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.

Are banks poised to boost marketing budgets?

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.

bank_marketing_spend_change

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).

marketing_percent_of_revenues_YTD-3Q14

marketing_percent_of_revenues_card_charters_YTD-3Q14

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.

Positive Signs in Leading Credit Card Issuers’ 2Q14 Financials

The 2Q14 financials for leading U.S. credit card issuers had a number of positive elements, notably a return to outstandings growth, along with continued strong performance in volume and credit quality metrics.

Outstandings

In a recent EMI blog post, we suggested that the extended series of declines in credit card outstandings had bottomed out.  The latest quarterly performance metrics for the leading U.S. credit card issuers provides more evidence of this turnaround: EMI’s analysis of 13 leading U.S. card issuers found a 1% year-on-year (y/y) growth rate in average outstandings in 2Q14.

average_outstandings_2Q14

Growth was led by SunTrust, which grew outstandings 19% y/y, albeit from a low base.  Wells Fargo continued its strong outstandings growth rate, with a 10% y/y increase as Wells Fargo credit card penetration of retail banking households reached 39% (from 35% in 2Q13).  The top four issuers—Chase, Bank of America, Capital One and Citi—once again acted as a brake on overall industry growth.  However, even these four issuers are seeing positive signs.  Chase’s new account production rose 40%.  Capital One reported a 1% rise in end-of-period outstandings, as it returned to growth earlier than anticipated, driven by a combination of rewards, non-high-balance revolvers, and credit line increases.  Even though Citi reported a 3% y/y decline, it attributed this to continued run-off in promotional rate balances, whereas full-rate balances have grown for five consecutive quarters.

Volume

In the absence of credit card outstandings growth in recent years, issuers have focused on volume growth.  This growth continued and even accelerated in the most recent quarter (for the eight leading issuers reporting card volume, y/y volume growth rose from 7% in 1Q14 to 9% in 2Q14). Issuers attributed this growth to a combination of new account growth and increases in average cardholder spending.

card_volume_2Q14

Six of the eight issuers in the above chart had stronger y/y volume growth in 2Q14 compared to 1Q14.  As in previous quarters, Wells Fargo and Chase led the industry.  Wells Fargo benefited from both account growth as well as a 14% rise in average spending per account, as more cardholders moved their Wells Fargo card to top of wallet.  Capital One reported an 11% growth rate, but claimed that if private-label cards were excluded, its growth rate was 16%, driven by continued marketing and customer experience initiatives.

Credit Quality

With charge-off and delinquency rates below historic norms for many issuers, one would expect that a push for outstandings growth would lead to upward pressure on these rates.  However, this has not been the case, and issuers continued to report significant y/y and q/q declines in charge-off rates in 2Q14.

charge-off_rates_2Q14

Of the 12 leading issuers reporting credit-card charge-off data, 10 reported double-digit y/y declines.  The two main “monolines”—American Express and Discover—continued to have the lowest rates, but SunTrust and Chase now also have charge-off rates below 3%.

Implications

These positive metrics are clear signs that the credit card industry’s recovery from the 2008 financial crisis and resulting Great Recession, is gaining momentum.  For issuers looking to capture a share of this growth, the following are some areas they should consider:

  1. Cross-sell and upsell existing customers.  There has been much coverage in the industry of Wells Fargo’s continued growth in its credit card penetration rate, which has fueled strong outstandings and volume growth.  Regional bank card issuers also tend to follow this cross-sell model, although most of these lack Wells Fargo’s cross-sell expertise and experience.  However, leading issuers are now taking a growing interest in cross-selling existing customers; for example, Bank of America reported that 65% of its new credit cards issued in 2Q14 were to existing bank clients.  Issuers should also commit to regularly assessing existing cardholder qualification for card “upgrades”, and then make appropriate upsell offers.
  2. Invest in multiple credit card sales channels.  For many years, direct mail was the overwhelmingly dominant channel for new account generation.  However, a number of factors are leading to a change in the credit card sales channel mix, including:
    • A general decline in direct mail as a marketing channel, driven by both lower response and the emergence of lower-cost channels.
    • Increased customer usage of online and mobile banking channels, and increased bank industry recognition of the sales potential of these channels.  54% of new Chase credit card accounts in 2Q14 were acquired online.
    • The reduced usage of bank branches for everyday transaction processing has led to a redefinition of their role, with banks now looking to realize branches’ potential as sales channels.  Wells Fargo recently reported that 83% of its general-purpose credit cards were sold in its Community Banking stores.
  3. Develop offers to drive desired cardholder behavior.  Issuers need to have a series of offers available to drive specific cardholder actions at different stages of the customer life cycle (e.g., activation within 90 days of acquisition; retention during the card expiration period; card usage and referrals on an ongoing basis), which ultimately help optimize customer lifetime value.
  4. Continue to focus on rewards.  Issuers are increasingly aware that rewards products and programs are integral to achieving retention and growth objectives, so there is a need to continually assess how key program elements—such as earn rates (basic and bonus) and user experience—stack up against competitors.
  5. Invest in credit card brands.  It is notable in recent years that many credit card issuers are creating and supporting card brands, both to generate build stronger customer awareness, as well as acting as a point of differentiation from competitors.  These new brands apply to both:
    • Individual cards (e.g., Santander Bank’s Bravo and Sphere cards, and Huntington’s Voice card)
    • Card portfolios; this is especially prevalent in the small business sector, with issuers like Chase (Ink), Capital One (Spark Business) and U.S. Bank (Business Edge) all branding their small business card portfolios.