Welcome! Mercator Advisory Group’s point of view received mention in a recent a Wall Street Journal article on risks to credit card profitability. We think the credit card industry will continue to outpace other retail bank sectors but that margins will continue to slip.
If your credit portfolio runs on par with top U.S. banks, you should anticipate higher collection volumes through at least year end. The latest Fed data indicates that charge-off rates hit 3.65%. This is a far cry from the recession, but the metric for Q1 2018 is the highest since Q1 2013. Collection volumes are likely to require additional staff or at least more production hours. With low unemployment, it might be worthwhile to start the hiring cycle sooner rather than later.
With increased collection comes involuntary account attrition, a topic we covered the recent Mercator Advisory Group research report: Credit Card Acquisitions: Maximizing Results amid Change. You will find the report filled with data on account volumes, attrition rates, and the shift to digital acquisitions.
A Slowdown in Revolving Debt
Another concern among issuers is the growth of revolving debt in the United States. It looks like $1 trillion is the market peak. After the recession, when $1 trillion in revolving debt dipped $150 billion, the market steadily rebounded; between 2013 and 2017, the metric rebounded from $855.6 billion to $1.029 trillion. Instead of growing in January 2018, the parameter decreased by $2 billion. In a credit card market, that is bad news for interest revenue.
All Is Not Doom and Gloom, Though
There are still plenty of opportunities in U.S. credit. Attacking some niches requires shifting, however. As an example, there is plenty of opportunity in the small business credit card market, which we covered in March (see the research report U.S. Small Business Credit Card Forecast, 2017–2022: Healthy Market, Room for Improvement). The private label credit card market, covered in our most recent report, Private Label Credit Cards: A Market, Not Just a Niche, is competitive and operates with 300 million cardholders. Existing players usually focus on the top 250 retailers, but we believe that a downstream model targeting internet companies with revenue in the millions rather than billions is a potential niche. Comenity Bank recently bagged an online retailer in that space.
Moreover, smart money is coming into the credit card business and will make a splash. Wall Street’s Goldman Sachs looks positioned to enter the U.S. credit card market, as we detailed in a Viewpoint released in May, Goldman Sachs Credit Cards: A Golden Opportunity. Interestingly, the company built its $3 billion Marcus by Goldman Sachs start-up on the mantra “Consumer loans to eliminate high-interest debt.” We have to wait and see how the company structures its credit card policies.
The European Union has now added a new set of regulations on data protection which will affect every payment market. If your business has even one European transaction, or one European customer, the General Data Protection Regulation (GDPR) affects you. The regulation took effect on May 25. You can find more about it in our research report titled General Data Protection Regulation: The European Union’s Cross-Industry Approach to Data Protection, released in April.
Watch for upcoming research on credit card rewards. They still work and everyone loves them (me included), but will the industry ever get beyond the rewards arm race? Mercator’s Credit Advisory Service will also release our third annual review of credit card profitability and, if all goes well, a deep dive on credit card securitizations. Securitization in the U.S. froze after Dodd-Frank, but issuers are getting back into the market. Securitizations allow issuers to take accounts off their balance sheet and sell them to investors; the bank card business still services the debt for a fee.
Thanks for your time. We look forward to speaking with you. Your Mercator account rep can always set up a meeting or send me an email.
Director, Credit Advisory Service
Mercator Advisory Group