Credit Card Analysis, Pt. 2

Part
01
of four
Part
01

Credit Card Aggregators: Over- and Under-Served Markets

Gen X and baby boomers constitute the underserved segment of the credit card aggregator market.

OVERVIEW

  • Financial technology (Fintech) describes new technologies/innovations that seek to automate the delivery and use of financial services.
  • Third-parties having access to bank data and being able to build apps that connect financial institutions and third-party providers (aggregators) are among the most active areas of fintech innovation.

OVERSERVED AND UNDERSERVED SEGMENTS

  • The credit card aggregator market caters to the 91 million consumers with low-to-moderate incomes, 51 million people battling volatile revenues, those with credit challenges (121 million people), and the underbanked/overbanked (67 million people).
  • These consumers constitute the financially underserved people in the US and represent most of the credit card aggregator market. However, while their services are helpful to these consumers, they might experience challenges when navigating the numerous technological innovations of such companies.
  • The underserved segments of credit card aggregators thus follow after the age group that is less connected with technological innovations, i.e., Gen X and baby boomers. Consumer-oriented fintech targets the younger generations of Gen Z and millennials, who are "digitally-savvy, urban, and better-educated."
  • However, fintech experts believe the focus of the industry on millennials is more because of the size of the segment, rather than the ability of older generations to use fintech.
  • Fintech usage is, however, "highest among millennials, with a global average adoption rate of 48% among tech-savvy 25-34-year-olds." Consumers in the older category use fintech services on average (30% for 45-54-year-olds and 22% for 55-64-year-olds). However, despite these statistics, they are still underserved.
  • The fintech industry, and in essence, aggregators, tend to offer little to older consumers because their priorities and solutions do not align with the needs of that category.
  • Credit Karma's target segment, for example, is for consumers between 18 and 34 years, which comprises Gen Z and millennials.
Part
02
of four
Part
02

TAM: Credit Card Aggregators

With the recent sale of Credit Karma to Intuit for $7.1 billion, the market for "fintech" and specifically credit card aggregators is potentially valuable for businesses to enter. Given the current challenges for US credit card consumers with debt management, and the expected growth in use of credit cards over the next five years of roughly 6% per McKinsey, the TAM is most conservatively $556 million and likely exceeds $600 million.

Total Addressable Market — Most Conservative Estimate

  • Based on the individual valuations for the companies, when summing them together it comes to roughly $1.85 billion in revenue or funding for these companies ($1B+$110M+$500M+$234M+$12.3M)
  • It also means a maximum of 125 million consumers, assuming all customers are unique and no overlap exists between users of these products (74M+10M+22M+8M+11M+12K). This last assumption is extremely conservative.
  • While these companies may only serve a maximum of 125 million credit card consumers, whereas there are approximately 180 million credit card holders in the United States. This represents a missing segment of approximately 30% of the market in the worst case. (125 Million / 180 Million = 69%).
  • Adding in even the missing 30% and assuming no movement from existing credit card aggregator users as the worst case scenario leaves approximately $556 million on the table (30% of $1.85 billion).

Relaxing Assumptions and Changing TAM

  • Adding in the McKinsey estimates for growth, this could potentially be closer to $600 million by 2023 (assuming the user growth of 6% and a flat growth in revenues of these companies, resulting in taking 34% of $1.85 billion).
  • Dropping the assumption that the users of these services are unique would raise the TAM even more, though there is no reliable way to estimate how much overlap exists between credit card aggregator users given the available data.

Research Strategy

    This research began by looking to see if specific information on the overall market for credit card aggregators existed. Given the narrowness of the market, it has not been studied in depth outside the broader "fintech" label, which is more comprehensive. After researching known credit card aggregators and looking for industry reports on their competitors via Craft, Comparably, and Crunchbase, a list was complied of the main players: Credit Karma, Credit Sesame, Nerd Wallet, ThePointsGuy, Bankrate, and FeeX. I sourced information on each products' users and revenues/funding from the company sites, press releases or statements provided by the company to the media, and Crunchbase. All valuations come from 2017 and later, and use the latest numbers. Other competitors, such as Mint, offer these same services but their market sizing cannot be separated from other components of its parent company. As well, other aggregators such as SmartAsset and SelfLender did not have financial or user information available. Additional information on trends in the credit card use market came from reviewing credible sources such as Nilson Reports or McKinsey Studies to best determine trends and growth expectations in the overall credit card market that could feed into the market for credit card aggregators. This helps to determine a baseline for a potential market, and then compare that to what is currently in the market. Credit Karma has $1 billion in annual revenues and 74 million unique visitors a month. Credit Sesame has $110 million in funding and 10 million unique visitors a month. Nerd Wallet has $500 million in annual revenues and 22 million unique visitors a month. The Points Guy does not report revenue or funding, but does have 8 million unique visitors a month. BankRate in 2017 had $234 million in revenue for its products, and still maintains 11 million unique visitors. FeeX has $12.3 million in funding, but only 12,000 visitors per month.
Part
03
of four
Part
03

Credit Card Aggregators: Regulatory Concerns

Five regulatory concerns faced by companies considering launching a credit card aggregator or payment aggregator are obtaining a PCI certification, getting a Payment Service Provider License, complying with KYC guidelines, the concern of facing penalties, and complying with the requirements of the Card Associations.

1. Obtaining the PCI Certification

  • While it is not a law, PCI certification is a requirement for any company implementing a Credit Card Aggregator model and an international regulation for online credit card operators.
  • This regulation implicates expenses to the company and following strict rules like building and maintaining a secure network, creating processes to protect and encrypt the data of the cardholder, managing programs that protect the network's vulnerability, spending on restricting and controlling physical access to secure areas, training the personnel in security practices, etc.
  • The certification costs $15,000 each time, and if the company doesn't pass the certification, the fee is paid again. Failing to be PCI certified can impact the company by being limited from managing credit card payments and information, higher charges from the credit card companies and banks, potential security risks, losing the right to accept credit cards in the future, etc.

2. Getting a Payment Service Provider License

  • One of the regulatory barriers faced when launching a Credit Card Aggregator in a company is being approved as a Payment Service Provider (PSP).
  • Businesses wanting to be approved as PSP need to have security metrics, a strategy to store credit cards safely, established banks and processors they'll work with, have a certification to use a payment gateway, the payment software also needs to be certified under the person's name, and be PCI certified.

3. Complying with KYC Guidelines

  • Companies implementing a Credit Card Aggregator model must also comply with KYC guidelines.
  • The Know Your Customer guidelines make companies focus on establishing the identity of the customer, understanding the nature of any activity or transaction made by the customer, and monitoring activities to prevent money laundering.
  • The impact in the company includes the costs of acquiring a Customer Identification Program (CIP), Electronic KYC Verification programs, and training the personnel to recognize suspicious and fraudulent activities.

4. Facing Penalties

  • An important concern that companies adding credit card aggregators have is that, after they are certified as PCI, if they are found violating the PCI regulations they can get fined from $5,000 to $100,000 monthly by the credit card companies.
  • Additional to these fines, the banks working with these companies can also charge penalties.
  • This would mainly impact small and medium businesses whose finances can suffer from the costs of these penalties.
  • Failing to comply with KYC guidelines can also lead to severe fines, damaging the relationship with the banks, and in some cases, jail.

5. Complying with the Card Associations Requirements

  • To prevent penalties or having their merchant account closed, companies launching a credit card aggregator must be approved by Card Associations and comply with their requirements.
  • This implicates additional work for the company like being sponsored by an acquirer (financial institution or bank) to register as an aggregator; establishing processes against factoring; submitting the policies and procedures of the company to the Card Associations for approval; complying with the rules of collecting, checking, processing, and storing data; creating customer service and operating regulations; and an agreement to process payments based on each type of merchant.
Part
04
of four
Part
04

Credit Cards: Buying and Shopping Habits

In a survey of one thousand people who own at least one credit card in the US, 35.7% of the respondents said that they preferred to use their credit cards while shopping and only 6.8% said that they preferred to use cash. The credit card consumers usually focus on the benefits of their purchases rather than the cost. More insights into the topic have been presented below, along with an outline of the research strategy.

Purchasing/Shopping Locations and Purposes

  • The credit card users in the US prefer to make online purchases through different online shopping portals rather than making in-store purchases.
  • According to a survey conducted by Value Penguin on US consumers, 48% of the respondents preferred to use their credit cards for online shopping.
  • Similarly, 47% and 38% of the respondents preferred to use their credit cards for travel purposes and for making purchases in department stores, respectively.

Online Overshopping Habits

  • In a survey conducted on 1700 consumers who use credit cards in the US, two in five people admitted to "blowing their budgets while online shopping in the past six months."
  • Clothes (27.8%) and electronics (16.8%) are the categories where online shoppers tend to overspend the most.
  • In the same survey, 42% of the respondents reported having overshopped and exceeded their budget while making online purchases.
  • Similarly, 29% of the respondents reported that they purchased something using credit cards, knowing that they could not pay right away.

Payment Preferences

  • According to a survey conducted by The Ascent, 35.7% of the respondents preferred to use credit cards for shopping and making purchases.
  • Similarly, 6.8% and 57.5% of respondents preferred to use cash and debit cards, respectively.

Frequently Shopping Generation

  • Millennials are the frequent and highest-spending shoppers when compared to other generations, such as baby boomers and Generation X. According to a report, "3 in 10 (29.9%) millennials place an online order at least weekly, compared to 23.8% of all American consumers."
  • In a survey, 22.9% of millennials admitted having shopped online under the influence of alcohol.
  • According to the same survey, 55.9% of millennials admitted having overshopped and exceeded their budgets.
  • According to a report, 58.2% of Gen X and 39.3% of baby boomers in the US shop using credit cards to build their credit history. Similarly, 71.9% of millennials shop using credit cards for the same reason.

Credit Card Users' Focus While Shopping

  • According to an article on Forbes, the consumers who use credit cards to make purchases focus on the benefits of their purchase rather than its cost. This insight is directly related to the overspending habit of shoppers who use credit cards.
  • A study reported that credit card users were 28% better than cash users at making purchases by analyzing the benefits of a product. The same study reported that cash users "were 82% better at recalling aspects related to an item's cost than credit card users."

Shopping for Credit Card-Related Benefits

  • The consumers in the US also prefer to use credit cards while shopping because they are influenced by rewards, cashback offers, and loyalty points.
  • According to a study, 43% of the US consumers who own a credit card have a cash-back credit card. Similarly, 20.6% of shoppers who own a credit card prefer a rewards card.
  • According to The Ascent, 49.7% of millennials, 47.9% of Gen X, and 42.6% of baby boomers shop using a credit card to earn the purchase rewards.

Research Strategy

We started our research by looking for quantitative data on the buying and shopping habits of US consumers who have or regularly use credit cards. We were able to find the required quantitative insights after looking across multiple credible reports and surveys on databases, such as Forbes, TSYS, Value Penguin, and more. We corroborated our findings across the reports before including the findings in this research. We found that a report by Coupon Follow must be downloaded by providing some personal information. Therefore, the main findings from the report have been presented in the attached Google Doc. In this way, the research was completed successfully.
Sources
Sources

From Part 02
Quotes
  • "Credit card balances carried from one month to the next hit $466.2 billion in December 2019, according to NerdWallet’s annual analysis of U.S. household debt. Credit card debt has increased more than 7% in the past year and almost 37% in the past five years."
Quotes
  • "In its 2019 fiscal year, Intuit’s consumer sector (basically, Mint and TurboTax) generated $2.775 billion in revenue, versus $3.533 billion for its small business and self-employed division, which is dominated by its QuickBooks accounting software."
Quotes
  • "Second Quarter 2017 Segment Highlights: Credit Cards Segment: Second quarter segment revenue of $78.9 million and Adjusted EBITDA of $25.1 million; year over year increases of 13% and 2%, respectively. Credit cards consumer inquiry revenue of $63.9 million; a year over year increase of 21%."