Leading Credit Card Issuers Focusing Growth on Multiple FICO® Score Segments

November 10, 2016

In a recent blog, EMI discussed some key takeaways from leading credit card issuers’ 3Q16 earnings, one of which was the relatively strong growth in credit card outstandings. In this blog, we look deeper into outstandings trends to identify what FICO Score segments issuers are focusing on to grow outstandings.

Firstly, it is notable that leading issuers reported y/y growth in credit card outstandings across multiple FICO Score segments. However, there were important variations among the issuer categories:

Largest issuers: The following chart looks at y/y changes in outstandings by FICO Score for both Bank of America and Chase. (Citibank also published data on the FICO Score composition of its credit card outstandings, but these were skewed by the acquisition of the Costco portfolio from American Express, so we did not include Citibank in the analysis.) Bank of America generated low growth across most segments, as it struggles to grow overall outstandings following a protracted period of declines. Chase’s growth was concentrated in the 660+ FICO Score segment, boosted by the recent launches of both Sapphire Preferred and Freedom Unlimited.

Monolines: Capital One and Discover both generated strong growth in the lower FICO Score (660 and under) segment. This segment now accounts for 36% of Capital One’s total credit card outstandings, significantly higher than Discover (18%) and Chase (14%).

Wells Fargo: in spite of the fallout from the recent fake-account scandal, Wells Fargo continued to growth credit card outstandings in 3Q16. It reported strong growth across most FICO Score segments, with particularly strong growth in the subprime segment. However, it continues to struggle to grow superprime outstandings, as it lacks a card that can truly compete against high-profile affluent cards like American Express Gold and Platinum, and Chase Sapphire Preferred.

Regional Bank Card Issuers: SunTrust, Regions and PNC all reported strong overall growth. SunTrust reported very strong growth across all segments. Regions’ outstandings growth was concentrated in the low-prime and subprime segments. However, PNC’s outstandings growth was concentrated in higher-FICO Score segments, driven by the April 2016 launch of the Premier Travelers Visa Signature® card.

As issuers seek to continue to increase overall credit card loan growth, it is likely that they will continue to focus on multiple FICO Score segments. They will also be looking to identify underperforming segments, diagnose reasons for this underperformance (e.g., deficiencies in cards, offers or communications targeting these segments), and develop initiatives to improve performance. Similarly, issuers will want to identify if they are overly dependent on certain segments for outstandings growth or share, and whether this dependence leaves them vulnerable to changes in the macroeconomic or competitive environments.

Key Takeaways from Leading U.S. Credit Card Issuer Quarterly Financials

November 4, 2016

EMI’s review of 3Q 2016 financials for the largest U.S. bank and credit card issuers revealed several trends:

Acceleration in outstandings growth. Average outstandings rose 6% y/y in 3Q16 for the 13 issuers in the study; this growth rate marks an increase from previous quarters (3% in 2Q16 and 2% in 1Q16).

American Express reported a 14% y/y decline, due to the loss of the Costco and JetBlue portfolios; excluding these portfolios, it grew loans by 11%.
Bank of America reported no change in average outstandings, ending a protracted period of loan declines due in large part to divestitures.
Regional bank card issuers continue to focus their attention on cross-selling credit cards to existing clients. Regions grew outstandings by 11% and reported that its credit card penetration rate rose 130 basis points (bps) y/y to 18.2%.

Continued volume growth. EMI analyzed volume data for 8 leading issuers, and found cumulative y/y growth of 9% in 3Q16.

American Express’s sale of the Costco card portfolio to Citi led to a 15% decline in its card volume, while Citi’s volume rose by 57%.
Issuers are launching new rewards cards and enhancing existing rewards programs to drive additional volume. Discover reported that its rewards costs rose 13% y/y to $368 million in 3Q16, and its rewards rate rose by 13 basis points to 1.20%. However, Discover has been struggling to grow volumes in recent quarter, with y/y growth of just 2% in 3Q16, down from 4% in 1Q16 and 3% in 2Q16.

Ramp up of card account production. Related to—and encouraged by—the growth in outstandings, issuers are ramping up new card acquisition.

Bank of America issued 1.32 million new U.S. consumer credit cards in 3Q16, the strongest quarterly performance since 2008.
Chase benefited from the launch new cards (Sapphire Reserve and Freedom Preferred) to grow new card production 35% y/y to 2.7 million. Chase reported at the BancAnalysts Association of Boston Conference this week that it opened more than 1 million new Freedom Unlimited accounts in the five months following its launch.
Issuers are investing more in marketing in order to drive growth. American Express grew its marketing and promotion spend 10% y/y for the first 9 months of the year, to $2.4 billion.

Charge-off rates remain very low. For many issuers, net charge-off rates continue to operate at or near historic lows, with seven issuers reporting rates below 3%.

There is some evidence of upward movement in charge-off rates as issuers chase growth. 8 of the 12 issuers in the chart below reported y/y rises. And most issuers are reporting y/y rises in 30+ day delinquency rate (which have traditionally been an indicator of future charge-offs).
However, issuers expect that rates will not rise significantly in the coming quarters. For example, Chase reported a charge-off rate of 2.51% in 3Q16, and projects that this rate will rise to about 2.75% in 2017.
Capital One did report a 66 bps y/y rise in its charge-off rate; this is related to the fact that it is continuing to target low-FICO segments; the <660 FICO score segment accounted for 36% of Capital One’s outstandings at the end of 3Q16, up from 34% at the end of 3Q15.

Credit Card Issuers Focusing Growth on Different FICO Score Segments

May 24, 2016

The Wall Street Journal recently reported that credit card outstandings may reach the $1 trillion threshold in 2016, for the first time since before the 2008 Financial Crisis. This is mainly due to overall economic growth and the rise in employment. Issuers are now increasing their focus on growing outstandings by making aggressive acquisition-and-activation offers (American Express is currently offering a bonus of up to $300 on its Blue Cash Everyday Card), promoting lengthy introductory offers, and increasing credit lines for existing cardholders.

A big question for issuers is, should they concentrate efforts on particular FICO score segments, or seek to drive growth across the FICO score spectrum? In the aftermath of the Financial Crisis and the resulting huge spike in charge-off rates, many leading issuers narrowed their focus, concentrating on the high-FICO score affluent segments, and ignoring subprime and low-prime consumers. However, as the economy has continued to recover, at appears that some issuers have renewed interest in the lower-FICO score categories.

EMI’s analysis of leading issuers’ 1Q16 SEC filings reveals that issuers are following different approaches:

1. Growing outstandings across all FICO score segments. Regional bank card issuers like Wells Fargo and Regions have relatively strong growth across all FICO score segments. It is notable that the <600 subprime segment accounts for 9% of Wells Fargo’s outstandings, a higher percentage than for other issuers. Wells Fargo issues a subprime card and recently incorporated a free FICO score into its mobile banking app.

2. Generating stronger outstandings growth in low-FICO score segments. Capital One, Discover and SunTrust all have markedly strong growth rates in outstandings for low-FICO segments. 35% of Capital One’s outstandings come from the <660 FICO segment, whereas this segment accounts for only 18% of Discover’s outstandings. Discover grew <660 outstandings by 12% (to $10.0 billion), and it is worth noting that Discover launched the Discover it Secured Card in January 2016. SunTrust grew its <620 FICO portfolio by 39%, although this was coming from a low base of just $45 million.

3. Continuing to focus outstandings growth on higher FICO score segments. The three largest issuers—Chase, Citi and Bank of America—all continue to experience declines in outstandings in their lower FICO score segments, which is offset by growth in higher FICO score categories. Regional bank card issuer PNC also follows this pattern.

As issuers look to continue to grow outstandings (and appear to be willing to let charge-off rates rise from their current low levels), they will need to develop approaches to target the different FICO score segments, including:

Ensuring they have products in place to target different FICO score—and demographic—segments.
Developing messaging, pricing, acquisition/activation offers and ongoing incentives to both attract new cardholders and encourage existing cardholders to increase their spending and borrowing
Creating tools (such as free FICO scores) to educate consumers on understanding how their credit scores are determined and how they can practice good credit management