Across the spectrum of banking products, credit card portfolios remain a shining star. Low losses and strong net interest margins are driving robust profitability. Consumers have been willing to take on more card debt, fueling growth in the industry. Experian reports that bankcard balances were up 17% percent in the first quarter of 2016 compared with last year. Much of this growth is coming from new cards, with over $100 billion in new bankcard lines having originated in the second quarter of 2016.
As we look at the remainder of 2016 and into 2017, there are four key trends that we believe will drive continued fierce competition in the credit card market:
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 vehicle for every sub-segment and niche, broad product suites are becoming the norm – especially with top issuers. Citibank now actively markets six products, including points, cashback, low rate, and premium products. The proliferation of products goes hand in hand with more sophisticated market segmentation. However, while we see some issuers continuing 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 second quarter of 2016 was below the rate seen in 2015.
Battle between cash and points
Since the end of 2013, cards offering cashback have increased from 30% to 40% of all offers, while cards offering points have declined from 35% to 25% of the market. All top issuers have been actively marketing cashback products like Citi’s Double Cash card, which is working hard to stand out from the crowd. 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).
Democratization and assimilation of mobile payments
Despite the predicted demise of plastic (and cash), no mobile wallet solution has truly broken through to displace or disintermediate credit cards. In her article on Payments.com, Karen Webster argues that for mobile payments to ignite, they need to create “certainty for the consumers…certainty that comes with 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 certainty. While mobile payments providers work to fill this void, we are seeing that credit card issuers are democratizing across platforms, touting the ability to link to Apple Pay, Samsung Pay, Android Pay, and more.
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.
All in all, there remains a positive outlook for the credit card business. With the top issuers continuing to invest heavily in marketing, product development, and the customer experience, smaller issuers must innovate, differentiate, and leverage their unique assets to compete in this dynamic and ever-evolving marketplace.