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The Credit Card Industry

The Credit Card Industry. Samuel Boochever Dhara Shah Nicole Kelly. Part 1: Industry Overview. Payment Cards: Provide means to use "money" to complete a transaction between merchant and consumer Charge Cards Debit Cards Fleet Store-Value Credit Cards. Why Choose Payment Cards?.

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The Credit Card Industry

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  1. The Credit Card Industry Samuel Boochever Dhara Shah Nicole Kelly

  2. Part 1: Industry Overview • Payment Cards: Provide means to use "money" to complete a transaction between merchant and consumer • Charge Cards • Debit Cards • Fleet • Store-Value • Credit Cards

  3. Why Choose Payment Cards?

  4. Payment Card Framework • Network Joint Venture: “Cooperation among several independent businesses.” • Four Key Players: Merchants, Consumers, Financial Intermediaries, Payment Solution Companies • Complex interaction among players

  5. Credit Cards Defined • Provides consumer funds to purchase goods and/or services in return for payment at a later date • Revolving Credit: Can delay repaying balance in full by paying a minimum monthly payment • Lending Institution vs. Payment Systems • Financial institution actually lend the credit • (i.e. Visa USA Inc., MasterCard International Inc., Kohlberg Kravis Roberts & Co., American Express Co.) provide payment systems to facilitate transactions

  6. Advantages/Disadvantages to Consumer

  7. Market Definition • All Credit Lending Institutions with their own card • 27.2% J.P. Morgan Chase & Co. • 19.2% Bank of America Corporation • 18.9% Citigroup Inc. • 17.2% American Express Company • 4.0% Capital One • CR4: 83.2 • HHI: 1810-1850 • Total Number of Companies: 192

  8. Current Trends • Current Revenues: $48.3bn • Current Profit: $3.2bn • 5 Year Annual Growth Revenues: -5.1% • 5 Year Annual Growth Profits: -28% • Proj. 5 Year Annual Growth Revenues: 5.8% • Proj. 5 Year Annual Growth Profits: 1.3% • Delinquency Rates Increased 14.0% in the Last 5 Yrs. • 2011 Expected to Be First Year of Growth since 2005

  9. Market Drivers

  10. Barriers to Entry

  11. Life Cycle Stage: Mature • Industry consolidation • # of enterprises decreased 2.1% last year • Examples • B of A acquired Merrill Lynch & Countrywide • J.P. Morgan Chase acquired WaMu and Bear Stearns • Marginal growth • # of credit card owners increased from $173 to $181mil in the last 5 years • 17% of households in the US do not own a credit card • Still a large potential for growth • 2/3 of the global transactions are still conducted using cash • Changing consumer landscape (i.e. ecommerce)

  12. Competition • External • Other Payment Forms • Internal • Competing For Market Share • lower annual fees • lower interest rates • rewards programs • incentivized balance transfer programs from other cards • new technology

  13. Market Demographics Chart

  14. Market Demographic Characteristics • Young adults 18-26 • 84% of college students have credit cards • In 08, half of college students had 4 or more cards • Individual aged 26-60 • Used for everyday purchases; wide range of purchasing behavior • Senior Citizens 60+ • Growing market as healthcare costs increase and social security/retirement savings decrease • Business • Most common source of financing for small businesses

  15. Revenue Model • 40% Cardholder Fee • Includes annual fees, cancellation fees, late payment fees, non-usage charges, and risk-based fees • 40% Interchange Fees • Fees charged by a bank to process transactions made on a card from another bank. • 20% Interest Payments • Interest on outstanding debt • Convenience Users: 55% of consumers pay their balance in full month; called convenience users.

  16. Revenue Growth vs. Volatility

  17. Cost Structure Benchmarks • Interest Expense • ~20% of revenue, borrow from other financial institutions at low rate and charge consumers higher rate • Provision For Loan Losses • ~35% of revenue, unpaid debt that are just written off • Wages • ~5.1% • Advertising • ~7.6%, increased slightly as competition has increased and companies fight to maintain/increase reputation amid recession • Rewards • ~18%, 70% of all credit cards now offer rewards

  18. Threats • Three Main Threats • Fraud • Identity threat • Security of highly personal confidential information. • These threats have always existed but are likely to increase in severity of the next couple years as more transactions are taking place and more data is being stored on the internet.

  19. Regulation • The Truth in Lending Act (TILA) of 1968 • Aimed to increase the transparency of credit card advertising. Direct Mail was the main source of advertising during that time and the TILA dictated that the credit offer must disclose certain info in a separate area called the Schumer Box. Still in effect. • Credit Card Accountability, Responsibility and Disclosure (CARD) act in 2009. • Result of Recession • Aims to reduce deceptive acts by credit cards regarding contracts. • The major advertising effects will be the limit placed on marketing directed at the group consisting of 18-26 year olds. Consumers in this age group must have proof of income or co-sign with an adult.

  20. Industry Assistance • TARP • JP Morgan: $25.5bn • Citigroup: $45bn • Bank of America: $45bn

  21. Pt. 2: Advertising Strategy

  22. Raw Data Analysis • Total Television Advertising Expenditures • 2006 - $1,313,292,181 • 2010 - $1,047,655,039 (20% decrease) • Caused by the recession

  23. Market Advertising Expenditures • Largest advertising campaigns were New York, Los Angeles, Chicago, San Francisco, Philadelphia and Boston

  24. Market Advertising Expenditures • Most money was spent on drama/adventure, situational comedy and slice-of-life • Professional football advertising increased significantly in 2010 • Targeted because the top 10 most expensive programs were sports programs or awards shows

  25. Market Advertising Expenditures • The most money is spent on Sundays, followed by Mondays or Thursdays depending on the year • Most ad dollars were spent on primetime slot 7-11pm with the most expensive time slot was 9 pm on Monday

  26. Top 4 Firms • American Express • Bank of America • Citigroup • J.P. Morgan Chase • Account for 61% of total television advertising expenditures within industry

  27. Key Players in the Industry (by Advertising Expenditures)

  28. Subcategories of Credit Cards 2010 2006

  29. JPMorgan & Chase

  30. Bank of America

  31. Citigroup

  32. American Express

  33. Review: product attributes • Search • Attributes consumers can determine before purchasing the product • Experience • Attributes consumers can determine before or after use • Credence • Attributes consumers cannot personally evaluate even after service • Credit Cards can be in all three categories depending on the knowledge of the consumer

  34. Review: types of advertising • Persuasive • Creates product differentiation by creating a reputation for a company • Important for products with experience attributes and most important for products with credence attributes • Complementary • Appeals to the preferences of the consumer, usually aiming to create a social prestige through advertising • Informative advertising • Means by which to convey information to consumers.

  35. Advertising Strategies • Direct Mail • Television • Print • Internet

  36. Informative Advertising • Detail the terms and conditions of the card

  37. Persuasive Advertising • Most used in the industry • Differentiating card companies from each other

  38. Persuasive Advertising "Bank of America Cash Rewards" "Citibank Identity Theft" "Chase Fraud Alert"

  39. Complementary Advertising • American Express • Ranked #1 most trusted company  • 24th best global brand • Targets consumers with $100,000 to $1 million annual income • Consumers see card as a luxury • Gold Card, Platinum Card • Other companies are competing with "metallic" or "gem" cards

  40. Celebrity Advertising • American Express mostly uses “My Life. My Card” campaign • Celebrities to build luxury image • Consumer wants to feel part of celebrity class • "Tina Fey American Express"

  41. Advertising Partnerships • "American Express Delta Skymiles“ • Each company partners with travel industry • Airlines • Hotels

  42. Advertising Partnerships • Charity Sponsors • Tapping into social responsibility

  43. Targeting Particular Niche Markets • Student Credit Cards • Encouraging students to begin building credit history • Reinforcing potential and importance of market • 15% of market consists of 18-26 year olds

  44. Example: Citi

  45. Brand Value

  46. Perceptual Map Uniformity American Express Accessibility Selectivity Chase B of A Citi Variety

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