Credit Card Issuers Focusing Growth on Different FICO Score Segments

May 24, 2016

The Wall Street Journal recently reported that credit card outstandings may reach the $1 trillion threshold in 2016, for the first time since before the 2008 Financial Crisis. This is mainly due to overall economic growth and the rise in employment. Issuers are now increasing their focus on growing outstandings by making aggressive acquisition-and-activation offers (American Express is currently offering a bonus of up to $300 on its Blue Cash Everyday Card), promoting lengthy introductory offers, and increasing credit lines for existing cardholders.

A big question for issuers is, should they concentrate efforts on particular FICO score segments, or seek to drive growth across the FICO score spectrum? In the aftermath of the Financial Crisis and the resulting huge spike in charge-off rates, many leading issuers narrowed their focus, concentrating on the high-FICO score affluent segments, and ignoring subprime and low-prime consumers. However, as the economy has continued to recover, at appears that some issuers have renewed interest in the lower-FICO score categories.

EMI’s analysis of leading issuers’ 1Q16 SEC filings reveals that issuers are following different approaches:

1. Growing outstandings across all FICO score segments. Regional bank card issuers like Wells Fargo and Regions have relatively strong growth across all FICO score segments. It is notable that the <600 subprime segment accounts for 9% of Wells Fargo’s outstandings, a higher percentage than for other issuers. Wells Fargo issues a subprime card and recently incorporated a free FICO score into its mobile banking app.

2. Generating stronger outstandings growth in low-FICO score segments. Capital One, Discover and SunTrust all have markedly strong growth rates in outstandings for low-FICO segments. 35% of Capital One’s outstandings come from the <660 FICO segment, whereas this segment accounts for only 18% of Discover’s outstandings. Discover grew <660 outstandings by 12% (to $10.0 billion), and it is worth noting that Discover launched the Discover it Secured Card in January 2016. SunTrust grew its <620 FICO portfolio by 39%, although this was coming from a low base of just $45 million.

3. Continuing to focus outstandings growth on higher FICO score segments. The three largest issuers—Chase, Citi and Bank of America—all continue to experience declines in outstandings in their lower FICO score segments, which is offset by growth in higher FICO score categories. Regional bank card issuer PNC also follows this pattern.

As issuers look to continue to grow outstandings (and appear to be willing to let charge-off rates rise from their current low levels), they will need to develop approaches to target the different FICO score segments, including:

Ensuring they have products in place to target different FICO score—and demographic—segments.
Developing messaging, pricing, acquisition/activation offers and ongoing incentives to both attract new cardholders and encourage existing cardholders to increase their spending and borrowing
Creating tools (such as free FICO scores) to educate consumers on understanding how their credit scores are determined and how they can practice good credit management

Four Channel Trends in Leading Bank 4Q15 Financials

January 27, 2016

The largest U.S. banks have been publishing their quarterly and full-year financials over the past two weeks. Within these reports, we can discern a number of channel-related trends. These trends have a direct impact on how banks interact with their customer base in terms of providing everyday banking and value-added services as well as cross-selling additional products and services.

We’ve listed these key channel trends below:

Banks are continuing to reduce their branch networks. According to SNL Financial, the total U.S. branch network fell by 1,614 branches and is now at 92,997, a decline of 1.7%. These declines are driven by banks’ desire to cut costs, as well as from a recognition that greater usage of self-service channels for everyday banking transactions may enable banks to reduce bank density. The following chart looks at net changes in branch numbers for leading banks with more than 500 branches:

Citibank reported that it plans to close an additional 50 branches in the first quarter of 2016 as it exits certain markets (including Boston) and will concentrate its branch presence in six key metro markets. It is worth noting that in other markets where Citibank has cut its branch presence, it claims to have retained over 50% of deposits through its online and mobile channels.

Banks are overhauling branch design and staffing. Not only are banks reducing their overall branch numbers, they are changing how branches are designed and staffed. In its 4Q15 earnings conference call, SunTrust mentioned that it is relocating to new, smaller branch locations in Richmond and Raleigh, which will reduce its square footage in these markets by half. Overall, it has reduced its branch footprint by 2.5 million square feet over the past four years. PNC reported that 375 of its 2,600 branches have been converted to its Universal Banker model, and it plans to convert an additional 100 branches in 2016.
Mobile banking is maintaining its strong growth trajectory. According to Javelin Strategy & Research, 30% of U.S. adults used a mobile banking service weekly in 2015. Reflecting this trend, leading banks continue to show double-digit y/y growth in mobile banking users (Chase +20% to 22.8 million; Bank of America +13% to 18.7 million; and Wells Fargo +15% to 16.2 million). These customers are also using mobile banking for a greater variety of transactions. For example, Bank of America reported that mobile banking’s share of total deposit transactions rose steadily from 4% in 4Q12 to 15% in 4Q15.
Online banking usage remains strong…and is growing. While mobile banking garners most of the headline in financial trade press, online banking remains a key customer service channel, and some leading banks continue to register strong growth rates in online banking users. This is likely due to a number of factors, including overall account growth, increased customer comfort with using online banking, new online banking functionality, as well as lingering concerns over mobile banking security. The following table compares 2015 online and mobile banking users and growth rates for Chase, Bank of America and Wells Fargo:

We expect that as banks continue their migration towards self-service channels for a growing number of everyday banking transactions, banks will continue to scale back their branch networks. This will involve reducing branch density in particular markets, as well as exiting markets where they lack a critical mass or where their branches are underperforming. However, banks in general want to maintain a physical presence in markets, so they can leverage the power of the branch as both a sales channel and a branding beacon.

In addition, banks need to provide a consistent user experience across their online and mobile channels. In the short term, banks will continue to provide more functionality in the online channel, as consumers build trust in using their mobile devices for more complex financial transactions. But the distinctions between online and mobile channels are blurring, and banks are already starting to refer to “digital channels” to encompass desktop, tablet and mobile channels. Even the traditional delineations between “online” and “offline” channels are breaking down, as banks showcase their digital services in branches, and as digital channels include functions to enable customers make in-branch appointments.

Key takeaways from leading credit card issuer 3Q15 financials

October 30, 2015

The following is a list of several trends that EMI Strategic Marketing identified in leading credit card issuers’ 3Q15 financials:

Regional bank card issuers continue to lead in receivables growth. A key factor: regional banks, such as SunTrust and Wells Fargo, are focused on cross-selling credit cards to their bank customers.

Many national issuers not (yet) growing loans, but are ramping up new account generation. National credit card issuers like Citi and Bank of America reported y/y loan declines in 3Q15, due to continued run-off of legacy portfolios. However, both of these issuers are confident that their portfolios will grow in the near future. Citi reported that it is ramping up card acquisition for its core products, and this is starting to pay off with 6% y/y rise in active accounts. Credit card “monolines” are also investing in new account generation. Discover new account generation in 3Q15 was at its highest level since 3Q07. And American Express reported an 8% y/y rise in marketing and promotion spending, with a focus on attracting new card members. As a result of this investment, American Express generated 2.3 million new accounts in 3Q15, compared to a quarterly average of 1.6 million in 2014.
Card volume grew…but was impacted by low fuel prices. Leading issuers continued to report growth in purchase volume, but the y/y rate of growth was lower than in recent quarters, in large part due to low fuel prices. Discover reported y/y sales volume growth of 2.6%. However, excluding gas, the growth rate was 7%. Issuers reporting very strong volume growth included Capital One (+19% y/y), which is benefitting from its focus on transactors, and Wells Fargo (+15%).
Issuers are growing revenues…and expenses. Six of the largest U.S. credit card issuers have dedicated payment units, which publish quarterly revenue and expense data. Since the financial crisis, revenue growth has been elusive for issuers, but in 3Q15 four of the six issuers reported y/y growth in revenue. Benefitting from loan growth, five of the six issuers reported growth in net interest income. And three of the six reported noninterest income growth. However, as issuers are looking to generate new accounts as well as loan and volume growth, they are increasing their noninterest expenses. Banks with the largest y/y increases in noninterest expense in 3Q15 included American Express (+11%), U.S. Bank (+9%) and Discover (+8%).
Credit card yield shows signs of growth. Of the seven leading issuers who reported yield data in their quarterly financials, four reported y/y growth. In addition, six of the seven reported q/q rises in yield. This indicates that in the post-CARD Act environment, issuers are not competing aggressively on price, but are instead concentrating on enhancing rewards, providing additional value-added features, and making large acquisition-and-activation bonus offers.

Charge-off rates continue to decline…and may fall even further. As we have mentioned in previous blogs, credit card net charge-off rates are well below historical averages. Reasons for this extended decline include tight underwriting on the part of issuers and an aversion to building up large credit card debt on the part of cardholders. In its earnings conference call, Discover characterized the credit loss environment as “remarkably benign.” With continued y/y declines in 30+ day delinquency rates (which have historically been a predictor of charge-off rates), issuers are not expecting the charge-off rate to spike in the near term, and in fact rates may continue to decline further.