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10 Credit Card Trends to Watch in 2015

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.

  1. 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%.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.”
  7. 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.
  8. 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.
  9. 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:
    1. The continued importance of rewards programs, with bonus offers playing a key role in driving new customer acquisition and activation
    2. Issuers are very unlikely to lower APRs in 2015, so bonus offers will be the main way to attract new cardholder awareness and interest
    3. 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.
  10. 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.

Small business credit card issuers are ratcheting up rewards

In July, EMI posted a blog on leading small business credit card issuers making large bonus point offers to encourage small business customers to activate and continue to spend on their business cards.  Some of these leading small business card issuers are turning their attention to revamping rewards structures for their leading cards.  Yesterday, Bank of America announced the introduction of a new version of its Cash Rewards for Business MasterCard.  It has added 2% cash back on spending at restaurants, in addition to the previous rewards of 3% on purchases at office supplies, gas and computer network services, as well as 1% on other purchases.

Other issuers that have enhanced their small business rewards card programs include:

  • Capital One: launched the No Hassle Cash Premier Card, featuring 2% cash back, as well as a bonus of up to $150 (this card does come with a $59 annual fee)
  • American Express: introduced a new version of its Business Gold Rewards Card, with triple points on airfare, double points on advertising, gas and shipping, and 1 point per dollar on everything else.  It previously offered a flat 1 point per dollar reward.  The card also features a 50,000 point bonus (for spending $10,000 on the card within the first 150 days).  The annual fee for this card has risen from $125 to $175 (both American Express and Capital One are evidently betting that small businesses will be willing to pay an annual fee in exchange for these higher rewards)
  • Chase: launched new earnings structures for Chase Ink Classic and Ink Cash: 5 points per dollar/5% cash back on first $25,000 in annual spend on office supplies, telecommunication services and cable services; 2 points per dollar/2% cash back on first $25,000 in annual spend on fuel and lodging; and 1 point per dollar/1% on all other purchase

The growth of bonus offers and bonus rewards illustrates the extent to which the leading small business credit card issuers are competing to capture a share of small business card spending.  There is significant growth potential in this market, as cards still account for a small share of overall small business spending.

And there are recent signs of life in the overall small business card market, which has been in the doldrums since the start of financial crisis.  Last week, American Banker reported on FDIC data that shows big banks starting to grow loans of $100,000 of less (which are largely made up of small business cards).

Credit card “versioning” to target different user segments

American Express recently launched two versions of its Blue Cash Card.  The Blue Cash Everyday has tiered reward levels (3% at supermarkets, 2% at gas stations and drug stores, and 1% on other purchases) and carries no annual fee.  Blue Cash Preferred features higher reward levels (6% at supermarkets, 3% at gas stations and drug stores, 1% on other purchases), but carries a $75 annual fee.

This continues a trend seen in recent months, with leading credit card issuers launching different versions of the same card, with one version offering greater rewards and/or bonuses, as well as higher annual fees.  These leading issuers believe that heavy credit card users will be willing to pay the annual fee in exchange for the potential to earn the greater rewards.  These heavy spenders generate significant interchange income for the issuers.

The following table is a comparison of different versions of the same card, which have recently been introduced.  In most cases, the premium card offers higher reward levels as well as bigger incentives (for their first purchases, reaching spending thresholds, or for anniversaries).  And in the case of Citi, there is also variation in the APR for its three ThankYou cards.

As credit card issuers seek to generate additional noninterest income, we should expect to see more credit card versioning.  Issuers must carefully set pricing, rewards and incentives for the different versions of the cards, and clearly communicate the benefits of each version to appeal to different cardholder segments.