Tag Archives: channel

Reasons for Optimism in Credit Card Issuer 3Q13 Financials; What are the Marketing Implications?

The leading U.S. credit card issuers continued to exhibit trends that have become established in recent quarters, but there were also some signs of change:

  • Outstandings: Average credit card outstandings continued to decline y/y, with the big four issuers (Chase, Bank of America, Citibank and Capital One) reporting portfolio decreases.  However, both credit card “monolines” (American Express and Discover) and some regional bank card issuers reported relatively strong growth.  Even among the big three issuers, there were indications of growth: Chase reported a 6% y/y rise in new accounts (1.7 million); and Bank of America new accounts rose from 850,000 in 3Q12 to more than 1 million in 3Q13.

  • Volume: Reflecting the change in the industry in recent years from a lend-centric to a spend-centric model, most issuers reported strong y/y volume growth.  Wells Fargo volume rose 14%, as new accounts grew 11% and  credit card penetration of its retail bank households increased to 35%.  And it is looking to further propel volume growth with its recently-launched rewards program.  Bank of America and Chase also translated strong new account generation into double-digit volume growth.  Discover had relatively low volume growth of 3%, but is aiming to increase volume and outstandings at the same rate.

  • Credit quality: charge-off rates continue to decline for most issuers.  Of the 12 issuers who provided charge-off rate data, 10 have rates below 4%, and three issuers (American Express, Chase and Discover) have rates below 3%.  As a result, provisions for loan losses continued to fall for most issuers, which boosted profitability.  For 30+ day delinquency rates, issuers reported y/y declines, but q/q increases.

We expect that, as the economic recovery continues, consumer confidence will grow, as will their willingness to take on credit card debt.  This may lead to increases in charge-off rates from these historically low levels, but issuers will feel that the resulting growth in noninterest and net interest income will more than offset any rises in provisions for loan losses and noninterest expenses, such as marketing costs.

However, as issuers look to ramp up credit card marketing, they need to factor in the fundamental changes in consumer perceptions and usage of their credit cards.  These changes impact various elements of the marketing mix, including:

  • Positioning: Following the financial crisis, issuers shifted away from positioning credit cards as easy ways to access credit, and towards credit cards as an efficient payments method.  As consumer demand for credit recovers, issuers may need to adapt positioning once again to have a balance between a lend-centric and spend-centric focus.
  • Product: Issuers continue to target more affluent cardholders, so they will need to have a card portfolio that is appropriate for this market.  This explains why both Wells Fargo and U.S. Bank recently entered into card-issuing deals with American Express.
  • Pricing: As the CARD Act places many restrictions on issuers’ ability to change APRs, we expect that there will not be huge price competition in APRs, but rather the focus will be on lengthy zero-rate introductory offers, in particular on balance transfers.
  • Loyalty: Issuers will continue to enhance rewards programs (and accompanying offers) to drive activation, retention and ongoing spending.  To maintain control over costs, issuers are looking to develop more merchant-funded programs, and this trend may gain traction as issuers develop mobile wallets that will enable consumers to manage loyalty programs on their smartphones as well as receive specific merchant offers at the point of sale.
  • Channel: There has been much coverage of the fact that branches are rapidly losing share for everyday banking transactions.  Many banks are looking to redefine the role of the branch, in particular to leverage its potential as a key sales channel.  Wells Fargo recently reported that 80% of new card accounts are opened in its branches.  The online channel has also become a key credit card sales channel: Chase reported that 53% of new credit card accounts were acquired online in 3Q13.

Five Branch Channel Trends

At the recent Barclays Global Financial Services conference, presentations by leading U.S. banks highlighted the extent to which they are adapting their branch networks, based on the need to reduce costs, leverage new technologies, and reflect changing customer behavior.  The following are five branch channel trends that emerged from the conference:

  1. Reduction in branch numbers.  Many of the larger banks are closing unprofitable branches.  Bank of America and SunTrust both reported 7% falls in their branch numbers over the past two years.  BB&T cut its branch network by 3%.  According to FDIC data, there was a net decline of 839 branches in the year to June 30, 2013.
  2. Emergence of new branch models.  Banks are no longer following a one-size-fits-all model for branches, and instead are deploying different types of metrics based on a range of factors, such as market characteristics, branch density and competitive strength. First Horizon is piloting a concierge branch model in Memphis, Nashville and Knoxville, featuring no teller rows and staffed by universal bankers.  The Fifth Third micro-branch format, which it expects to pilot in the coming months, has 2-3 staff in self-service, non-cash-handling branches.
  3. Flagship branches and lower density. PNC presented its new hub-and-spoke branch model, which features an all-purpose universal branch surrounded by cashless branches, ATMs and electronic channels.  This comes as PNC plans to close 200 branches in 2013.  Other banks that have recently opened flagship stores include Bank of America, Citibank and Umpqua Bank.
  4. Overhaul of branch staffing and training. As branches process fewer everyday transactions, and the role of the branch shifts towards sales and customer relationship management, banks are reducing teller numbers while deploying additional specialists in branches.  In the first 6 months of 2013, PNC reduced its teller headcount by 6%, while growing investment professionals by 17%.  Bank of America claimed that its specialist headcount has grown to 6,800, with half of these based in branches.  In addition, banks are training and supporting staff to enhance their selling capabilities.  SunTrust reported that investing in training and technology for front-line retail staff resulted in a 30% rise in sales productivity (sales per FTE per day).
  5. Branch as beachhead. City National discussed the establishment of a branch in New York City, far from its Californian retail banking footprint. This branch is designed to support the bank’s targeting of the entertainment industry.  And other banks have established beachhead branches outside of their retail banking footprint, both to build brand awareness as well as support the banks’ commercial banking and capital markets activities, which tend to have nationwide reach.  This week, BB&T announced that it is establishing a presence in Chicago.  Earlier this year, BBVA Compass announced the opening of loan-production offices (focusing on commercial banking and wealth management) in New York and Washington, D.C.  And in October 2012, BMO Harris opened a corporate banking office in Atlanta.

EMI expects there will additional changes to branch deployment, design and staffing to its role fundamentally shifts away from everyday transaction processing, and more towards selling, providing advice, as well as branding.

Customers reducing branch usage, but some banks growing branches

Many recent surveys have pointed to customers’ reduced branch usage for everyday banking, as they embrace Internet and mobile banking. Many of the leading banks have reported very strong year-over-year growth in mobile banking active users in 2Q12, including Bank of America (+35%, to almost 10.3 million), Chase (+38% to just over 9 million), and Wells Fargo (+ 38%, to 8.3 million).  At the same time, many banks are implementing aggressive cost savings programs.

Based on this, one would expect banks to significantly cut back on their branch investment.  FDIC data bears this out, with total U.S. bank branch numbers falling by more than 500 in the year to end-March 2012.  However, the following chart reveals that this trend is not universal, with many leading banks increasing branch numbers over the past year.

While some banks (such as Chase) have grown their networks organically, the increase in branch numbers for most of the other banks listed above was a result of branch/bank acquisitions.

  • PNC grew its branch network following the acquisition of RBC Bank, as well as the purchasing of branches from Flagstar Bank.
  • Chase grew its branch network in growth markets like California and Florida.  However, it has scaled back ambitious plans to grow its network further in the coming years.  Chase has also radically expanded its Private Client locations, from 16 in 2Q11 to 738 in 2Q12.
  • KeyBank’s net increase of 14 branches was due to the acquisition of 37 branches in upstate New York, partially offset by branch closures.  The bank has reported that branch rationalization is one of the central elements of its new efficiency initiative, and it plans to cut 5% of its branches in the next 18 months.

Factors that impact bank branch numbers include:

  • M&A activity (highlighted in the examples above)
  • Strategic decisions to increase/reduce presence in specific markets (e.g., grow branch numbers in targeted markets, or reduce branches in other markets where the bank’s branch presence is below a minimum threshold)
  • Ability of specific branches to meet performance goals (e.g., growth, profitability)
  • Competitive activity

Though surveys indicate that branch usage is declining, a majority of consumers and small businesses still value branches, as they want a multi-channel bank relationship (encompassing physical and virtual channels).  This is leading banks to change branch design and staffing models in order to reposition branches to provide a broader role for the bank, in areas like selling, relationship development, product testing, and branding. (See our recent blog on the changing role of the branch.)