely to use contactless payments now than before the coronavirus outbreak.

The response. Issuers initially responded to the change in spending patterns by:

Changing bonus earning categories to encourage consumers with travel-centric cards to use these cards for everyday spending. Chase introduced higher earn rates for grocery spending on its Sapphire Cards and most of its travel-oriented co-branded cards.
Extending the eligible period to meet a spending threshold and qualify for activation bonuses on new cards. American Express and Citi extended this period by three months.

Next steps.

Issuers need to ensure that contactless payment functionality is available on all of their credit cards.
Card networks and issuers should increase the spending limit for contactless payments. Note that this has already taken place in most European countries in response to the pandemic.
Issuers should switch from chip-and-signature to chip-and-PIN. A recent Mastercard survey found that 72% of consumers would prefer to avoid signatures.

Borrowing

The trend. The economy retrenched in recent months, and cardholder borrowing has fallen, due to both decreased spending and a desire to reduce debt. This was evident in issuers’ credit card outstandings for the first quarter. EMI analysis of 22 leading issuers found a 4.4% y/y rise in average credit card outstandings in 1Q20. However, the y/y rise in end-of-period outstandings was just 1.7%, indicating a pull back in balances towards the end of the quarter.

In terms of key credit quality metrics, there was no dramatic upsurge in delinquency or charge-off rates, but these metrics take time to register and many consumers have taken advantage of payment relief programs. According to TransUnion, 3.2% of card accounts were in financial hardship programs in April, up from less than 0.01% in March.

The response. At the onset of the pandemic in mid-March, most issuers were quick to introduce payment relief programs (mainly deferrals on minimum payments and waivers on late fees) and they also engaged in the following activities:

Dramatically raised their provisions for loan losses in their 1Q20 financials.
Scaled back credit card solicitations. Bank of America reported that card loan origination fell 55% between February and the first two weeks of April.
Tightened underwriting. In its 1Q20 financials, Discover reported that it significantly tightened underwriting and pulled back on credit line increases and balance transfer offers.
Cut credit limits. According to an April 2020 CompareCards survey, 25% of credit cardholders said that their credit limits were cut involuntarily, or that their cards were closed in the previous 30 days.

Next steps.

In the near term, issuers will likely need to continue existing actions, such as extending relief programs. However, as the economy returns to some degree of normality, issuers will scale back or end relief programs, inevitably leading to increased delinquencies and charge-offs.
Issuers should redeploy staff to engage directly with cardholders on their repayment plans.
Issuers should develop information/advice for consumers on how to improve their debt management and make the materials easily available by publishing on various media.

Channel Usage

The trend. Because the pandemic has forced banks to close many branches, there has been a significant rise in digital channel usage for financial needs. More consumers are trying digital channels for the first time, and existing users are depending on digital channels for a broader array of financial activities. This migration to digital channels is likely to persist.

The response. Issuers actively directed cardholders to digital channels for their customer service needs.

Next steps. To consolidate the recent gains made in digital channel usage by credit cardholders, issuers should:

Accelerate the promotion of digital channel benefits on websites, in social media and in monthly statements.
Ensure that digital channels are providing a positive user experience.
Expand digital channel functionality.
Promote human channels for cardholders who need to engage directly with the issuer.

Adapting branch networks for a digital banking future

February 14, 2020

There’s no longer any question that banking has hit the digital tipping point. According to a 2019 American Bankers Association (ABA) survey, the banking channels used most often by consumers are online (37%) and mobile apps (36%), with bank branches now in third place at 17%. But before we declare the branch model is doomed…take note: a 2018 Celent survey found that 77% of consumers prefer visiting a branch to discuss a lengthy topic, 63% prefer a branch for investment advice, and 51% opt for a branch to open a new deposit or credit card account. And Deloitte’s Global Digital Banking Survey revealed that branch experience influences customer satisfaction more than mobile or online channels.

So while banks are investing more and faster in digital platforms, they are also looking to solve the puzzle of next-gen branch banking. Here are 3 ways that banks can reinvent their human channels to perform effectively in a digital world.

Reduce the overall number of branches, but look to open branches to expand reach.

Over the past decade, there has been a net decline of more than 13,000 bank branches in the U.S.

The pace and extent of each bank’s branch reductions have varied widely, driven largely by growth opportunities in footprint geographies and competitive intensity:

In April 2019, midwest-focused U.S. Bank announced plans to trim up to 15% of its branches by the end of 2021 as it pursues a digital-first strategy.
Wells Fargo’s branch strategy maintains significant branch presence in attractive markets, while aggressively reducing branch counts in other markets.

Lower branch density has reduced the cost of entry into some new markets. While many banks are cutting their overall branch numbers, they are also opening branches in targeted strategic markets.

In 2018, Chase announced plans to open 400 branches in 15-20 expansion markets, including Boston, Washington, D.C. and Philadelphia. As a result of this expansion, Chase’s branch network coverage will rise from 69% to 93% of the U.S. population.
Similarly, though Bank of America has reported a net reduction of more than 750 branches over the past five years, it has also opened 200 new branches, with another 400 expected to open over the next three years in markets like Cincinnati, Cleveland and Pittsburgh.
To achieve its ambition of national presence, PNC has targeted new markets with a digital-first strategy supported by a thin branch network. It recently opened branches in markets like Dallas and Kansas City, and reports these new branches are generating deposits at five times the pace that the bank would expect for a de novo branch in its legacy markets.

Reimagine branches.

Branches have long since begun transformation from service centers to…well, something else. Some banks have set an immediate course for sales, driving service transactions to smart ATMs and contact center hotlines and pulling real estate from tellers to sellers. Other FIs have redesigned select branches or entire networks as everything from experiential attractions to coffee houses to community centers.

Universal trends are fewer square feet and more open space. Matching those changes, branch headcount is lower and skill levels higher. From the nation’s largest banks to some of the smallest, branches are being reinvented.

On the regional end of the scale, 132-branch Berkshire Bank is introducing new “storefronts” in greater Boston. No tellers, but if you need to make a conference call, you’ll find free co-working spaces and event rooms. Just be prepared to have a “needs assessment” with your friendly Berkshire banker coming or going.
Global bank, HSBC deployed “Pepper,” a humanoid robot in New York City, Seattle, Beverly Hills and Miami. Likely more of a marketing play than a scalable technology innovation, the bank claimed that the presence of Pepper boosted business by 60% in New York alone.
Chase–ever practical–launched Digital Account Opening in branches, so the technology can handle the busywork leaving bankers time for providing advice (read selling). And Bank of America is in the middle of a six-year plan to renovate 2,800 branches, flat-out taking humans out of many, leaving only machines.
Oregon-based Umpqua takes a contrarian view that people want to bank with people, and invites branch traffic with cookies, chocolate coins, movie nights and marketplaces where small business clients can share their wares with retail customers.

Make physical and digital work together. Human matters.

Intuitive technology is good for reducing cost, but humans are better at driving sales, creating relationships and building loyalty. Beyond the small businesses and aging boomers who still prefer the corner bank to the cool app is the reality that in “money moments that matter,” people turn to people–whether it’s in a branch or a contact center. But those humans must be consistently positive, empathetic and “know” everything that the technology channels know. Winning banks will:

Design an onmichannel approach that enables customers to use the channel they choose with consistent experience
Recognize the brand value and acquisition horsepower of branch networks
Give your customers great digital experiences, but power your human channels with the best in technology and insights to make the most of those moments that matter

Four Channel Trends in Leading Bank 4Q15 Financials

January 27, 2016

The largest U.S. banks have been publishing their quarterly and full-year financials over the past two weeks. Within these reports, we can discern a number of channel-related trends. These trends have a direct impact on how banks interact with their customer base in terms of providing everyday banking and value-added services as well as cross-selling additional products and services.

We’ve listed these key channel trends below:

Banks are continuing to reduce their branch networks. According to SNL Financial, the total U.S. branch network fell by 1,614 branches and is now at 92,997, a decline of 1.7%. These declines are driven by banks’ desire to cut costs, as well as from a recognition that greater usage of self-service channels for everyday banking transactions may enable banks to reduce bank density. The following chart looks at net changes in branch numbers for leading banks with more than 500 branches:

Citibank reported that it plans to close an additional 50 branches in the first quarter of 2016 as it exits certain markets (including Boston) and will concentrate its branch presence in six key metro markets. It is worth noting that in other markets where Citibank has cut its branch presence, it claims to have retained over 50% of deposits through its online and mobile channels.

Banks are overhauling branch design and staffing. Not only are banks reducing their overall branch numbers, they are changing how branches are designed and staffed. In its 4Q15 earnings conference call, SunTrust mentioned that it is relocating to new, smaller branch locations in Richmond and Raleigh, which will reduce its square footage in these markets by half. Overall, it has reduced its branch footprint by 2.5 million square feet over the past four years. PNC reported that 375 of its 2,600 branches have been converted to its Universal Banker model, and it plans to convert an additional 100 branches in 2016.
Mobile banking is maintaining its strong growth trajectory. According to Javelin Strategy & Research, 30% of U.S. adults used a mobile banking service weekly in 2015. Reflecting this trend, leading banks continue to show double-digit y/y growth in mobile banking users (Chase +20% to 22.8 million; Bank of America +13% to 18.7 million; and Wells Fargo +15% to 16.2 million). These customers are also using mobile banking for a greater variety of transactions. For example, Bank of America reported that mobile banking’s share of total deposit transactions rose steadily from 4% in 4Q12 to 15% in 4Q15.
Online banking usage remains strong…and is growing. While mobile banking garners most of the headline in financial trade press, online banking remains a key customer service channel, and some leading banks continue to register strong growth rates in online banking users. This is likely due to a number of factors, including overall account growth, increased customer comfort with using online banking, new online banking functionality, as well as lingering concerns over mobile banking security. The following table compares 2015 online and mobile banking users and growth rates for Chase, Bank of America and Wells Fargo:

We expect that as banks continue their migration towards self-service channels for a growing number of everyday banking transactions, banks will continue to scale back their branch networks. This will involve reducing branch density in particular markets, as well as exiting markets where they lack a critical mass or where their branches are underperforming. However, banks in general want to maintain a physical presence in markets, so they can leverage the power of the branch as both a sales channel and a branding beacon.

In addition, banks need to provide a consistent user experience across their online and mobile channels. In the short term, banks will continue to provide more functionality in the online channel, as consumers build trust in using their mobile devices for more complex financial transactions. But the distinctions between online and mobile channels are blurring, and banks are already starting to refer to “digital channels” to encompass desktop, tablet and mobile channels. Even the traditional delineations between “online” and “offline” channels are breaking down, as banks showcase their digital services in branches, and as digital channels include functions to enable customers make in-branch appointments.