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.
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%.
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.
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.
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.
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.
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.”
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.
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.
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:
The continued importance of rewards programs, with bonus offers playing a key role in driving new customer acquisition and activation
Issuers are very unlikely to lower APRs in 2015, so bonus offers will be the main way to attract new cardholder awareness and interest
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.
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.
With the proliferation and increased power of smartphones—a recent Pew Research Center survey finding that 56% of adults now own a smartphone—many more consumers use their mobile phones for a wide range of activities, including mobile banking. The Federal Reserve Board found that 28% of mobile phone users banked with their device in April 2013, up from 21% a year earlier.
Now banks are looking to move beyond basic mobile banking to enable consumers to conduct a much wider array of banking and payments transactions over their mobile phones. And the banks plan to package this enhanced functionality into a mobile wallet. According to a recent survey published by Clear2Pay, 43% have plans to deploy a mobile wallet offering in the next 6-12 months. The mobile wallet would provide important customer retention, engagement, cross-sell and ultimately revenue generation benefits. However, there are significant hurdles to overcome, including technology issues, competitive pressures, and consumer resistance.
With this in mind, the following are some key steps for banks to take to prepare for a mobile wallet future:
Develop a dedicated group. Banks should create a dedicated group to develop and implement a mobile wallet strategy. This group would include representatives from various bank departments, such as retail banking, payments, channel, marketing, and IT. This group would also champion mobile wallets to key stakeholders—including senior management—within the bank organization.
Continue to grow mobile banking subscribers. Today’s mobile banking customers are the most likely segment to embrace mobile wallets, so banks should continue to encourage their customers to try out and continue to use mobile banking services. Some of the leading U.S. banks have already built up impressive mobile banking user numbers, including Chase (14.0 million active mobile banking subscribers in 2Q13, +32% y/y), Bank of America (13.2 million, +28%) and Wells Fargo (10.7 million, +29%).
Introduce more advanced mobile banking functionality. As consumers have become comfortable with using mobile banking for basic banking activities (such as checking balances), banks are starting to incorporate additional functionality, such as mobile check deposit and mobile bill pay. USAA recently introduced voice technology to its mobile banking app. Consumers’ gradual adoption of more advanced functionality makes the jump to mobile payments less daunting.
Conduct consumer and merchant research. To get some direction on how to position and market mobile wallets, banks should conduct research into
Attitudes to, and interest in using, mobile wallets
Reasons for using/not using mobile wallets
Preferred mobile wallet components
Most trusted providers
Types and levels of incentives that would drive usage
Distinguish mobile wallets from mobile payments. For many consumers–and even industry commentators—mobile wallets and mobile payments are the same thing. However, mobile wallets encompass a wider array of services, including mobile offers and loyalty programs. For consumers already using mobile banking services, transitioning to mobile wallets may be more seamless than switching to standalone mobile payments.
Promote banks’ perception as trusted providers of mobile wallets. A 2011 Fiserv research study found that banks constituted the most trusted provider of mobile wallets, far ahead of credit card companies and mobile phone providers. Banks should leverage this high trust level to position themselves against alternative providers.
Leverage partnerships. Payments networks like Visa are already leading the way in the development of digital wallets. Over the past 12 months, Visa has entered in agreements with leading banks like TD Bank, Bank of America and U.S. Bank, to distribute its V.me by Visa digital wallet to their customers. Entering into such partnerships early in the evolution of digital/mobile wallets enables these banks to get an early start in marketing such services.
Develop mobile wallet offers. Based on consumer research and competitive analysis, develop a series of offers to drive different mobile wallet behaviors, such as initial trial, continued usage, usage of new functionality, and referral.
Mobile payments continue to receive widespread coverage in payments-related media, as various companies pilot and roll out mobile payment products targeted at both consumers and merchants. In recent weeks:
Visa launched the V.Me digital wallet, with plans for a consumer launch by the 2012 holiday season.
MasterCard launched PayPass Wallet Services, which includes a PayPass Wallet, PayPass Acceptance Network and PayPass API
While these launches are generating a good deal of hype in the industry, and mobile payments are the hot topic in 2012, it is worth noting that researchers assessing consumer and merchant interest in mobile payments are finding that consumer interest in mobile payments is lukewarm at present:
Financial consulting firm Carlisle & Gallagher Consulting Group found that nearly half of U.S. consumers are interested in using a mobile wallet to help them manage card payments.
Most consumers are comfortable with established payments methods and feel that they do not have a compelling enough reason to change. In addition, they have concerns regarding security and privacy. In addition, most merchants have yet to embrace mobile payments. The main reason for this is that there is a cost to equipping terminals for mobile payments acceptance, and merchants do not yet see the benefits outweighing costs.
However, with growing smartphone penetration, increased consumer use of mobile phones for shopping, and enhanced mobile payment and acceptance products coming on stream, most observers expect consumer and merchant attitudes to and usage of mobile payments to grow significantly in the coming years.
With this in mind, we have developed the following ten steps to overcome challenges and build a strong mobile payments franchise:
Incorporate mobile payments into a digital wallet. Although mobile payments on their own have a “buzz” factor as well as enhancing ease and convenience, these attributes on their own will not be enough to encourage widespread adoption of mobile payments. Some mobile payment providers are looking to leverage power of the smartphone as well as social media apps to develop mobile wallets that will include targeted offer and loyalty program management functionality, in addition to mobile payments.
Identify and target segments who are more willing to try new technologies and alternative payments. In addition, develop strategies for other segments along the product-adoption curve.
Conduct consumer and merchant research. Focus on identifying what these audiences would look for in a mobile wallet or in mobile acceptance tools, what offers and incentives would drive usage, as well as what factors reduce the likelihood to adopt mobile payments.
Clearly articulate key selling points (over both existing payment methods and other mobile payments products), and incorporate these into all communications.
Establish a partnership strategy that seeks to harmonize the different objectives and concerns of each stakeholder in a mobile payments consortium. (This is particularly important as there is widespread recognition that no one company can go it alone in the embryonic mobile payments space.)
Develop local marketing plans, as mobile payments will tend to be rolled out initially in select markets rather than on a nationwide level.
Conduct mobile payments pilots in select markets to assess and enhance the user experience, evaluate different offers and incentives, and test different media and messaging
Create compelling incentives for consumers and merchants to trial mobile payments.
Build referral programs to encourage initial mobile payments users to recruit friends and family.
Once it has been launched, continually enhance your mobile payment solution to continue to meet changing customer needs, as well as to maintain a competitive advantage.