Key takeaways from leading credit card issuer 3Q15 financials

October 30, 2015

The following is a list of several trends that EMI Strategic Marketing identified in leading credit card issuers’ 3Q15 financials:

Regional bank card issuers continue to lead in receivables growth. A key factor: regional banks, such as SunTrust and Wells Fargo, are focused on cross-selling credit cards to their bank customers.

Many national issuers not (yet) growing loans, but are ramping up new account generation. National credit card issuers like Citi and Bank of America reported y/y loan declines in 3Q15, due to continued run-off of legacy portfolios. However, both of these issuers are confident that their portfolios will grow in the near future. Citi reported that it is ramping up card acquisition for its core products, and this is starting to pay off with 6% y/y rise in active accounts. Credit card “monolines” are also investing in new account generation. Discover new account generation in 3Q15 was at its highest level since 3Q07. And American Express reported an 8% y/y rise in marketing and promotion spending, with a focus on attracting new card members. As a result of this investment, American Express generated 2.3 million new accounts in 3Q15, compared to a quarterly average of 1.6 million in 2014.
Card volume grew…but was impacted by low fuel prices. Leading issuers continued to report growth in purchase volume, but the y/y rate of growth was lower than in recent quarters, in large part due to low fuel prices. Discover reported y/y sales volume growth of 2.6%. However, excluding gas, the growth rate was 7%. Issuers reporting very strong volume growth included Capital One (+19% y/y), which is benefitting from its focus on transactors, and Wells Fargo (+15%).
Issuers are growing revenues…and expenses. Six of the largest U.S. credit card issuers have dedicated payment units, which publish quarterly revenue and expense data. Since the financial crisis, revenue growth has been elusive for issuers, but in 3Q15 four of the six issuers reported y/y growth in revenue. Benefitting from loan growth, five of the six issuers reported growth in net interest income. And three of the six reported noninterest income growth. However, as issuers are looking to generate new accounts as well as loan and volume growth, they are increasing their noninterest expenses. Banks with the largest y/y increases in noninterest expense in 3Q15 included American Express (+11%), U.S. Bank (+9%) and Discover (+8%).
Credit card yield shows signs of growth. Of the seven leading issuers who reported yield data in their quarterly financials, four reported y/y growth. In addition, six of the seven reported q/q rises in yield. This indicates that in the post-CARD Act environment, issuers are not competing aggressively on price, but are instead concentrating on enhancing rewards, providing additional value-added features, and making large acquisition-and-activation bonus offers.

Charge-off rates continue to decline…and may fall even further. As we have mentioned in previous blogs, credit card net charge-off rates are well below historical averages. Reasons for this extended decline include tight underwriting on the part of issuers and an aversion to building up large credit card debt on the part of cardholders. In its earnings conference call, Discover characterized the credit loss environment as “remarkably benign.” With continued y/y declines in 30+ day delinquency rates (which have historically been a predictor of charge-off rates), issuers are not expecting the charge-off rate to spike in the near term, and in fact rates may continue to decline further.

10 Credit Card Trends to Watch in 2015

January 9, 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.

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%.
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.
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.
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.
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.
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.”
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.
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.
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.
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.

Are banks poised to boost marketing budgets?

December 3, 2014

In recent years, banks have been primarily focused on cost cutting. However, as the U.S. economic recovery continues to gain momentum, banks are identifying opportunities for revenue growth. As banks look to capture this, they will obviously be looking at the size and composition of their marketing budgets.

EMI’s analysis of the latest FDIC data for 20 leading retail banks found little evidence that banks are growing their marketing budgets. In fact, marketing spending for these banks over the first 9 months of 2014 was 2% lower than the same period in 2013. As seen in figure 1, 10 of the 20 banks reported growth in their marketing budgets, led by PNC and Capital One.

These 20 banks invested an average of 1.5% of their net revenues in marketing during the first 9 months of 2014. Although this marketing-to-revenue ratio rose 2 bps y/y, it is well below the 2% average that existed prior to the financial crisis. For banks looking to grow revenues, they will need to return marketing-to-revenue back to this 2% level.

Figure 2 shows that 14 of the 20 banks have marketing-to-revenue ratios of between 1% and 2%. For Chase, Bank of America and Capital One, the ratios are for their retail bank charters; marketing-to-revenue ratios for these banks’ credit card charters are much higher (as seen in figure 3).

Of course, banks looking to increase their marketing investment in order to grow revenues also need to ensure that these marketing budgets are effectively deployed, in order to optimize marketing ROI. The following are some considerations for banks as they prepare marketing budgets for 2015:

Consumer perceptions of banks have changed. In the aftermath of the financial crisis, banks suffered reputational damage as they were seen as key contributors to the crisis. In recent years, banks have worked hard to change their business models in order to focus on their core competencies (and this has been recently seen in improved customer satisfaction ratings). Marketing will play a key role in communicating banks’ key positioning as trusted providers of financial services and support.
Consumer banking behavior has changed. Consumer adoption of self-service-channels (online, mobile, ATM) has now attained critical mass and these channels account for a majority of everyday banking transactions. These channels create significant advertising and cross-selling opportunities (and challenges) for banks.
Bank branches have untapped marketing potential. As everyday bank transactions move to self-service channels, banks are cutting branch numbers and reinventing various aspects of the branch (size, layout, staffing, integration with other channels). Banks should also consider the fact that the branch is the key physical expression of the bank brand, and should allocate a portion of their marketing budgets to capturing branches’ marketing potential.
Bank need to embrace non-traditional marketing channels. Younger demographic segments (such as millennials) have very different media consumption patterns than their older peers, with significantly higher usage of online/mobile and social media. However, banks’ innate conservatism has resulted in their failure to fully embrace new embrace new media. Banks need to both significantly increase their investment in non-traditional marketing channels, but also find innovative ways to convey their core messages to a new audience.