Why More Banks Are Reinvesting in Credit Cards
Examining trends in spend activity provides a clear indication of customer engagement, which gives you a keen sense of the overall health of the business.
U.S. credit card customers have become so diligent in making their payments that some are beginning to wonder whether the industry has entered a prolonged era of low chargeoffs and low delinquencies.
Since 2011, five out of 42 domestic midsize banks with between $10 billion and $25 billion in total assets have re-entered the consumer credit card issuing business, according to an analysis of Federal Deposit Insurance Corp. call report data obtained from SNL Financial. Over this same time frame, none of the banks in this group have exited. In fact, the last credit card program sale in this cohort took place in 2008.
Looking more closely at the data for banks with $10 billion to $25 billion in assets as of the first quarter of 2013, we have found:
- Sixteen of the 42 banks have been and remain longtime credit card issuers (i.e., managed credit card balances greater than or equal to $1 million since 2001).
- Six of the 42 banks have launched a new credit card program since 2001.
- Four of the 42 banks have exited credit cards entirely between 2004 and 2008.
- Sixteen of the 42 banks have not issued credit cards from 2001 to the first quarter of 2013.
We see three major trends driving banks to consider increasing investment in credit card programs.
First, M&A consolidation of credit card businesses (e.g., MBNA's sale to Bank of America) along with numerous bank combinations have fundamentally changed the competitive landscape. Many of those banks reluctant for a full-service national bank to be their credit card agent program provider also became much larger in assets, branches and clients to render credit card relaunch more lucrative particularly in an era when credit cards are increasingly considered foundational to a full customer relationship.
Second, according to FDIC Quarterly Banking Profile data, credit card profit margins have improved since the Great Recession ended. Consumer credit card spend has been growing industrywide since 2009. Net chargeoff rates for the analyzed group were down to 3.0% in the first quarter of 2013 versus a peak of 8.8% in 2009. Meanwhile, a gross credit card interest yield of 10.6% in the first quarter 2013 is far better than yields on most other consumer loans.
Lastly, legislation has leveled the playing field insofar as credit card pricing practices for megaissuers are now far more consistent with practices small and midsize financial institutions have always exercised. By way of example, a midsize bank's credit card customer is less likely in today's market to be lured away by an aggressive introductory rate since a contender for this customer can no longer reprice interest and fees as aggressively.
Looking forward, we anticipate several additional midsize bank entrants to the market while the likelihood of banks' exiting credit cards remains low. These banks will have several choices for how to launch a new credit card program ranging from systems outsourcing in which only plastics, statements, data processing, fraud management and off-hours servicing are outsourced to full-service outsourcing through which all operational functions may be outsourced while the bank maintains control over key strategic functions (e.g., product, pricing/the P&L, underwriting, collections).
Keys to a successful relaunch will include avoiding card product proliferation, which can amplify subscale cost competitiveness issues, and reserving proactive marketing to one's own demand deposit account relationship customers.
Frank B. Martien is a partner with First Annapolis Consulting.