Tag Archives: Credit card

Credit Card Issuers Continue to Pursue Spend-Centric Model

First quarter 2012 results of the leading U.S. credit card issuers reveal that they are continuing to drive spending growth by cardholders. Four of the seven leading issuers reported double-digit year-on-year growth rates, led by Chase and Capital One at 15%, followed by U.S. Bank at 14% and American Express at 12% (American Express also reported that small business card volume rose 16% y/y, its highest growth rate since before the financial crisis.  In contrast, Bank of America and Citi had anemic – albeit positive – growth rates.

The situation with regard to lending growth is more mixed. With the return to economic growth, and the significant improvement in credit quality, issuers have been looking to increase outstandings. However, consumers still bear the scars of the financial crisis and remain reluctant to increase their card borrowing. In addition, many issuers have not yet significantly relaxed the stricter underwriting standards that came into place in 2008 and 2009. The three largest issuers (in terms of outstandings) all reported y/y declines, with Bank of America’s average loans falling 11%. Bank of America’s average U.S. credit card outstandings have declined almost 22% over the past two years, and fell below $100 billion in the most recent quarter.  (It should be noted that this decline is partly attributable to card portfolio sales, with the bank selling portfolios over the past year to Regions, Sovereign and Barclaycard.)  Bank of America and Citi were the two issuers with declines in both volumes and outstandings. Chase also reported a y/y decline in average outstandings, but this was due to the sale of the Kohl’s private label portfolio in the first quarter of 2011.

So, at first viewing, we see some credit card portfolio retrenchment among those banks like Bank of America and Citi that were hardest hit by the financial crisis, while other leading issuers are now growing their portfolios. However, at closer inspection, Bank of America and Citi are also positioning themselves for future card growth. Citi had credit card account growth for the fourth consecutive quarter. And Bank of America reported that new accounts in 1Q12 were up 19% y/y.

In addition, it is notable that Bank of America is changing the composition of its card portfolio by selling off some private-label card portfolios and changing how cards are originated. (It reported that half of the 800,000 cards originated in the first quarter came through its branch channel.)

10 payment trends for 2012

As we head in 2012, we gaze into our crystal ball to identify some key trends in the U.S. payments sector. Of course, it should always be recognized that the macro environment will have a significant impact on the payments sector. At present, there are signs of U.S. economic recovery, but this recovery remains fragile.

  1. Continued growth in credit card spending: in recent quarters, credit card spending has recovered significantly from the declines it experienced in 2008-09. This is partly due to economic recovery, but issuers are also increasingly marketing credit cards as effective payment tools for everyday purchases. The Nilson Report recently predicted that credit card’s share of payments volume will rise from 24.5% in 2010 to 31.0% by 2015. In addition, expect issuers to try to drive significant growth in small business credit card spending in 2012. This will of course depend on growth in small business optimism, but card’s share of small business expenditure remains very low, and issuers see huge growth potential in this sector.
  2. Growth in debit card spending, but with some headwinds: Debit cards have enjoyed very strong growth over the past decade, and this growth should continue in 2012 as consumers switch payments volume away from cash and checks. However, there are a number of factors that will eat into debit cards growth trajectory, including: lingering impacts from the October 2011 debit card fee debacle, banks dropping debit rewards in response to lower debit interchange rates, and (again related to interchange) banks increasingly pushing credit cards (with rewards) for everyday spending.
  3. Strong growth for prepaid cards: Issuers increased issuance and marketing of prepaid cards in 2011, and this resulted in very strong prepaid card volume growth. We expect this growth to continue in 2012, as consumers get increasingly comfortable with using such cards, and as issuers find new spending applications for these cards (online and offline).
  4. Mobile payments to gain some traction: mobile payments was one of the hot payments topics of 2011, with the launch of Google Wallet, development of the Isis joint venture, Visa and MasterCard developing mobile payment strategies, and Square reaching 1 million merchants. Bank Technology News recently reported that sales of NFC-enabled smartphones are expected to grow by 129% in 2012, and this will further propel mobile payments emergence. However, there will continue to be significant challenges for mobile payments in 2012, including: merchant acceptance, tensions in mobile payments partnerships, privacy and security concerns, as well as the need to develop the value-added features that will encourage consumers to switch from existing payments methods. It is also worth noting that much of the hype around mobile payments is based on a vision of using a smartphone for point-of-sale purchases. However, note that two big growth areas for mobile payments in the near term are person-to-person payments and e-commerce.
  5. Card charge-off and delinquency rates to “normalize”: issuers net charge-off and delinquency rates spiked dramatically following the financial crisis, and have fallen sharply over the past two years. There are definite signs among many leading issuers that these declines are abating. However, some leading issuers (notably Bank of America and Citi Cards) continue to have relatively high rates, so will work to reduce these further in 2012. Other leading issuers now have rates that are below historic averages, so may be willing to loosen underwriting criteria somewhat in order to grow lending.
  6. Focus on customer relationship optimization: as competitive intensity increases in 2012, issuers will continue to invest in post-acquisition customer communications (activation, retention, cross-sell, upsell and share of wallet growth). Issuers will increasingly seek to build data-driven customer communications (although significant internal hurdles will remain).
  7. Emergence of more customer-centric product portfolios: some issuers have been revamping their product suites over the past two years. This process should continue in 2012 and will involve: streamlining existing portfolios (to eliminate multiple cards with very similar characteristics), introducing new products to reach new audiences (e.g., high-end and secured cards), versioning of cards with higher fees for high rewards earning, as well as closer integration of emerging payments into the product suite.
  8. Continued APR tiering, but with changes: with issuers likely to focus on outstandings growth in 2012, they will look to be price competitive. In such a fragile economic environment, the Fed is unlikely to change its interest rate policy in the coming months, which means that issuers will continue to use variable APRs. They will also continue to use tiered APR pricing, but expect some downward pressure on the lower and upper tiers.
  9. Growth of introductory offers on balance transfers: issuers who do not plan to compete aggressively on APRs will look instead to build outstandings through 0% introductory offers on balance transfers for 12+ months, in some cases accompanied by lower BT fees for transfers made during an initial period.
  10. Rewards: with most issuers eliminating rewards on debit card spending, issuers will seek to grow their credit card rewards programs, as this will drive volume and interchange revenue. However, with the focus on cost containment, issuers will look beyond interchange revenue to fund these programs, including: imposing annual fees (to fund high-level rewards programs), offering merchant-funded programs, and sharing funding with other departments for relationship reward programs.

Credit card issuers show renewed interest in private-label cards

In recent months, some leading credit card issuers have shown a growing interest in creating or growing private-label credit card portfolios:

  • Capital One announced the acquisition of HSBC’s $30 million card portfolio in August 2011.  This follows its April 2011 purchase of Kohl’s private-label portfolio.  In reporting 3Q11 financials, Capital One indicated that it would be interested in acquiring more private-label portfolios.
  • This week, the Wall Street Journal reported that Wells Fargo is actively exploring whether to issue private label cards
  • In reporting 3Q11 financials, Citigroup announced that it would be moving its private-label card portfolio from Citi Holdings (it asset-disposal unit) to Citicorp.  And it recent renewed its private-label card issuing deals with Shell, Sunoco and Sears.
  • TD Bank has recently entered into a number of deals to issue cards for: Cartier; Furniture First; and Bailey, Banks and Biddle.

There are a number of reasons for issuers’ renewed interest in this market:

  • Credit quality metrics have improved significantly in recent quarters, for both own-branded and private-label cards, with very strong declines in charge-off and delinquency rates.  For example, the net credit loss rate for Citi’s Retail Partner Cards portfolio fell from 12.24% in 3Q10 to 7.51% in 3Q11.  During the same period, the portfolio’s delinquency rate fell from 7.94% to 5.70%.
  • With loan-to-deposit ratios now well below 100% for many leading banks, and with continued pressure on net interest margins, banks are looking to grow loans in new categories
  • Given the recent growth in commercial and corporate lending, banks are also seeking to cement relationships with large corporate clients
  • The CARD Act has impacted revenues and profitability from issuers’ own-branded card operations.  As a result, some issuers are looking to build scale to their card operations by investing in various card categories

In building their private-label card portfolios, issuers need to understand how the marketing of credit card has changed in recent years.  Today, credit card marketing is more focused on encouraging cardholders to allocate a greater share of their everyday spending to cards, rather than cash or checks.   And even though outstandings are showing some tentative signs of growth, issuers are not aggressively chasing loan growth with aggressive interest rates and low underwriting standards.  In building their private-label portfolios, issuers need to apply these learnings and take the longer-term view, in order to avoid the mistakes of the past.