Capital Bancorp's flagship credit card business has been performing well, but the recent results also suggest that large challenges lie ahead.
During the second quarter, total loan volume in the Rockville, Maryland-based bank’s OpenSky credit card division increased at a robust 17% year-over-year clip to $142.2 million, net of reserves.
The problem lies with the number of active OpenSky customer accounts. Those fell for a fourth consecutive quarter to 616,435, a decline of 13% from their June 30, 2021, peak.
It’s concerning. Credit cards are big business for the 22-year-old Capital, which last week reported a record quarterly profit of $11.5 million. Though the OpenSky portfolio makes up less than 6% of its total assets, the business generated 57% of the company’s pretax net income through the first six months of 2022.
Usage among existing borrowers proved high enough to keep the OpenSky portfolio in expansion mode from a volume standpoint, but the customer decline contributed to decreased deposits and lower fee income. Most OpenSky accounts are secured. They require a deposit corresponding to the borrower’s credit line.
OpenSky deposits fell 11.4% from the same period last year to $214.1 million on June 30. Credit card fee income also dropped 11% year over year to $12.1 million.
Capital attributed the customer attrition largely to aggressive marketing by fintechs and credit card companies, and to competitors offering unsecured subprime cards to customers who might otherwise get a secured product. The $2.15 billion-asset Capital is feeling the bite from those trends — though not enough to chase competitors down the same path.
“We’re not going to follow suit and change our credit standards or our profitability [targets] just to show growth,” said CEO Edward Barry.
Capital acquired OpenSky in 2011, the year before Barry took over as CEO. The bank has since expanded OpenSky significantly, but in recent years it has faced increasingly stiff competition.
“We’ve seen a wave of products designed to either build credit or provide a route of entry to credit for consumers unable to access traditional forms of credit,” said Patrick Haggerty, a director at the financial services advisory and investment firm Klaros Group.
Competition for market share in the secured credit card sector is likely to get even tougher, said Roy Ng, co-founder and CEO of Bond Financial Technologies, a San Francisco-based financial software developer. Ng noted that a number of fintechs and other companies have contacted Bond with plans for new cards.
Following on the heels of nonbank card issuers like Chime, Step and Petal that are already offering newer, aggressively marketed secured cards, other players are looking to “generate additional revenue streams,” and are attracted to the interchange-fee opportunities that cards provide, Ng said.
Those firms are also forecasting that a tightening credit market will make it “more difficult for consumers to qualify for unsecured cards,” he said.
At the same time, companies like Tomo and X1 have rolled out unsecured cards that leverage advanced analytics and alternative data.
“Although the relative performance and sustainability of these new products over the long term remains to be seen, it is clear that they appeal to a broader audience,” Haggerty said. “It is not surprising then to see some of the more traditional secured card issuers losing market share.”
For Barry, kicking Capital’s marketing game into higher gear would raise its customer acquisition costs to an unacceptable level. On the other hand, unsecured subprime cards are risky. Capital introduced an unsecured OpenSky card in November, but Barry has ruled out widening credit parameters to increase the potential customer base.
“People are getting offers for a different product than they’d normally get, and they’re taking them,” Barry acknowledged. “It’s really hard to compete against that. In many respects, we don’t want to.”
TomoCredit relies strictly on cash-flow data to gauge the creditworthiness of immigrants and young consumers, who often have too little financial history for traditional scoring models.
So far, Capital’s response to the influx of competitors has been two-pronged. The bank has worked on refining its business processes to make opening an OpenSky account as frictionless as possible. It’s also exploring co-marketing partnerships, which yield opportunities to cross-sell OpenSky products to a partner’s customer base.
Some of Barry’s reluctance to make dramatic moves is attributable to his belief that the company is about to flip the script. Capital gained a substantial number of customers in 2020 and 2021 during the COVID-19 pandemic. Indeed, its customer count surged 77% in the 12 months ending June 30, 2021.
To a certain extent, the losses Capital is experiencing in 2022 represent natural movement of those borrowers to other channels, Barry said. He expects the situation to normalize next year.
“People try something new and don’t like it, or they achieve their goals and move on,” Barry said.
Standing pat doesn't mean Capital is standing still. Its new unsecured card initiative is designed to keep borrowers who are planning to drop their secured cards as customers of the bank. The program is gradually taking root, with gross unsecured loans reaching $25.7 million on June 30, up 45% since the end of last year.
“One thing we noticed about the secured customer card base, we were doing a good job of repairing people’s credit and helping them graduate, but we didn’t have the next product,” Barry said. “All we were doing was serving up customers to Capital One, Citibank and Bank of America.”
