Credit Card Analysis, Pt. 1

Part
01
of four
Part
01

Credit Card Industry: Overview

Third-party aggregator sites such as Credit Karma and The Points Guy are driving digital credit card marketing. With 73% of card applications being received digitally, and through third-party sites, major credit card issuers are seeking to conduct large scale marketing of their products and product offerings using such channels.

HISTORY OF CREDIT CARDS

  • The history of credit cards in the US dates back to the westward expansion of America in the 1800s. Merchants extended credit to local farmers and ranchers using credit coins and charge plates as forms of credit. Such transactions allowed them to skip monetary payments until after harvesting their crops or selling their cattle.
  • A century later, this method of transaction evolved when a few department stores and oil companies issued out their proprietary cards, which led to modern-day store cards. Such cards, however, did not serve the purpose of convenience more than it did to promote customer loyalty and improve service. Also, they were peculiar to the issuing merchants and could only be used there.
  • Later on, in 1946, the launch of the Charg-It card heralded the era of bank-issued charge cards.
  • However, the development of the Diners Club Card in 1950 bears the title of the first credit card in widespread use. The card was mainly used for entertainment and travel. Technically, the Diners Club Card was still a charge card, as the bill on the card had to be fully settled at the end of the month.
  • The American Express card was the next major debut in the history of US credit cards. It launched in 1958 and introduced the first plastic card in 1959, replacing cardboard and celluloid cards.
  • Major banks such as the Bank of America soon followed suit with BankAmericard credit cards, followed by the MasterCard, launched by a group of banks in California in 1966, under the Interbank Card Association (ICA).
  • As the credit card industry grew, so did the legislation to address consumer complaints.
  • Technological innovations and reform later led to the development of keychain cards and interactive cards, among other things, which have played a role in the appearance and functionalities of credit cards today.

CREDIT CARD INDUSTRY BACKGROUND

  • Reports regarding the US credit card industry show that the total outstanding credit card balances are still increasing and, at the end of 2018, were nominally above pre-recession levels. Delinquency and charge-off rates have increased in the past two years, despite being significantly low in the years following the Great Recession.
  • Also, "late payment rates have increased for new originations of general-purpose and private label cards, both overall and within different credit tiers."
  • Revolving accounts have experienced an increase in the total cost of credit (TCC) within the past two years and stood at 18.7% in 2018.
  • Credit scores, in general, were the same or decreased slightly since 2017. However, consumer demand for credit cards peaked in 2016 based on application volume. The rates of approval of credit cards also reduced slightly since 2016.
  • Consumers are driving the cost to industry to fund rewards cards based on cardholders' increasing use of such products.
  • Credit card companies and issuers have reduced the daily limit range on debt collection calls placed over delinquent credit card accounts.
  • Finally, new and emerging technologies are promoting consumer interaction with, as well as control over their credit cards. Consumers are using and servicing their cards via digital portals such as mobile devices. On the other hand, credit card providers are more equipped to manage risk and provide customer service using technologies such as artificial intelligence (AI) and machine learning (ML).

INSIGHTS REGARDING THE IMPACT OF AGGREGATORS ON THE US CREDIT CARD INDUSTRY

INDUSTRY MATURITY

  • Third-party aggregator websites launched in the 2000s and gained significant recognition and relevance in the credit card industry in subsequent decades.
  • Their entrance into the industry was marked by the period of recession recovery, for which they used and provided innovative marketing and branding techniques.
  • By 2014, consumers reported that they carried out 8% of their most recent credit card applications via these sites.
  • The industry is, however, beginning to show signs of maturity as the largest aggregator sites are embedding their brands in "consumer and media consciousness, increasingly concentrating consumer traffic and issuer compensation in a few sites."

REDUCTION IN DEBT COLLECTION REVENUE

  • Many creditors are increasingly employing the services of third parties to collect and sell debts on their behalf, from consumers to debt collectors. The debt collectors themselves also receive debts through third parties, thus leading to industry consolidation. As such, the revenue generated by the industry for debt collection has reduced recently from $13.5 billion to $11.5 billion, between 2013 and 2018.
  • This development also led to about 10,000 job losses in the past three years, as the number of debt collection firms is declining.

INCREASE IN DIGITAL CREDIT CARD MARKETING

  • Third-party aggregators are driving the trend of digital in the credit card industry. The increased usage of their services by consumers is driving digital credit card applications.
  • Currently, digital offers constitute almost half of all credit card offerings, and 73% of all card applications are digitally executed and received.
  • Sites such as Credit Karma and The Points Guy provide comparison statistics with which they rank different card offers and opportunities, thus assisting consumers in assessing and choosing the card that best suits their needs.
  • With significant increases in the traffic to these sites, major credit card issuers such as Chase, BOA, and Wells Fargo, among others, have begun to employ their services to conduct large scale advertising.

Part
02
of four
Part
02

Credit Card Aggregators: Demographics

Millennials and Gen Z typically comprise third-party aggregator consumers in the US.

AGE

  • Third-party aggregator sites usually resonate with the younger generation in the US, which consists of Gen Z and millennials.
  • About 70% of them are interested in using "digital payments advisory and expense management services that can give them a better understanding and control of their spending."
  • Third-party aggregator sites such as Credit Karma and The Points Guy provide comparison services to assist consumers in choosing the best card for them.
  • As such, the typical age range of third-party aggregator users is between 18 and 34 years.

GENDER

HOUSEHOLD INCOME

  • Since Gen Z are majorly students and have their primary source of credit debt from student loans, the average household income of typical third-party aggregator consumers is determined from that of millennials $71,400.

EDUCATION LEVEL

  • The education level at which people typically start using credit cards and related services differ from high school (9.8%), post-high-school-no college (18.8%), and college (47.5%), to post-college (24%).

RACE

  • Third-party aggregator sites assist consumers in deciding the best credit cards for them. As such, they are more likely to be patronized by people who are unsure of the credit card to use.
  • Based on this data, the typical racial demographics of third-party aggregator consumers in the US are African Americans (27%), Hispanics (20%), and Whites (12%).

Part
03
of four
Part
03

Credit Card Aggregators: Notable Events

Notable events that have taken place in the credit card industry in the past year include MRC Vegas 2019, Intuit acquiring Credit Karma, Card
Forum, the Inaugural TPG Awards, and Apple's partnership with Goldman Sachs and MasterCard.

MERCHANT RISK COUNCIL, VEGAS 2019

  • This event was organized to determine the role which fraud, payments, security, and technology impact customer metrics of loyalty, retention, and the success of one's business.
  • MRC Vegas 2019 brought together several online merchants, "vendors, card brands, issuers, and e-commerce visionaries, to share insights regarding the best practices, strategies, challenges, and growth opportunities, among others, of fraud and payments."
  • MRC Vegas is regarded as the largest, most reputable industry event where over 1,500 e-commerce professionals, merchants, card brands, issuers, and other attendees from over 30 categories discuss issues relating to "fraud prevention, risk management, payments, cybersecurity, data, and technology."

INTUIT TO ACQUIRE CREDIT KARMA FOR $7.1 BILLION

  • Intuit is acquiring a third-party aggregator website, Credit Karma, for $7.1 billion in cash and stock.
  • Since its founding in 2007, Credit Karma has amassed more than 100 million users.
  • Fintech companies should be going public. However, due to the numerous IPO's that have been performing poorly, fintech companies are thus more attracted to making acquisitions.

CARD FORUM 2019

  • This event is a conference that was organized in May 2019 to analyze the payments industry from the angle of cards. It brought over 600 cards and payments industry professionals, including several merchants, issuers, networks, and cards-related bodies.
  • The program provided cutting-edge discoveries to the most admired and innovative institutions in the industry.
  • Some topics at the conference include consumer credit summit, women in payments leadership exchange, and credit issue disruption: how the new credit lending ecosystem is changing to meet consumer demand, among others.

INAUGURAL TPG AWARDS

  • The inaugural The Points Guy (TPG) Awards provides several awards to deserving companies and individuals, in a bid to celebrate credit cards, loyalty, and travel.
  • Some awards given out include the premium card of the year, mid-tier card of the year, and best credit-card perk award, among others.
  • Some sponsors of the program include Capital One, Chase, Bank of America (BOA), and American Express.

APPLE, GOLDMAN SACHS, AND MASTERCARD

  • Apple is partnering with Goldman Sachs, and MasterCard to support its launch of its Apple Card. The partners would serve as the issuing bank and global payments network, respectively.
  • Goldman Sachs is a new entrant into the consumer financial services industry and is launching a unique credit card system that does not outsource to third-party aggregator sites for marketing and advertising.
  • Both companies are, however, very excited about the partnership with Apple and hope to help improve the financial wellbeing of consumers by providing faster and more secure transactions, while promoting transparency, simplicity, and privacy.

Part
04
of four
Part
04

Credit Cards: Financial Wellness

Spending out of budget can affect up to 65% of a consumer's credit score negatively.

DEBT

  • Often regarded as the top reason why consumers should not own a card, the possibility of falling into debt as a result of owning a credit card is extremely high.
  • About 75% of American cardholders have accumulated debt worth $870 billion.
  • On average, each household that uses a credit card owes no less than $8,398 in credit card debt.
  • Having a lot of debt, is highly detrimental to a consumer's financial wellbeing, as the level of debt typically comprises 30% of the consumer's credit score.

HIGH-INTEREST RATES AND FEES

  • Credit cards come at high-interest rates that could be detrimental to consumers. The Federal Reserve revealed that the average percentage rate (APR) across all accounts in the US was 15.09%, the highest recorded since 1994.
  • As all purchases made on a credit card are essentially loans with the highest rates in the industry, when a customer defaults on payment, even occasionally, these interests, along with late-charge fees, could accumulate and place them in a cycle of debt.
  • Other fees associated with credit card ownership include annual fees and over-limit fees, which are expensive and may be challenging to manage.
  • For example, a payment that is 30 days past the due date could reduce a consumer's credit score by up to 100 points.
  • Typically, a high credit card interest rate is a reflection of the risk a consumer poses, which is calculated based on the person's credit score. As such, high-interest rates are indicative of a lower credit score.
  • Ultimately, these rates usually lead to debt and late payments, which will increase the risk on the account and thus reduce the consumer's credit score.

SPENDING OUT OF BUDGET

  • Having a credit card opens people up to making unplanned purchases and, sometimes, spending out of budget.
  • A study revealed that shoppers would spend 100% more when shopping with a card than they would with cash.
  • Another study by Dun & Bradstreet revealed that consumers spend 12-18% more when shopping with credit cards than with cash.
  • People spend more using credit cards because it is more comfortable. There is hardly any immediate penalty/consequence for overspending with a credit card. As such, it is easier for consumers to go over their budget.
  • Consumers also feel less detached from the expenses they make using credit cards and usually focus on the benefits of purchase rather than the cost. As such, they are unable to assess or produce a more rational cost-benefit analysis.
  • Spending out of budget can affect 65% of a consumer's credit score negatively.

INACTIVITY

  • For most credit card issuers, consumer accounts only register as inactive after a year passes without any transaction. Credit utilization places affect a consumer's credit score by 30%, making it the second most important factor after the consumer's payment history (35%). However, Inactivity on a credit card places credit utilization at 0%.
  • Having all credit cards belonging to a consumer as inactive can reduce his/her credit score by a few points. However, if one's account is closed due to inactivity, it affects the consumer's credit history, which has a 15% effect on credit scores.
  • The longer the account was open before being inactive, the higher the impact on the consumer's credit history due to closure.

FRAUD

  • The ownership and use of credit cards create an avenue for identity theft, which has direct bearings on the payments history on the consumer's account.
  • A single missed payment due to the actions of fraudsters could seriously affect a consumer's credit score, reducing it by up to 110 points.
  • It also significantly decreases the length of the consumer's credit history, as well as credit utilization.
  • If the thief manages to acquire a credit card using a consumer's name, the chances of the card being maxed out are significantly high.
  • Such situations pose a threat to the consumer's credit score, as FICO estimates that charging up to a card’s limit can lower credit scores by up to 45 points.
Sources
Sources