Credit Card Issuers Looking to Grow Loans Across the Credit Spectrum

An analysis of 10-K SEC filings by EMI Strategic Marketing has found that leading credit card issuers are looking to grow outstandings across a wider range of FICO Score segments.

In the aftermath of the Financial Crisis and Great Recession, issuers narrowed their focus, moving away from lower FICO Score segment, and concentrating their efforts on prime and superprime consumers.  In recent years, issuers have reduced charge-off rates to very low levels.  With the steady growth in the economy and rising consumer confidence, issuers see an opportunity to grow their credit card outstandings and many are willing to take on more risk in order to achieve the desired growth.

The four largest credit card issuers—Chase, Bank of America, Citibank and Capital One—all reported growth in each of their FICO Score categories in 2016.  Three of these issuers (the exception was Citi) had strongest growth in their lowest credit score segment.  Citibank had double-digit growth in large part due to the acquisition of the Costco portfolio from American Express, and this acquisition influenced the relative growth rate of different credit score segments.  Note that 36% of Capital One’s outstandings are held by consumers with credit scores below 660, compared to only 14% of Chase’s and 15% of Citibank’s (Citi-Branded Cards unit) outstandings.


Leading monoline credit card issuer Discover followed a similar pattern, with stronger growth for the <660 FICO Score segment, which accounted for 18% of total outstandings at the end of 2016.


Among the regional bank card issuers, Wells Fargo reported very strong growth (+19%) in the <600 segment, and consistent growth across most other segments.  However, it had a 7% decline in the 800+ segment, as it does not appear to have an affluent credit card that can compete effectively with American Express, Chase (which launched Sapphire Reserve in 2016) and Citibank.


Other regional bank card issuers are also looking to drive growth across the credit spectrum.  SunTrust, KeyBank and Regions have some of the strongest credit card loan growth rates in the industry, with very strong growth at the lower end of the spectrum.  In contrast, PNC had strongest growth in the 650+ FICO Score segments.


The following are some key considerations for issuers looking to grow outstandings across the credit spectrum:

  • Compare the FICO composition of the issuer’s credit card portfolio to its peers.  Assess the organization’s appetite to expand into new credit score segments.
  • Understand the financial needs, characteristics and behaviors of different credit score segments
  • Have products, offers and pricing in place for a range of consumer segments.
  • Invest in new marketing channels (and develop messaging) to reach different segments
  • Partner with other bank units that have strong connections with particular segments (e.g., wealth management and consumer financing units) in order to drive cross-sell to underserved segments
  • Ensure that company underwriting reflecting company objectives (while maintaining underwriting discipline).

Credit Card Issuers Focusing Growth on Different FICO Score Segments

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

Leading Bank Credit Card Issuer Focus on Higher-FICO consumers

A recent EMI blog highlighted the differing outstandings growth rates for different categories of credit card issuers, with the top three issuers (Chase, Bank of America and Citi) all reporting reduced outstandings, while regional banks are growing outstandings, albeit from much lower bases.

However, further analysis using data from annual regulatory filings reveals significant variations in outstandings within leading bank credit card portfolios for different FICO credit score categories.

The three leading credit card issuers reported lower outstandings between end-2011 and end-2012.  For each of these issuers, outstandings fell in all FICO categories, but the rate of decline was significantly higher for lower FICO segments, which led to higher FICO categories increasing their share of total outstandings.

  • 740+ FICO share of Bank of America outstandings rose from 38% in 2011 to 40% in 2012.
  • The 660+ FICO segment accounted for 84% of Chase credit card outstandings at the end of 2012, up from 81% in 2011
  • Citi has an even high concentration of outstandings held by consumers with FICOs of 660+, at 95% at the end of 2012, up from 91% a year earlier, and only 74% at the end of 2010.

Most of the leading regional bank credit card issuers grew outstandings in 2012, with stronger growth rates for higher FICO segments.

  • Wells Fargo reported y/y growth in all FICO segments, even in the lowest FICO segment.
  • PNC reported overall outstandings growth of 8% in 2012, fueled by an 11% rise for the 720+ segment, partially offset by a 5% decrease in outstandings held by consumers with FICOs below 620.
  • SunTrust followed a similar pattern to PNC, with a 25% increase in the 700+ FICO segment, and a fall of 12% in the <620 segment.
  • However, Regions bucked the regional bank trend with outstandings declines in the higher FICO segments and increases in the lower segments.

These trends are increasing competitive intensity for higher-FICO consumer credit card spending and borrowing, with new card launches, value-added features, bonus offers to drive acquisition and activation, and enhanced rewards programs to boost usage and retention, as well as cross-sell initiatives targeted at the bank’s private banking and wealth management clients.

In addition, the extent of the decline in sub-prime credit card portfolios means that many issuers are turning to non-credit card payment methods (including debit, prepaid and secured cards) to meet the payment needs of consumers with lower FICOs.