Tag Archive for: credit card

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Revolvers Who Miss Payments Are Probably Going to Cancel Your Credit Card

(New York, NY):  Credit cardholders can be divided into two groups based on their payment behavior—revolvers and transactors. And while this distinction often identifies key differences between those who carry a balance and those who do not, revolvers are not all created equal. Recent research conducted by Auriemma Group compared on-time revolvers (i.e., those who carry a balance but haven’t missed a payment in the last 12 months) to late payment revolvers (i.e., those who skipped/missed a payment on at least one card in the past 12 months) with the aim of understanding the demographic factors that differentiate the groups from one another. In comparing the two groups, the research found that late payment revolvers are a serious retention risk, and that their card experience will need to be deeper than just paying off an outstanding debt to prevent them from cancelling their card.

Revolvers represent 56% of the credit cardholder population, with 38% qualifying as on-time revolvers and 18% as late payment revolvers. Late payment revolvers tend to be younger (34 vs. 46 average age), more highly educated (70% vs. 57% college degree or more) and employed (86% vs. 66%) when compared to their on-time revolving counterparts.

While those demographics would be a welcome addition to an issuer’s portfolio, these customers don’t tend to be especially loyal to specific cards. Most have cancelled (52% vs. 6% on-time revolvers) and/or acquired (55% vs. 14%) a new card within the past year. These customers also tend to have competing financial responsibilities—72% are parents of a minor (vs. 34%), 50% hold a mortgage (vs. 42%), and 36% hold a student loan (vs. 22%).

Because of these competing priorities, this group is motivated to consolidate outstanding balances they have on their cards—creating the opportunity to acquire these customers.

“To better manage their credit card debts, half of late payment revolvers have taken a balance transfer,” said Jaclyn Holmes, Director of Auriemma’s Payment Insights practice. “This is in comparison to just 9% of on-time revolvers, which showcases one way to get these customers into your portfolio.”

While there is ample opportunity to convert late payment revolvers to new customers via balance transfers, the real challenge is keeping them engaged with the product. Late payment revolvers have more inactive cards in their wallet—only 43% have used all their cards (compared to 58% of on-time revolvers), demonstrating a consolidation of spend. And while an attractive balance transfer offer could entice late payment revolvers to acquire a new card, the likelihood of abandonment is high, with more than half of this population cancelling a card in the last 12 months.

Issuers must also contend with the group’s general sentiments toward credit cards as a product. Most (52%) prefer debit over credit. They also tend to have lower average FICO scores than their older on-time revolving counterparts (570 vs. 720), partly due to having limited credit histories. The group also has lower credit lines and lower average outstanding balances ($2,640 vs. $4,446).

“We know from previous research that cardholders’ top reasons for cancelling a card are paying off the balance or getting a new card,” says Holmes. “It is critical for issuers to entice cardholders to want to spend with their cards and not just chip away at an outstanding debt, especially as the balance gets closer to zero. For late payment revolvers to become loyal to a product or brand, they must first develop a more positive relationship with credit generally. Offering incentives to these cardholders that encourage spend and develop loyalty will be the best chance issuers have at retaining the customer.”

Survey Methodology

This study was conducted online within the US by an independent field service provider on behalf of Auriemma Consulting Group among 800 US adult credit cardholders in March 2018. The number of interviews completed for both is sufficient to allow for statistical significance testing among sub-groups at the 95% confidence level ±5%, unless otherwise noted. The purpose of the research was not disclosed, nor did respondents know the criteria for qualifying. The average interview length was 25 minutes.

About Auriemma Group

For more than 30 years, Auriemma’s mission has been to empower clients with authoritative data and actionable insights. Our team comprises recognized experts in four primary areas: operational effectiveness, consumer research, co-brand partnerships, and corporate finance. Our business intelligence and advisory services give clients access to the data, expertise and tools they need to navigate an increasingly complex environment and maximize their performance. Auriemma serves the consumer financial services ecosystem from our offices in New York City and London. For more information, Jaclyn Holmes at (212) 323-7000.

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Four Things That Will Make UK Consumers Want Your Credit Card

(London):  UK cardholders have 1.77 credit cards in their wallet on average, and while some may assume consumers aren’t in the market for a new card, the majority are actually open to new card offers. But consumers aren’t settling for just any card, and to earn their business, issuers need to be smart about their products’ value propositions and how they’re marketed. In the densely populated field of credit card options, how can issuers stand apart from the pack? Offering the best rewards is a good start, according to new data from Auriemma Group. But consumers want more. Here are some of the more compelling ways issuers can increase their chances of getting into consumers’ wallets.

  1. Offer attractive rewards.

No matter the category, rewards continue to push consumers over the tipping point when making acquisition decisions. When faced with the long list of elite options, the 66% of respondents interested in acquiring another rewards card most frequently cited the richness of rewards as the chief factor for their selection. But just offering rewards isn’t enough.

  1. Highlight your card’s exclusivity and prestige.

When some consumers select a card, they do so because the card embodies a particular lifestyle. Aspirational or otherwise, cards perceived as prestigious (28%) and those with the best benefits (21%) (e.g., exclusive events, lounge access) are highly coveted by those looking for a new card. This group seeks cards that tout platinum or titanium status, viewing them as having the most enticing benefits.

  1. Maintain a well-known and respected public image.

Card selection is also heavily impacted by the familiarity with and reputation of your brand. Among those surveyed, approximately three-quarters (73%) indicated they would be unlikely to take a card from a brand they are unfamiliar with. Consumers over 55 years old were even more likely to say this (83% vs. 67% under 55). Likewise, 74% reported a brand’s reputation (positive or negative) would impact their decision, a factor even more important for cardholders under 55 (79% vs. 65% of 55+). And 21% of current cardholders in the market for a new card say they would base their decision on their personal affinity for the brand associated with it.

  1. If you’re UK-based, tell people!

Consumers see real value in products from issuers who have a distinct presence in the UK: 73% of cardholders said it was important for their card issuer to be headquartered in the UK. In fact, if rewards and rates were equal, 77% of cardholders with a preference would prefer their issuer have a national presence (vs. 23% global). UK-based issuers that are not calling attention to their geographical connection to cardholders are missing an opportunity to increase their wallet share and acquire new customers.

“Issuers who can effectively communicate these four attributes stand the best chance of acquiring new customers,” says Jaclyn Holmes, Director of Payment Insights at Auriemma. “The challenge will be in striking the proper balance and ensuring your message is targeting the correct consumers.”

Survey Methodology

This study was conducted online within the UK by an independent field service provider on behalf of Auriemma in June 2017, among 500 adult credit cardholders. The number of interviews completed on a monthly basis is sufficient to allow for statistical significance testing between sub-groups at the 95% confidence level ± 5%, unless otherwise noted. The purpose of the research was not disclosed nor did the respondents know the criteria for qualification.

About Auriemma Consulting Group

Auriemma is a boutique management consulting firm with specialised focus on the Payments and Lending space.  We deliver actionable solutions and insights that add value to our clients’ business activities across a broad set of industry topics and disciplines.  Founded in 1984, Auriemma has grown from a one-man shop to a nearly 50-person firm with offices in London and New York.  For more information, contact Jaclyn Holmes at 020 7629 0075.

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Bolstering Credit Card Profitability Despite Challenging Economic Indicators

(New York, NY): It’s been quite a while since the U.S. credit card industry has had to worry about profitability.  Nearly a decade of close-to-zero funding cost and below-trend losses were the perfect mix for very healthy margins, even after increasing both consumer rewards and co-brand partner compensation.  But lately, new data is emerging that suggests the good times may be waning.

From 2012 to 2016, US credit card issuers experienced a gradual erosion of profitability.  Net income as a percentage of average assets fell from a high of 6.6% to 2.7%, according to the FDIC.  In this context, the results of the 2017 stress tests, in which credit card assets represented the largest potential credit risk for the large bank holding companies, seems more understandable.

While a net return on assets (ROA) of close to 3% is still a healthy profit margin by banking standards, the downward trend is unmistakable. (It’s particularly noteworthy that this erosion was concurrent with historically low interest rates.) And there are new risks to profitability: data from Auriemma’s Industry Roundtables indicate that the top 11 U.S. card issuers’ average quarterly loss rate increased 13.4% between the fourth quarter of 2016 and the first quarter of 2017, signaling that the increasing credit loss trend has not yet abated.

While these trends are gathering force, it’s important to note that the credit card industry has seen difficult times before and has always been able to adjust and rebound.  Here is a potential roadmap for this situation.

The first step for all players, regardless of size, is to conduct a deep-dive portfolio review. By identifying which segments are most vulnerable to deterioration, an issuer can more closely tailor possible solutions.  Ideally, the segmentation should be more than just a FICO or risk segmentation and would include profitability metrics as well. While the CARD Act has essentially eliminated the ability to re-price for credit migration, calculating profitability for each FICO band (or other risk metric) is still a critical step in evaluating the portfolio.  This analysis can be optimized with segmentation by either origination vintage or by origination campaign. Of particular importance: vintage analysis for any change-in-terms (CIT) portfolio actions. Establishing the link between underwriting changes and credit outcomes is critical to an honest assessment.

After the portfolio review, there are many possible paths to follow. Here are a few strategies for issuers to consider.

Take no action. If the portfolio review suggests that the credit trend is anomalous or is likely to revert to a better level, then taking no action and continuing to monitor the portfolio may be the best course. One month does not a trend make.

Be the counter-puncher – and aim for growth. Being aggressive when others play a conservative hand is a time-honored, but high-risk way to grow. (Warren Buffett famously said, “Be fearful when others are greedy and greedy when others are fearful.”) Some issuers will see the market deterioration as an opportunity to gain market share as more conservative issuers pull back. This approach is not for the faint of heart, and the challenges it presents are obvious.  But for a highly capitalized, sophisticated, credit-savvy issuer this can be a tremendous opportunity.

Change underwriting standards. For an issuer that has seen some portfolio deterioration but is not expecting a default tsunami, reducing credit exposure on newly originated accounts with tightened underwriting may be all that is needed. In addition to modifying credit selection and market solicitation criteria, issuers will also want to revisit line assignments (both for the existing portfolio as well as for the new accounts), collection entrance parameters, servicing and collection strategies among other operating levers.

Conduct a portfolio segment sale. One possible outcome of the portfolio analysis, depending on the issuer’s outlook, may be to sell a segment of the portfolio which effectively transfers a disproportionate share of the total portfolio credit risk. While this type of pruning is not always possible, the current market appetite for consumer credit risk makes this a feasible strategy. (A recent example is Barclaycard US’ reported sale of $1.6 billion worth of subprime credit card receivables to the Credit Shop this year.)

These are just a few of the possible avenues to explore in the current environment.  Auriemma has a deep institutional memory about prior challenges and the creative ways in which successful issuers responded.

Ultimately, the strategy selected may be less important than the quality of the portfolio review; a strategy premised on a superficial analysis may be more dependent upon luck than execution. If, after a thorough portfolio review, an institution concludes that no change is needed, that may be a viable choice made with eyes wide open.  Heading into a challenging credit environment, however, it’s safe to say that inertia without analysis is hardly a wise choice.

About Auriemma Group

Auriemma is a boutique management consulting firm with specialized focus on the Payments and Lending space.  We deliver actionable solutions and insights that add value to our clients’ business activities across a broad set of industry topics and disciplines.  For more information, contact John Costa at 212-323-7000.

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EU Pullbacks Haven’t Axed Rewards Payment Cards—They Still Rule

(London, UK):  One year after the implementation of Interchange Fee Regulation (IFR), the majority of British consumers continue to favor payment cards that reward them with points or miles for their spending, according to recent research by Auriemma Group.  The EU-mandated cap on credit and debit card interchange fees reduced the revenues earned by card issuers, prompting many to scale back their rewards schemes in 2016. Despite these cutbacks, over half of UK credit cardholders in the Auriemma study say they earn rewards for payment card usage, and they respond enthusiastically by concentrating their spending on those cards.

As part of its ongoing UK Cardbeat research, Auriemma surveyed 400 UK adults who own rewards payment cards.  Almost a quarter (23%) reported a change to their rewards programme in the past year—78% of them saying the change decreased the overall value of the card. Still, more than half of that same group say their usage was not affected by these changes, and 82% say a payment card that earns rewards is their most frequently used card.

The most widely held type of rewards payment card is cashback (37%), followed by supermarket (33%), and airline (21%). Despite their smaller market share, airline miles seem to be the most powerful reward, as these cardholders spend more in total and report higher satisfaction overall.

“Airline and hotel rewards are big-ticket and aspirational” noted Marianne Berry, Managing Director of Auriemma’s Payment Insights practice, which conducted the study. “Most consumers who have an airline co-branded card are consciously banking their miles earned toward a free ticket for a vacation or personal travel, so they’re very motivated to use that card to pay for everything.”  On average, cardholders say they need to spend £8,325 to redeem points for a flight, compared to £3,386 for a hotel room.

This perception of rewards’ intrinsic value translates into much more spending. On average airline rewards cardholders spend more per month (£1,182) on their airline rewards cards than retailer/grocery (£606) and cashback (£564) cardholders do on those cards combined. And 62% of their spend is outside the card’s partner brand (vs. 52% retailer/supermarket cards), suggesting a purposeful effort to earn miles with a range of purchase types. They also ascribe a higher value to their airline miles earned. About half (46%) of airline rewards cardholders believe a mile is worth £0.05 or more, while only one-quarter (24%) of their retailer/grocery counterparts believe a point earned is worth the same.

“Ultimately, industries vary in how they structure their rewards payment card programmes,” says Berry. “Those with airline cards spend more and have to wait longer to redeem, while those with retail or grocery cards get more frequent, but lower-value rewards. These rewards schemes appeal to different types of cardholders.”

On February 22, these findings (and more insights on UK rewards payment cards) will be presented by Berry at the 2nd Co-Brand EMEA conference in London, entitled, “Is Your Marketing Bold Enough?” Auriemma’s Director of International Partnerships, David Edwards, will act as Chairman for the event. Those interested can visit www.airlineinformation.org to learn more.

Survey Methodology

This study was conducted online within the UK by an independent field service provider on behalf of Auriemma Consulting Group in September 2016, among 400 adult rewards cardholders. The number of interviews completed on a monthly basis is sufficient to allow for statistical significance testing between sub-groups at the 95% confidence level ± 5%, unless otherwise noted.

About Auriemma Group

Auriemma is a boutique management consulting firm with specialised focus on the Payments and Lending space.  We deliver actionable solutions and insights that add value to our clients’ business activities across a broad set of industry topics and disciplines.

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Paying by Plastic Changes Tipping Behavior

(New York, NY): Tipping for service may be a cultural norm in the US, but prompts at point of sale can greatly affect who gets tipped and how much, according to new report by Auriemma Group. The firm’s latest Cardbeat ® survey of 800 US credit cardholders found that presenting consumers with the opportunity to add a tip when they pay by credit card can increase tipping behavior by almost a third.

When queried about their normal habits, the vast majority of consumers (93%) say they typically tip their servers in a restaurant, while 72% tip for food delivery and 69% tip their hair dresser or barber. Tips are far less prevalent when given in cash, however, with fewer than half of those surveyed saying they generally tip taxi drivers (46%), valet parking attendants (38%), or hotel room cleaners (39%). Asked what they’d do if they didn’t have cash handy, 41% of consumers say they’d skip leaving a gratuity altogether for courtesy services where they may otherwise tip. Given the option, nearly 9 in 10 (89%) cardholders say they would always tip on a card if they could, with 79% adding that they feel it’s an inconvenience when they’re unable to tip on their credit card.

As payment card acceptance becomes more widespread, however, so does the likelihood of tipping. A noteworthy 30% of cardholders say that tip suggestions that appear at point of sale make them more likely to tip. “These tip prompts are often used on mobile point of sale (mPOS) systems, such as those used by car services or taxis” said Jaclyn Holmes, the Auriemma senior manager who directed the study. “When the checkout screen asks if they want to tip 15%, 20%, or 25%, people are far more likely to leave any tip, although most opt for the lowest suggested amount.” At fast casual restaurants 81% of cardholders would leave a tip after passive merchant prompting through an mPOS system, representing a 31% increase in the number of cardholders who would leave a tip at a restaurant of that kind. “On a cumulative basis, such prompting could create a significant increase in payment card transaction volume,” Holmes noted. “Baristas and drivers may welcome these innovations, but so will the IRS, which can more easily document these sources of income.”

About Auriemma Group

Auriemma is a boutique management consulting firm with specialized focus on the Payments and Lending space. We deliver actionable solutions and insights that add value to our clients’ business activities across a broad set of industry topics and disciplines. For more information, please visit Jaclyn Holmes at 212-323-7000.

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Auriemma Expects Credit Card Portfolio Values to Trend Lower Over the Next Several Years

(New York, NY):  Auriemma Group, a nationally recognized credit card valuation agent, has identified several factors which it believes will cause credit card valuations to decline.  The drivers of this anticipated reduction in market value are both changes in card business models as well as regulatory and accounting rule changes.  While Auriemma remains bullish on the credit card business over the short – intermediate timeframe, we expect to see the value reductions appearing in earnest by 2017.

Of the threats to the business model for traditional card issuers, Auriemma is focused on the following:

  • The inevitable increase in delinquency and bad debt expense as the business reverts to the long term mean for consumer credit performance
  • The gradual erosion in underwriting discipline which we are anticipating based upon the entrance of new issuers into the subprime arena
  • The change in “lifetime” value of a customer brought about in part by the change in perception about use of credit cards versus debit cards among millennials
  • The proliferation of alternative payment channels which will exert pressure on traditional card income as newer players enter the market and demand revenue participation.

Several of these are long term trends which we have been watching/anticipating and see signs of acceleration.  With regard to the impending regulatory and accounting changes and the anticipated change in market value, Auriemma is focused on the following:

  • FASB’s new methodology for loan loss allocation which we believe will have an exaggerated impact on credit card issuers versus other consumer lenders
  • The changes in both the composition of common equity tier 1 (CET1) capital and in the specific new capital treatment of purchased credit card relationships (PCCR) intangible assets.

Both the anticipated changes to the loan loss reserving methodology and to the new capital treatment for PCCR will result in very significant pressure on regulatory capital for the industry and will likely slow down future portfolio consolidation.  Auriemma’s expectation that market values will decline does not mean the card industry will become unprofitable; rather, the increase in the amount of capital necessary will result in a significantly lower return on equity.

There are multiple strategies that an issuer may pursue to position itself for these challenges.  Such strategies can allow for both aggressive and defensive postures.  Similarly, investors in credit card equities need to understand how their portfolio companies will address these issues.  Auriemma is prepared to assist our clients both in developing strategies and implementing plans to align their goals with the changing environment.

 About Auriemma Consulting Group

 Auriemma is a boutique management consulting firm with specialized focus on the Payments and Lending space. We deliver actionable solutions and insights that add value to our clients’ business activities across a broad set of industry topics and disciplines. Auriemma has been providing credit card portfolio valuations for over two decades and is a nationally recognized valuation agent. For more information, please contact John Costa at (212) 323-7000.

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Banks That Issue the First Credit Card in Wallets Have Opportunity to Grow with Consumers’ Incomes

(New York, NY):  Becoming the first credit card in a person’s wallet has long-term financial benefits for banks; the average account tenure is 17.4 years. Further, more than two in five (41%) consumers report that they also have some other type(s) of account(s) with the same bank in addition to their credit card, most commonly checking and savings accounts. The results were published in Cardbeat,® a syndicated research report published by the Auriemma Group, and is based on a web-based survey of credit card users in the U.S.

Logically, most (64%) consumers indicate that they applied for their first card in order to establish their credit history. Additionally, the largest percentage (71%) of these consumers cite a specific life-event being associated with their first credit card acquisition, with many being related to educational milestones such as college or high school graduations. In theory bank transactional data, as well as lower-tech solutions such as having retail bank salespeople help to manage consumer relationships can enable banks to market to consumers during these life events.

Although direct mail remains an important acquisition channel for credit cards, in recent years, branches have been a rapidly-growing acquisition channel for new cards for a number of large banks. In fact, branches or other facilities that offer face-to-face consumer interactions are now responsible for nearly half (45%) of all new credit cards sold.

However, retail banks face challenges, notably, most new credit cards are issued to the Millennial population (born between the years of 1981-1991, now between the ages of 23-34), and this demographic segment is much more likely than other age groups to avoid visiting bank branches completely, preferring to conduct most of their routine bank business at ATMs or online instead. This makes reaching them more difficult than it was for prior generations. Some financial institutions have started to experiment with concepts like video chats with bank call center reps right from the ATM. While these are still in trial phases, its definitely a step in the right direction.

Marianne Berry, Managing Director of the Payment Insights practice at Auriemma, says that the overall message to banks is clear:  the benefits of being the first credit card in someone’s wallet are genuine, and these tend to be long-lasting, attractive consumer relationships. She says, “While most of the Millennial population cannot yet be defined as affluent based on income or assets, there is little doubt that in time, some will become affluent.”  Ms. Berry adds the banks that establish relationships with Millennials now, during their formative years, will have a unique opportunity to grow and expand existing relationships with these consumers as their personal wealth grows.

About Auriemma Group

Auriemma is a boutique management consulting firm with specialized focus on the Payments and Lending space. We deliver actionable solutions and insights that add value to our clients’ business activities across a broad set of industry topics and disciplines. For more information about Auriemma’s research, please call (212) 323-7000.

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