The Credit Card Industry

1. The Credit Card Industry Ryan Burkard, Giampiero Giunta, AND Ruchi nanda

2. Why Credit Cards? • Complex industry • Well-known advertising campaigns • Relevant to everyone

3. A card association earns revenue from a merchant fee and an interchange fee Merchant bank gives payment to retailer minus fees ($97.50) Cardholder Purchase ($100) Consumer Merchant/ Retailer Merchant Bank / Processor Card network submits payment minus a fee (%) back to merchant bank ($98) Submit charge to merchant bank and then on to card association Card Association Card association forwards charge to card’s issuing bank Issuing Bank Issuing bank forwards the original charge to the consumer who pays the balance due ($100) Issuing bank submits payment back to association minus an interchange fee (% of transaction) ($99)

5. ‡ Giunta, Nanda, & Burkard

6. Porter’s Five Forces An industry framework used to determine attractiveness and competitive intensity of an industry

7. The Credit Card Issuer Market is Highly Concentrated Source: Ibisworld

8. The Credit Card Industry has got huge barriers to Entry Source: Ibisworld

9. The credit card issuer follows a TOP DOG strategy in order to survive Aggressive Behaviors Low High High Barriers Ex-Ante Low Source: Ibisworld

10. Suppliers and consumers in the industry have medium bargaining power, putting downward pressure on profitability Source: Ibisworld

11. The credit card issuer industry is HIGHLY PROTIABLE due to the upward pressure on profits from these five forces

12. ‡ Giunta, Nanda, & Burkard

13. The card association industry is extremely concentrated Source: Ibisworld

14. The credit card association plays the role of a FAT CAT Source: Ibisworld

15. The credit card association plays the role of a FAT CAT Aggressive Behaviors High Low High Barriers Ex-Ante Low Source: Ibisworld

16. Suppliers have low bargaining power and consumers have medium bargaining power, putting insignificant pressure on profitability Source: Ibisworld

17. The credit card association industry is deemed VERY PROFITABLE based on these forces

18. Together, the credit card industry is very lucrative and, unsurprisingly, was heavily regulated by Credit Card Act of 2009 and Dodd Frank Wall Street Reform Dodd Frank Wall Street Reform -16% in credit card issuing Source: Ibisworld, Bloomberg, Seeking Alpha

19. Advertising Strategies and Raw Data Analysis ‡ Giunta, Nanda, & Burkard

20. After the financial crisis, there has been a significant decrease in consumer spending and advertising allocation… …resulting in more practical marketing choices Effects of financial crisis realized Source: Bloomberg: Company 10-Ks

21. Total Ad Expenditures of Each Firm American Express and Capital One have remained with high expenditures. MasterCard and Visa have dropped significantly in their ad expenditures We will look further into this.

22. Number of Ads for Each Firm American Express airs the most ads Signaling Cheapest ads Visa and MasterCard spent a lot in 2006, however they aired much fewer ads compared with Am EX Higher profile events? Olympics, Super Bowl Visa and MasterCard’s ad expenditures and airings declined a lot

23. Empowered consumers expect marketers to support them “on demand” • The average American household has 10 active credit cards, the average American has 4 active credit cards • The internet allows consumers to easily compare interest rates, rewards, etc. from the comfort of their home • 80% of complaints filed with the Consumer Bureau are tied to credit cards Source: Consumer Bureau

24. Humor Advertising

25. Iconic Advertising Source: Mastercard 10-K (2002)

26. Card appeal Philanthropy Personal pictures Exclusive groups

27. Sponsorship

28. Social Media/Mobile Advertising One in four cardholders has become a fan, friend or follower of their credit card brand or issuer Source: Synergistics Research Corp.

29. Narrow customer base Large transactions > fewer customers > better customer service High price point Low price point Many small transactions > connection with banks (no vertical integration) Broad customer base

30. Capital One treats credit cards as information, data drives its business strategy Makes key acquisitions in the information technology market: Bundle Performs about 30, 000 credit card experiments a year Uses every client interaction, including ads, as an opportunity to cross-sell Its advertising strategy is a paradox, but not really Source: Bloomberg News

31. What types of Programs does Capital One Advertise On? Sports heavy, especially College sports March Madness Capital One Bowl Capital One has a low price point  target the college aged person Drama and Adventure TV series

32. For American Express, being a customer is not just a transactional mechanism, but a lifestyle choice Caters to the lifestyle of the customer with the ideal credit score of 760 Entices with exclusive memberships, and shared reputation i.e. gold and black cards Its advertising strategy is purely complementary Source: American Express

33. Where does American Express Advertise? Mostly on Drama/Adventure TV series Major network TV shows to reach a large number of people. Reinforces signaling advertising strategy

34. Monthly Advertising of American Express Strong correlation between years Heavier advertising towards the later part of the year Holiday season: remind shoppers to use their American Express cards to buy the gifts!

35. MasterCard and Visa attract the largest audience by being very involved in all American events and using memorable advertising strategies

36. MasterCard Advertising Program Distribution Where does MasterCard Advertise? Obviously major cuts in ad spending across the board, except for golf Why did MasterCard cut spending? Went public in 2006, possibly advertised very heavily to gain investors’ interest initially Now taking a similar path to Discover  less advertising Increased profits with similar revenues. The stock has performed very well

37. MasterCard Monthly Advertising Distribution Drastic changes in overall advertising efforts across all months Minimal ads in 2010 compared to 2006 Arnold Palmer Invitational presented by MasterCard in March Overall, not much of a trend in month-to-month spending

38. Where does Visa Advertise? Very heavy focus in sports NFL Olympics Slow decline in all other program types Why such a drop in Spending from ‘06 to ’10? MasterCard is their main competitor, maybe they don’t need to advertise as much because MasterCard is not. Prisoner’s Dilemma

39. Visa’s Olympic Ad Campaign Drop in ad expenditures while consist number of ads Lower cost for each ad Still a strong effort in 2010 despite less spending Less Olympic ad spending contributes to the overall spending reduction of Visa

40. Visa’s Monthly Advertising Distribution Significant overall decline in Ad Expenditures Largest Months: February October through January February expenditures are so much higher because of the Olympic ad campaigns Oct. – Jan. high due to NFL season

41. Investment and Advertising Recommendations ‡ Giunta, Nanda, & Burkard

42. Source: Seeking Alpha

43. The credit card industry should advertise new technologies to connect with young consumers on a new level Source: Wired.com

44. Questions?