Tag Archives: Discover

Trends Impacting Credit Card Marketing

A review of various bank and credit card issuer presentations at the recent Barclays Global Financial Services conference revealed a number of trends that could have a significant impact on how credit cards are being marketed.

  • Priority is cross-selling existing customers.  Regional banks that have recently re-acquired their branded credit card portfolios (such as KeyBank and Huntington) are following the lead of Wells Fargo model, in cross-selling credit cards to existing customers (35% of Wells Fargo’s retail households have a Wells Fargo credit card).
    • Regions Bank—which acquired its card portfolio two years ago—reported that its credit card penetration rate is now 13%, and it has ambitions to grow this to 20%.  In addition, even issuers with a national credit card franchise are concentrating efforts on their own customer bases.
    • U.S. Bank is increasingly focused on deepening customer relationships and has increased card penetration to 34%.
    • And Bank of America claimed that 60% of new cards issued in the second quarter of 2013 were to existing customers.
  • The online channel is now the most popular method for new account production.  The popularity of the online channel for new cardholder acquisition is largely driven by its lower cost-per-acquisition relative to other channels, such as direct mail.  It is also a by-product of consumers’ increased comfort with using electronic channels to manage their finances.
    • American Express reported that more than 50% of card acquisition comes through online channels.
    • 71% of Bank of America’s new U.S. consumers credit card accounts came from branch and online channels in 2Q13, compared to 57% in 2Q11.
    • And these examples are consistent with recent data from Chase, who reported in 2Q13 that 53% of credit card accounts were acquired online.
  • Card issuance is growing. 
    • Bank of America claimed that its card issuance is at its highest level since 2008.
    • This mirrors recent data from Experian, which found that overall bank card origination volume (based on credit issued) jumped 21% y/y to $69 billion in 2Q12, the highest level since the fourth quarter of 2008.
  • Credit quality remains strong. Most issuers do not see any significant reversal in the continued downward trajectory in credit card charge-off and delinquency rates.
    • Discover does not envisage significant upward movement in its loss rates over the next 12 months.
    • Chase attributed part of the improvement in its credit-quality metrics to a shift in its customer mix toward higher-income consumers.
  • The competitive battle is centered on rewards.  Although most issuers now offer attractive teaser rates on their main cards, issuers are looking to differentiate and create a competitive advantage through their rewards programs.
    • Discover said that “rewards is the new competitive landscape” and this realization influenced the launch of its Discover It card.
    • U.S. Bank is looking to differentiate by taking its rewards program in-house, claiming that this will enable it improve redemption value, enhance the customer experience and customize rewards.

Trends and Implications from Credit Card Issuers’ 2Q13 Results

After analyzing the 2Q13 financial results for the leading U.S. credit card issuers, EMI has identified some common themes and emerging trends.

  • Outstandings: At first glance, the continued decline in outstandings for the top issuers is consistent with trends we have seen in recent years. However, some of these issuers stated their belief that this extended sequence of declines is coming to an end. Chase claimed that its credit card outstandings have reach an inflection point and it expects growth in the coming quarters. Bank of America also emphasized signs of recent outstandings growth, and claimed that card issuance was at its highest level since 2008. During the quarter, strongest growth rates were reported by monolines and regional banks, but these smaller issuers may face renewed competition from the top issuers in the coming quarters. Some issuers reported yield declines in 2Q13, with Discover attributing a 24 basis point yield decline over the past year to an increase in promotional rate balances and a decline in higher rate balances.

  • Volume: Many of the leading issuers improved their card volume growth rates in the second quarter, as the economy continued to recovery, and as consumers responded to rewards-based promotions. In the coming quarters, expect issuers to continue to promote their rewards programs (in particular to attract more affluent cardholders), while increasing their focus on introductory offers and APRs as they seek to grow loans.

  • Revenue: In recent years, credit card revenue growth has been anemic, as issuers have struggled with loan growth, and have had to adjust to new fee structures following the CARD Act. However, the latest financials provided some encouraging news. American Express grew net interest income 6% y/y (benefitting from a 4% rise in outstandings) while its noninterest income rose 5% (driven by an 8% rise in volume). Discover generated even stronger growth in both net interest income (+9%) and noninterest income (+14%). Given the fundamental changes to the card industry in recent years, expect issuers to continue to seek balanced overall revenue growth between net interest income and noninterest income, and avoid an over-dependence on either aggressive lending or fees to meet their revenue targets.
  • Charge-Off and Delinquency Rates: Issuers continue to benefit from declines in charge-off rates. Of the 11 leading issuers who reported charge-off rates, 8 reported y/y declines, while one issuer was unchanged. Two issuers (American Express and Discover) had charge-off rates below 3%, while 5 other issuers (Chase, Citi, Fifth Third, PNC and Wells Fargo) had rates below 4%. In addition, 30+ day delinquency rates also continue to decline, with 8 of 9 issuers reporting y/y declines (the exception was Capital One, due to its acquisition of the HSBC portfolio).

Looking ahead, to the extent that issuers focus on outstandings growth (with more aggressive introductory offers on balance transfers, lower APRs and more relaxed underwriting standards), both charge-off and delinquency rates should rise from their current low levels. However, recent trends in outstandings and volume indicate that consumers increasingly see their credit cards as an efficient, convenient and more rewarding payment method, and less simply as an easy source of credit. Whether this is a temporary phenomenon in the aftermath of the financial crisis or a long-term change has profound consequences for how credit cards are positioned, promoted and priced.

Tentative Recovery in U.S. Credit Card Lending Continues in 1Q13

EMI’s analysis of recently-published U.S. bank data by the FDIC reveals that credit card outstandings rose 1.6% y/y to the end of 1Q13.  Outstandings have been recovering in recent quarters, following a protracted period of declines as a result of the 2008 financial crisis.  In addition, net credit card charge-offs continue to decline, falling 12% y/y in 1Q13.

Our analysis also finds that:

  • 1,238 U.S. banks (19% of the total) have card assets, with 6% of banks having more than $1 million in card assets.  55 banks have more than $100 million in outstandings, with just 23 banks holding more than $1 billion in credit card loans.
    • Of the 55% with more than $100 million in assets, 31(56%) reported increases in their credit card loan portfolios between end-1Q12 and end-1Q13
  • The three largest credit card issuers–Citibank, Chase and Bank of America–all continued to report credit card loan declines, as they continue to deleverage.  The cumulative decline for these three issuers was 5%.
  • The former “monolines”–American Express, Discover and Capital One–all increased outstandings.  Capital One reported a 44% increase, largely due to the acquisition of the HSBC card portfolio.  American Express grew credit card loans 6%, with Discover’s outstandings rising by 7%.
  • Many regional banks continued to increase credit card lending, albeit from significantly lower bases than their national bank counterparts.

These trends in credit card outstandings–slow overall growth, declines among the big three issuers, growth for monolines and regional banks–are consistent with industry predictions that EMI published in a blog earlier this year.