Tag Archives: Chase Card Services

Key Takeaways from Credit Card Issuers’ 3Q21 Financials

We have come to the end of the financial reporting season for the main U.S. banks, and the following trends are showing up in four key credit card metrics:

  • Outstandings
  • Volume
  • Charge-off rates
  • New account production

Leading issuers report y/y growth in outstandings. In recent quarters, issuers have reported strong y/y declines in outstandings, due to low economy activity and high repayment rates. In the most recent quarter, however, many issuers are now reporting y/y loan growth, led by American Express (+6%) and Capital One (+4%). This growth should continue in the coming quarters as payment rates moderate (in part due to the ending of federal COVID support payments).

Strong growth in credit card volume continues. All of the leading issuers who include volume data in their quarterly financials reported y/y growth rates of at least 20%, driven by the increase in economic activity, recent account growth and the ongoing transition to electronic payments. Many issuers are reporting that spending levels are well above 2019 levels. In addition, issuers are now reporting strong growth in categories where spending plummeted in 2020 during the COVID-19 pandemic, particularly travel & entertainment (T&E). American Express reported a 124% y/y rise in T&E spending in 3Q21, although this was still 29% below the 3Q19 level. Discover reported that 3Q21 travel spending was 1% higher than the same period in 2019. American Express has also reported that spending growth is being driven by younger consumers: its Gen Z and Millennial customers generated y/y spending growth of 38% between 3Q19 and 3Q21, vs. a 6% decline for Baby Boomers.

Charge-off rates have fallen to historic lows but may be bottoming out. Net charge-off rates for most leading issuers are now less than 2%, due to high payment rates and bank supports for consumers in arrears during the pandemic. Some issuers – such as Capital One – reported modest quarterly increases in delinquency rates in recent months, an indication that the decline in charge-off rates should bottom out in the coming quarter.

Issuers have started to ramp up new credit card acquisition activity.Wells Fargo and Bank of America more than doubled new accounts between 3Q20 and 3Q21, as production returned to pre-pandemic levels. Moreover, issuers appear to be committed to investing marketing dollars to drive further acquisition and usage. Capital One has ramped up its marketing spend by 79% y/y in the first 9 months of 2021 and expects to continue this investment in the fourth quarter.

Credit Card Issuers Experiencing Loan Growth Across FICO Spectrum…But Face Rising Charge-Offs

Most leading U.S. credit card issuers reported relatively strong y/y growth in outstandings in the first quarter of 2018.

Breaking these growth rates out by FICO Score segment, we see that issuers generated growth across multiple FICO Score categories.

  • There are important differences in the FICO composition of card portfolios.  The <660 FICO Score segment accounted for 34% of Capital One’s portfolio, a much higher percentage than other issuers, such as Fifth Third (3%), Chase (7%), KeyBank (11%), Citi (16%) and Discover (19%).
  • Among the largest issuers, one of the most notable trends was strong growth in the low-prime/sub-prime and super-prime segments, but low/no growth in their prime portfolio.  Bank of America grew its sub-prime (<620) outstandings by 6% and its super-prime (>720) increased 8%.  However, its loan portfolio held by consumers with FICO scores between 620 and 739 only increased by 2%.
  • Most regional bank card issuers (such as PNC, SunTrust and Regions) reported strong growth in their sub-prime and near-prime portfolios.  Fifth Third’s <660 FICO Score portfolio rose 43%, but this category only accounts for 3% of the bank’s credit card portfolio, so growth was from a very low base.

As issuers enjoy strong growth in their credit card outstandings—especially for sub-prime and near-prime consumer segments—it is worth noting that charge-offs are also on the increase.  Most issuers reported double-digit y/y basis-point growth in their credit card net charge-off rates.  Four of the 12 issuers below now have charge-off rates of more than 4%, and only one (American Express) has a charge-off rate of less than 3%.

So, while issuers want to grow credit card loans across the FICO Score spectrum, they need to ensure that various functions are all calibrated to ensure that cardholder delinquencies and charge-offs remain at manageable levels.  These functions include:

  • Underwriting
  • Marketing: targeting, offer development, and messaging
  • Pricing: fees and APRs need to be set at levels that balance cardholder ability to pay with an appropriate margin to offset potentially higher charge offs
  • Customer support: onboarding, financial education, as well as early engagement in cases where cardholders experience payment challenges

10 Credit Card Trends to Watch in 2015

As the credit card industry moves into 2015, economic growth and improved consumer confidence are fueling credit card industry optimism.  Here are ten trends that we believe will significantly shape the industry in the coming year.

  1. Outstandings growth will gain momentum.  As EMI reported in a recent blog, end-of-period outstandings at the end of 3Q14 were up 0.9% y/y.  Up to now, the strong growth by “monolines” and regional bank card issuers has been offset by the low growth or even declines among the top four issuers: Chase, Bank of America, Capital One and Citi.  However, even among this top-four segment, there are now signs of growth; Capital One grew average outstandings 2.6% y/y in 3Q14, while Chase reported growth of 1.8%.
  2. Focus on volume growth will continue.  Even as issuers shift their focus somewhat to outstandings growth, recent results from the main card networks—Visa, MasterCard, American Express and Discover—show that card volume growth remains robust.  This should continue in next few years; according to a recent issue of The Nilson Report, credit card’s share of consumer payment volume is expected to grow from 28% in 2013 to 36% in 2018.
  3. Card rates will rise.  Given issuers’ overwhelming dependence on variable-rate pricing, APRs should rise in 2015 in line with changes to the federal funds rate.  Other factors that may create upward pressure on APRs include the targeting of lower-FICO segments as well as ongoing enriching of rewards programs.  Issuers will continue to promote wide APR ranges rather than a single rate; this gives maximum flexibility is assigning the optimal price to match the perceived risk of default.  Given issuer focus on growing outstandings, expect to see growth in 0% introductory rates on both purchases and balance transfers.
  4. Charge-off rates may rise modestly…from historic lows.  Leading credit card issuers have expressed surprise at the scale and duration of the decline in charge-off rates in recent years.  The expectation is that, as issuers relax underwriting standards and grow credit lines, charge-off rates will rise towards more normal levels.  However, it is worth noting that 30+ day delinquency rates also remain very low, so it is also likely that charge-off rates will continue to bounce along the bottom for the first half of 2015.  Some leading issuers reported strong y/y growth in provision for loan losses in 3Q14 (e.g., American Express +16%, Capital One +17% and Discover +17%), but this appears to be mostly driven by anticipated growth in outstandings rather than an expectation that charge-off rates will rise significantly.
  5. Rewards will remain a key competitive battleground.  In 2014, Issuers once again upped the competitive ante among rewards cards, with a spate of new launches (e.g., Citi Double Cash, American Express EveryDay, Wells Fargo Propel).  And issuers’ twin objectives of growing card volume and reducing churn mean that rewards programs should continue to be a key focus for issuers in 2015.  Issuers will need to look beyond the earn rate in order to build or maintain a competitive advantage in this area; Discover recently eased restrictions on CashBack redemptions, informed by research that found that consumers value redemption experience and flexibility as much as a higher earn rate.
  6. New payment form factors will gain traction.  Two new payment methods will be followed with great interest in 2015: EMV cards and Apple Pay.  In advance of the October 2015 shift in liability for fraudulent transactions, issuers are rolling out EMV cards (70% of U.S. credit cards are expected to have chips by the end of the year) and merchants are upgrading terminals to handle EMV transactions (47% of terminals expected to be EMV-enabled by the end of 2015).  In addition, most issuers have entered into partnerships with Apple to offer ApplePay to their customers.  As with EMV, consumer and merchant acceptance will be key to Apple Pay’s growth prospects.  Issuers willingness to embrace these new forms of payment is encapsulated in a recent statement by American Express CEO Ken Chenault at a recent financial services conference: “..credit cards could be displaced…I really don’t care from a form factor standpoint because we’re agnostic. So plastic could go away. I could care less, could go away tomorrow.”
  7. Issuers will ramp up online and mobile marketing and sales.  As online (and mobile) banking has now achieved critical mass, issuers are increasingly incorporating cross-sell offers into consumers’ online banking sessions to benefit from fact that online average acquisition costs are significantly lower than traditional channels, such as direct mail.  Some leading issuers (e.g., Chase, American Express and Capital One) have also made significant investments in digital marketing, driven by both the lower acquisition costs as well as the ability to measure ROI.  The shift to online channels for new account production is being led by Chase, which reported that 54% of new card accounts were generated online in the first 9 months of 2014.
  8. Bank card issuers will increase focus on selling cards through their branch channel.  Regional banks are focused on increasing credit card penetration of existing clients.  They are also looking for products to focus on to realize branches’ potential as sales channels.   For inspiration they look to Wells Fargo, which has reported steady growth in credit card penetration of retail banking households (40% in 3Q14 vs. 27% in 1Q11).  The bank also reported that its branches accounted for 83% of card production in 2013.
  9. Issuers will continue to push bonus offers.  A number of factors that we have already discussed should ensure that bonus offers will remain high in 2015:
    1. The continued importance of rewards programs, with bonus offers playing a key role in driving new customer acquisition and activation
    2. Issuers are very unlikely to lower APRs in 2015, so bonus offers will be the main way to attract new cardholder awareness and interest
    3. The decline in average acquisition costs from using online and branch channels means that issuers can afford to offer strong bonus offers while maintaining profitability.
  10. Near-prime and sub-prime market will grow. In 2014, Wells Fargo and U.S. Bank both introduced American Express-branded cards with strong rewards and high annual fees, targeting superprime FICO segments.  However, there is a growing sense that this market is now saturated.  As issuers look for growth, they will be tempted to relax underwriting standards to reach prime and near-prime FICOs.  Issuers are less likely to target the sub-prime card market; this market is more likely to be targeted by newly-launched specialist sub-prime issuers, such as Fenway Summer’s FS Card Inc.