Tag Archives: Discover

What will happen in the U.S. credit card industry in 2013: 10 potential trends

As it enters 2013, the credit card sector is looking to continue its slow-but-steady recovery following the financial crisis in 2008-09. The following are a series of industry trends that we expect to see over the next 12 months:

  1. Outstandings growth, but not for top three issuers. Economic recovery and returning consumer confidence should result in consumers increasing their demand for credit. However, the lingering scars from the financial crisis for both banks and consumers will temper this demand.  The top three credit card issuers (Chase, Bank of America and Citi) have scaled back their portfolios dramatically in recent years. These issuers claim that this period of retrenchment is coming to an end, but they are highly unlikely to grow their portfolios significantly in 2013.  Instead, outstandings growth will come from issuers like:
    • Discover: recently reported 6% y/y growth in outstandings and plans to continue to push lending growth
    • Wells Fargo: grew average outstandings 9% y/y in 4Q12, as it continues to grow credit card penetration of its retail banking households (from 27% in 1Q11 to 33% in 4Q12)
    • Other regional banks, such as SunTrust, Fifth Third and PNC: who all reported strong y/y outstandings growth in 3Q12 (albeit from relatively low bases), and who (like Wells Fargo) are focused on cross-selling credit cards to existing customers
  2. Push for loan growth to lead to (some) price competition. In recent years, credit card APRs have been relatively high. Even as competition returned to the affluent card market in 2011 and 2012, there was little or no evidence of APRs moving downwards, with issuers competing instead with bonus points and tiered rewards programs. 2013 may bring some downward pressure on APRs, but issuers will continue to focus on both bonus offers and low introductory rates on purchases and/or balance transfers.
  3. Lower rate of volume growth. Over the past two years, in the absence of loan growth, issuers have been focusing on growing volume, but there are recent signs that the rate of growth is slowing down. American Express recently announced 8% volume growth in 4Q12, down from 11% in 4Q11 and 15% in 4Q10. Issuers will continue to target volume growth in 2013, but will be looking for volume and loan growth to be more in synch than in recent years.
  4. Return of revenue growth. With the expected return to some outstandings growth, net interest income should grow significantly in 2013, in particular with interest expense remaining low. Noninterest income will benefit from continued volume growth, but this will be partially offset by many issuers pulling back on marketing payment protection products, which featured prominently in a number of issuer settlements in the past year.
  5. Charge-offs and delinquency rates to return to a more “normalized” pattern. For many leading issuers, charge-off rates are below historic levels. As issuers begin to target outstandings growth, they will be willing to accept small increases in the charge-off rate. Some issuers are reporting q/q growth in delinquency rates, indicating a return to seasonal patterns that have been largely absent in recent years.
  6. Pressure to reduce rewards program costs. Issuers’ desire to grow purchase volume among more affluent cardholders in recent years has led to a significant focus on their rewards programs, with the development of tiered rewards, as well as aggressively positioned bonus offers. There are a number of factors that may lead issuers to scale back these rewards-based offers in 2013, including:
    • The continuing need to control costs;
    • The desire for a more even balance between outstandings and volume growth; and
    • The opportunity to develop more merchant-funded offers, in particular as merchants seek to capture consumer spend as it moves to online channels.
  7. Growth of personalized offers. Advances in data analytics create opportunities for issuers to develop targeted offers based on cardholder demographics, preferences and spending behavior. In addition, the emergence of mobile payments creates the potential to incorporate customer location into offer targeting.
  8. Emergence of mobile payments. Both mobile wallets and mobile payments have garnered a lot of attention over the past year, although there is a long way to go before they properly emerge as accepted payment methods. However, in 2013, there will be a number of critical steps taken in the continued evolution of mobile payments, including:
    • Launch of more mobile devices with more payment capabilities
    • Continued growth of mobile person-to-person payments and mobile Internet shopping
    • Deployment of more merchant terminals capable of accepting mobile transactions
    • Progress towards national rollout by Isis and Google Wallet consortia
    • Testing of standalone mobile payments apps by issuers (last week, U.S. Bank announced an iPhone payments pilot for new FlexPerks Travel Rewards Visa Signature cardholders)
  9. Fundamental shift in credit card positioning.  Prior to the financial crisis, credit cards were perceived by consumers (and positioned by issuers) as an easy way to access credit.  In recent years, as consumers cut card debt but continued to grow purchase volume, they have developed a more balanced perception of the credit card as both an efficient payments tool and flexible source of credit.
  10. Focus on nontraditional sales and service channels. Issuers will direct more of their marketing budgets to nontraditional customer acquisition channels, such as online and branch, which also have much lower cost-per-acquisition than direct mail. In addition, issuers will continue to develop new service functionality for both online and mobile channels.

Banks pull back on marketing spend in 2Q12

A scan of second quarter 2012 marketing spend data for leading U.S. banks revealed that most reported year-on-year declines.  These declines have been driven by both general economic uncertainty, as well as the fact that many banks have recently put ambitious cost-cutting initiatives in place.  Of the 12 banks studied, only four reported y/y increases in spending.  And Capital One’s spend excluding the impact of the HSBC card portfolio acquisition was also lower than in 2Q11.

The largest declines among the banks studied were at SunTrust and Bank of America.

  • SunTrust reduced marketing and customer development spending 30% y/y in 2Q12.  Its spend for the first half of 2012 was also down 30% from the same period in 2011.  In the presentation of its financials, the bank provided an update on its PPG Expense Program, which it expects to generate $300 million in annualized savings by the end of 2013.
  • Bank of America is following a similar a pattern, with marketing spend down 20% y/y in 2Q12, and down 19% y/y in the first half of 2012.  Like SunTrust, Bank of America devoted a section of its earnings presentation to discussing its New BAC cost reduction program, which has a goal of generating $5 billion in annualized cost savings by the end of 2014.

For other banks, the declines in 2Q12 follow significant recent growth in marketing spend.

  • JPMorgan Chase’s marketing spend in 2Q12 was down 14% y/y.  This follows a rise in 28% spending in 2011.
  • Citigroup reduced its marketing budget 6% in 2Q12, following a jump of 40% in 2011.

For some banks, marketing spend patterns can be related to timing of campaigns.

  • U.S. Bancorp’s marketing and business development spend was down 11%.  However, looking at the first half of the year, spend is up 22% over the same period in 2011).
  • Capital One actually grew spending 2% over the same period in 2011, and it reported that spending in the second half of 2012 would increase, due to the timing of some marketing campaigns.
  • KeyBank increased marketing spend 6%, which it attributed to a spring home equity lending campaign.

Finally, American Express reduced spend 3% y/y, but (at $773 million) its marketing and promotion expense still represented 10% of net revenues, a much higher percentage than at other leading financial institutions.  American Express’s goal is for its marketing and promotion expense to be around 9% of revenues.

Quarterly Card Issuer Financials Reveal Positive (and some Negative) Trends

All of the main U.S. credit card issuers have now reported second quarter 2011 financials, which reveal some interesting trends:

Volumes: In recent quarters, card purchase volumes have grown significantly as issuers have focused attention on positioning cards as spending rather than lending tools. Most issuers continued to grow volumes in 2Q12, although in some cases, the rate of growth was lower than in recent quarters. Wells Fargo (+15%), U.S. Bank (+13%), Chase (+12%) and Capital One (+11%, excluding the impact of the HSBC portfolio acquisition) all reported double-digit year-on-year spending increases. American Express, which has typically led the industry in volume growth, reported a y/y rise in spending of 9%, down from 12% in 1Q12. And both Bank of America and Citibank reported no growth in purchase volumes. Issuers will continue to push volume growth in the coming quarters, as they continue to seek to take payments share from cash and checks.

Outstandings: In recent years, issuers reacted to the financial crisis by significantly deleveraging their credit card portfolios. Now there are signs that this process has bottomed out and a number of issuers are growing outstandings. The largest portfolios continue to decline, with Bank of America (-10%), Citibank (-3%) and Chase (-1%) all reporting year-on-year declines in end-of-period outstandings. On the other hand, banks with smaller portfolios reported y/y growth, including SunTrust (+39%), PNC (+10%), Wells Fargo (+7%), U.S. Bank and Fifth Third (both +5%). In addition, American Express (+5%) and Discover (+4%) both grew outstandings. The prospects for outstandings growth in the industry in general in the quarters will be dependent on general economic conditions, as well as the extent to which issuers want to push loan growth in order to grow revenues.

Charge-Off and Delinquency Rates: As issuers reduced outstandings following the financial crisis in 2008, they also set about tackling charge-offs, which spiked spectacularly in 2008 and 2009. Charge-off rates have declined significantly over the past two years, and in many cases are now below normalized levels. There has been a widespread expectation in recent quarters that the sharp declines in charge-off rates would bottom out; however, the most recent quarter continued the pattern of charge-off rate declines. All of the main issuers reduced charge-off rates by more than 100 bps y/y, and only one main issuer (U.S. Bank) reported a q/q increase in its charge-off rate. American Express, Discover and Capital One reported charge-off rates below 3% in 2Q12. Bank of America remains the issuer with the highest charge-off rate (at 5.27% in 2Q12), but it is notable that this rate is down from levels of more than 14% in 2009. There is an expectation that charge-offs will continue to decline in the coming quarter, given that delinquency rates (which are an indicator of future charge-offs) are also continuing to decline. Some issuers are anticipating that credit quality indices will bottom out or even grow, in particular if the issuers relax underwriting standards to grow outstandings. So, a number of leading issuers are increasing their provision for loan losses.

Revenue: This remains the big negative for issuers, with downward pressure on both net interest income (for those issuers who are continuing to experience outstandings declines) and noninterest income (from the ongoing impact of the CARD Act, which makes it more difficult to generate fee income). Issuers with lower outstandings (Bank of America, Citibank and Chase) reported revenue declines, but issuers who grew outstandings in 2Q12 managed to grow revenues. American Express increased revenue 5%, with net interest income rising 6%. Discover grew total revenues 6%, with a 4% decline in noninterest income more than offset by a 10% growth in net interest income. Prospects for revenue growth in the coming quarters will be very much dependent on the ability to grow outstandings, given the limited scope for generating fee income.