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Credit Card Issuers: Adjusting to the “New Normal”

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.

Banks Look to Local Marketing to Build Small Business Engagement

Banks looking to build awareness and engagement with small business owners should look to leverage strengths in specific markets and develop targeted marketing campaigns and other outreach programs.  The following are some of the most popular ways that banks see to engage with small businesses at the local market level.

Leverage the branch network.

  • Small businesses continue to be among the heaviest users of bank branches, and leading banks deploy dedicated small business bankers in branches to provide expert advice and support. This past January, as part of a broader commitment to its brand network, Chase announced plans to hire 500 small business bankers.
  • Banks use their branch network to bring small business campaigns to life. Last month, Santander Bank rolled out its Small Business Month campaign, which featured in-branch merchandising and in-branch events across its network of more than 600 branches.
  • Some banks even allocate space in their branches for small businesses to use. Citizens Bank recently created open space in its Chestnut Hill, Massachusetts, branch that small business clients can use to conduct meetings with customers and business partners.

Target campaigns at local markets.

  • Capital One launched its We Work as One campaign, designed to promote and empower local businesses in select markets (New York City, Chicago, San Francisco, Denver and Boston) where it operates local Capital One Cafes.

Foster small business entrepreneurship.

  • Some banks include small business entrepreneurship as part of their broader community outreach. For example, Santander Bank’s Cultivate Small Business initiative promotes small business ownership in underserved communities in Greater Boston.
  • Banks also recognize small business achievement with contests and awards. In May 2018, Citizens Bank announced Small Business Community Champion Award winners in Boston, Philadelphia and Pittsburgh.

Partner with local groups that promote small businesses.

  • Banks look to develop partnership with a host of local organizations that represent small business interests.  Prominent among these organizations are the more than 3,000 chambers of commerce located through the U.S.  Many banks team up with local chambers to carry out joint initiatives, such as hosting member events and carrying out surveys. Last November, Webster Bank hosted a cybersecurity event in partnership with Greater Boston Chamber of Commerce.

Publish market-specific versions of small business surveys. 

  • These surveys enable banks to highlight their presence in and commitment to particular markets.  In addition, market-specific findings can be leveraged by small business bankers to engage with small business owners in these markets.  Banks that have recently published market-specific versions of small business surveys include Bank of America, PNC and U.S. Bank.

To develop and implement an effective small business-focused local market strategy, banks need to:

  • Identify and profile key local markets (including the bank’s in-market presence and competitive environment, as well as the size and composition of the small business market)
  • Prioritize the markets for targeting
  • Tailor marketing programs based on goals and local market conditions
  • Gain input and buy-in from key local stakeholders, including branch managers and in-branch small business specialists
  • Track campaign performance, and distill learnings for use in other local markets and future campaigns

Issuers Report Strong Credit Card Loan Growth Across FICO Segments in 2017

According to the latest FDIC Quarterly Banking Profile, U.S. credit card loan growth accelerated in 4Q17, rising 8.2% to $865 billion.

Given the strong overall growth in credit card receivables, are issuers focusing their growth ambitions on particular FICO Score categories? To address this question, EMI analyzed 10K SEC filings for leading credit card issuers.  Overall, we found that issuers reported strong credit card loan growth across their FICO Score segments. We also studied trends in different issuer categories.

  • In the aftermath of the Financial Crisis, the three leading issuers—Chase, Bank of America and Citi—focused attention away from near-prime and sub-prime segments and towards superprime consumers.  This led to significant declines in both outstandings and charge-off rates.  More recently, as economic growth and consumer confidence returned, these issuers have refocused on loan growth and are once again targeting lower FICO Score segments.  This is seen in the chart below that shows changes in outstandings by FICO Score segment between end-2016 and end-2017.  As these issuers are pursuing loan growth, their credit card net charge-off rates have also increased (+26 bps y/y at Bank of America, +30 bps to at Chase, +59 bps at Citi-Branded Cards North America).  However, charge-off rates remained below 3% for each of these issuers in 4Q17, and issuers should continue to focus on loan growth while charge-off rates continue at these low levels.

  • Second-tier national credit card issuers—Discover, Capital One and Synchrony—reported relatively strong growth, but with different FICO Score segment trends.  Discover reported 9% y/y growth, with no y/y change in share of outstandings for the <660 and 600+ segments.  Capital One had a similar overall growth rate (8%), but this was driven in part by the acquisition of the Cabela’s card portfolio, which boosted the >660 FICO segment’s share of outstandings.  It is also worth noting that the <660 FICO segment accounted for 34% of Capital One’s credit card portfolio at the end of 2017, compared to 25% of Synchrony’s portfolio, and 18% at Discover.

  • Regional credit card issuers present a mixed picture when it comes to the FICO Score segment composition of their credit card portfolios. This is driven by a number of factors, including a large variation in portfolio sizes, as well as their credit card underwriting standards.  Most issuers report growth across their portfolios, with strong growth rates in the low FICO Score segments.  Fifth Third reported very strong growth for its <660 segment, but this segment only accounts for 3% of its portfolio.  Regions’ 20% growth in its <620 FICO segment was driven by its launch of a credit secured card in July 2017.

Finally, as most issuers reported strong growth in their credit card portfolios in 2017, charge-off rates are also on the rise, growing 45 bps y/y to 3.61% at the end of 2017.  While the overall charge-off rate has risen from a low of 2.19% in 3Q15, it is down both from post-recessionary highs of 13.13% in 1Q10, and even the 4% levels in 2007, prior to the Financial Crisis.  With charge-off rates still below 4%, the leading issuers continue to be comfortable with promoting credit card loan growth.