Tag Archives: U.S. Bank

Emergence of fixed-rate student loans

As we enter the main student lending season, two leading banks–U.S. Bank and Wells Fargo–have launched fixed-rate pricing on student loans.  The rate on the U.S. Bank Fixed Rate Student Loan is 7.99%.  Wells Fargo has fixed-rate pricing on four of its student loans, with rates as low as 7.75%.  With this new pricing, the two banks are aiming to differentiate themselves from student lending competitors.  They are also playing on a growing expectation that U.S. interest rates will rise in the coming months.

As these banks have a high profile in the student market, other leading private student lenders will be tempted to follow suit with their own fixed-rate offers.  And the second quarter financials of these banks will be scrutinized in the coming weeks for any indications of a rise in student loan originations.

Opportunities and challenges in mobile payments

In recent weeks, we have seen mobile payment launches by Google and Square.  These follow the creation of the Isis joint venture by AT&T Mobile, T-Mobile and Verizon Wireless.  Many of the leading banks (including Bank of America, Wells Fargo and U.S. Bank) are currently conducting mobile payment trials.  And a series of smaller players (e.g., Dwolla, Boku, Propay) have recently introduced mobile payment apps.

Mobile payments have the potential to capture to a significant share of spending in the coming years.  However, there are significant challenges to overcome in order to realize this potential.  These include:

  • Consumer privacy and security
  • Technological functionality and interoperability
  • Revenue-sharing among stakeholders: There are a diverse range of companies looking to gain a share of the emerging mobile payments market, including: banks; payment networks; payment processors; payment app providers; smartphone manufacturers; communications service providers; and merchants.  Each of these companies bring strengths and limitations to the table, and no one company can go it alone.  So, an effective and sustainable mobile payments model will need the involvement of multiple partners, each of whom will need to earn a return commensurate with their contribution.
  • Changing consumer behavior: Consumer spending patterns change over time, and consumers are moving away from paper-based payment methods and towards cards and electronic payments.  However, consumers’ payment usage patterns alter more gradually than many would expect (according to The Nilson Report, by 2015, checks will still account for 12% of consumer payment volume).  To encourage consumers to switch to mobile payments, marketers will need to:
    • Identify and target consumer segments with greatest interest in using mobile payments
    • Develop a value proposition and user experience for mobile payments
    • Determine which merchant categories would be most receptive to mobile payments
    • Identify which payment methods are most vulnerable to being dislodged by mobile payments, and clearly articulate mobile payments’ advantages to consumers and merchants
    • Create incentives to encourage first-time and repeat usage by consumers
  • Merchant acceptance: contactless payments have been around for some time, but fewer than 150,000 U.S. merchants can accept such payments, compared to the approx. 6 million merchants that can handle card transactions.  Many merchants will balk at the cost of equipping their point-of-sale terminals to accept mobile payments.  To overcome this, mobile payment stakeholders will need to:
    • Develop technology solutions that reduce the cost of mobile payment acceptance
    • Market the benefits of mobile payments to merchants, so that they are more willing to make the investment in mobile payment acceptance

Credit card issuer quarterly scorecard: improved credit quality; volume growth; lending declines

In the latest quarterly financials, the leading U.S. credit card issuers displayed consistent trends in credit quality, purchase volumes and card loans.

  • Credit quality: issuers continued to report strong yearly and quarterly declines in charge-off rates.  The current rate of decline, as well as the high rates of decline in delinquency rates, indicate that charge-off rates will fall further in the next few quarters.

  • Purchase volume: All leading credit card issuers are growing purchase volumes year-on-year, with four issuers reporting double-digit volume growth. In addition, issuers like Chase and Capital One have accelerated volume growth in recent quarters.  In 1Q11, Citi reported a small y/y rise of 0.3%, which followed a protracted period of volume decline.  The 7 issuers listed in the chart had a combined $321 billion in purchase volume, up 9% y/y.

 

  • Average Outstandings: Although issuers have been effective in growing purchase volume, average outstandings for all leading issuers continued to decline year-on-year in 1Q11.  The 8 issuers combined for $515 billion in average outstandings in the quarter, down 18% from 1Q10.  The rate of decline slowed in 1Q11, with combined outstandings for the 8 issuers down 1.4% from 4Q10.  And Discover reported 1.7% quarterly growth in average outstandings.  Many issuers have reported that they expected outstandings to grow in the second half of 2010.