Across the spectrum of banking products, credit card portfolios remain a shining star. Low losses and strong net interest margins are driving robust profitability. Because of continuing positive long-term unemployment trends, consumers have been willing to take on more card debt, fueling healthy growth in the industry.
Experian reports that bankcard balances are up 6% in the first quarter of 2016 compared with last year, and much of this growth is coming from new card originations, with $87 billion in new bankcard lines originated in the first quarter of 2016. Many experts believe that before the end of 2016, there will be $100 billion in new originations in a single quarter. While mobile payments and fintech providers continue to make news (and not always for the right reasons), we have yet to see real disruption in the credit card space from any one technology or provider.
Over the course of 2015, there was a major shift in the physical interaction with payment cards as issuers and merchants shifted to chip cards and the EMV standard. By February of 2016, 70% of individuals were claiming to have a chip card in their wallet (according to a CreditCards.com survey). At the same time, a study by The Strawhecker Group found that only 37% of US merchants were EMV-ready four months after the liability shift took place. Remaining merchants should shift relatively quickly to EMV in the coming months as real-world experience demonstrates the tangible benefits of EMV. The top-five Visa merchants have reported an 18% decrease in fraud since implementation. At the same time, Visa and MasterCard are both working hard on solutions that reduce transaction times for chip cards in the hope of resolving a major consumer pain point with this new technology.
1. Continued Proliferation of Products
Issuers continue to broaden their suite of products to address different market segments. Taking a page from the auto industry where manufacturers now seem to have a different vehicle for every sub-segment and niche, broad product suites are becoming the norm, particularly among the top issuers. Citibank now actively markets six products, including points, cashback, low rate and premium products. Over a three-month period (February, March and April of 2016), Citi mailed over 9 million pieces for each of four products, and send 35 million pieces for its “Double Cash” card in April — the highest for any single product in more than a year.
Other issuers – especially regional banks – to broaden or enhance their product suite and fine-tune their targeting to compete with this product onslaught. The proliferation of products goes hand in hand with more sophisticated market segmentation. However, while some issuers will continue to focus on Near Prime audiences, Experian reports that over 90% of new originations continue to come from the Prime and Super Prime segments (Vantage Score > 660). In fact, the percentage of Subprime originations in the first quarter of 2016 was below the rate seen in 2015.
2. Battle Between Cash vs. Points
Since the end of 2013, cards offering cashback have increased by a third — up from 30% to 40% of all offers — while cards offering points have declined by the same amount — down from 35% to 25% of the total market. All top issuers have been actively marketing cashback products, many offering a base 1% with additional category-specific bonuses (e.g., Bank of America offering 2% on groceries and 3% on gas).
Two products in particular stand out from the crowd with unique value propositions. Citi’s Double Cash card keeps it simple with 1% earnings on purchases, and an additional 1% when customers pay their balances. Discover’s It card offers a “Cashback Match,” a bonus equal to all cash earned after your first year as a cardholder. Issuers seem to betting on cashback offers as recent trends have shown that response rates for cashback offers are double those of points offers (according to Mintel Comperemedia). This results in lower cost of acquisition, which is fueling a shift in marketing volume to cashback and funding more lucrative value propositions.
But points-based products aren’t dead yet. With issuers adding more lucrative up-front bonuses (up 20% from the first quarter of 2015 to an average of over 37,000 points), and with both Chase and Citi actively reengaging with co-brand points products, you can expect competition to remain strong.
3. Democratization and Assimilation of Mobile Payments
Despite the predicted demise of plastic (and cash and checks and branches), no mobile wallet solution has truly broken through to displace or disintermediate credit cards. In an article on Payments.com, Karen Webster argues that for mobile payments to ignite, they need to create “certainty for consumers… certainty that comes with creating a thick market of merchants and consumers and accounts that work across any mobile device that they happen to own, and can use at the places they routinely shop.”
No solution yet offers this “thick market.” While mobile payments providers work to fill this void, credit card issuers are democratizing across platforms touting the ability to link to Apple Pay, Samsung Pay, Android Pay and more. Connection to multiple providers is increasingly looking like “table stakes” for most credit card offers, and mobile payment capabilities are being assimilated into standard marketing copy, rather than touted as a major benefit. Until a breakthrough occurs, expect this trend to continue.
4. Cautious Eye on Delinquencies
Credit card delinquencies remain at record low levels, but issuers are keeping a careful watch over key leading indicators that could indicate trouble. While unemployment is at an eight-year low and consumer spending is strong, June was the worst month for job creation in five years. With continued uncertainty in foreign markets, a skittish stock market, the most unusual presidential campaign in generations and low consumer confidence, the economy remains on shaky footing. The good news is that average credit card portfolio yield remain exceptionally strong and has capacity to absorb an uptick in delinquency.
Evidence from recent offers in the mailbox also show that issuers like Chase and Capital One are increasing go-to rates to maintain yield as the Fed contemplates more rate increases. Issuers will continue to invest heavily in content and tools to help their consumers stay out of trouble and manage their debt. For example, Capital One’s Inform app (currently in a beta test) helps customers manage their spending and understand the impact of their payments on balance and interest charges.
Marc Bellanger is a Senior Strategy Director at Merkle. Marc has 20 years of experience developing marketing programs for major banking brands including Bank of America, HSBC, TD Canada, KeyBank, MBNA, and Chase. At Merkle, Marc’s focus is credit cards and payments, directing the development and deployment of multi-channel marketing strategies for product acquisition, customer engagement, and customer retention.