In terms of industry growth, 1994 likely was a very strong year for the credit card industry. We expect that credit card charge volume will post a 20% year-to-year gain and a 17% year-to-year increase in receivables.
Although the industry was strong in terms of volume, few of the hundreds of issuers were able to keep their market share. In fact, we estimate that 10 issuers accounted for 82% of the industry's growth in receivables.
These same 10 issuers accounted for 94% of the industry's growth in 1993. Even among these 10 issuers, there was a wide disparity in terms of growth, which was not based solely on size. First USA's receivables, which doubled, likely grew the fastest, while those of First Chicago, which was at the low end, increased 18.5% year to year.
Industry competition remained high in 1994. Industry estimates gauge the total number of applications mailed to households for the year at 2.5 billion at least and an additional 500 million telemarketing contacts.
Pricing in terms of the annual percentage rate was stable. The average rate was heading below 16% at the beginning of the year, but reversed because of the rise in the prime rate to which many cardholders are now indexed. The use of introductory rates was common, as many issuers are using low-rate offers as their main marketing tool, compared with no- annual-fee offers in 1992-93.
We expect 1995 to be a tougher year for the average credit card issuers because of the impact of higher short-term rates, the lack of a benefit from declining credit provisions, and expense pressure due to the high level of investment/marketing spending, which is necessary for credit card issuers to grow.
In our view, the rift between the market share gainers and losers will continue to widen in 1995. We expect the industry will stay on its orderly consolidation trend in 1995 and that pricing will remain the key strategy to gain market share.
However, we do not expect pricing to be irrational but to remain relatively tight among the "gainers." Industry growth will likely slow in 1995 as consumers' expenditure growth declines. However, because consumers increasingly will use credit cards at the expense of cash and checks, we believe that average balances will increase by 10% to 12% in 1995 and transaction volume will grow by 15%.
This article is excerpted from a recent Salomon Brothers report. Thomas P. Facciola
