CPG's July/August 2009 Wire Newsletter
Credit card issuers are facing severe profit challenges as a result of the economic downturn: consumers are spending less on their credit cards; bankruptcy filings have escalated sharply, and delinquencies and write offs continue to climb. To make matters even worse for issuers, the Credit Cardholder Bill of Rights will restrict pricing options and will result in lower credit lines and fewer credit cards issued. The newly proposed regulatory structure would be a further restriction on credit granting, as higher capital requirements and product regulation make the traditional credit card issuing business less attractive.
Banks competing in the card issuing business must compete going forward on several fronts. Credit cards will still be offered, but the aggregate number of cards will be less and line sizes lower than previously available. Consumer purchases will be increasingly supported by debit cards, pre-paid cards (both declining balance and reloadable), charge cards (where the outstanding balance is settled at the end of the monthly billing cycle), and online bill paying directly from DDAs.
Credit card product design before the Credit Cardholder Bill of Rights was based on promotional pricing, with teaser interest rates, relatively low standard rates, and low or no annual fees. Card issuers protected profits with penalty pricing, namely late and overlimit fees and higher interest rates triggered by delinquencies. In the future environment, the design will be reversed. The rack rate for cards will be relatively high interest rates and annual fees, but consumers who exhibit good payment behavior and who will deepen their relationship across a series of banking products will qualify for discounts on the credit card.
Tomorrow’s winners will package the credit card in a relationship account that includes the DDA/checking account. DDAs support debit cards and online bill paying today and can easily be linked to pre-paid cards and charge cards.
Tomorrow’s successful card issuers will be institutions which have:
- A core competency in consumer deposit gathering, particularly DDAs.
- Experience in relationship banking and a strong sales culture.
- Proven success in cross selling financial products.
- Systems architecture which supports the integration of customer accounts both for cross-transactions and for consolidated statements.
- Strong branch or store distribution networks to support face-to-face sales, particularly to explain to consumers how they can qualify for the best card pricing.
- The ability to leverage distribution networks and payments to support the needs of micro and small business.
Opportunities Ahead
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Organic Core Deposit Growth, 3/31/2008 to 3/31/2009
Between 1Q2008 and 1Q2009, banks benefited from a significant inflow of core deposits. As the stock market became increasingly volatile in 2008, consumers looked to move their money into relatively more stable transaction, money market, and savings accounts. The largest beneficiaries of this trend among banks with total assets of $20B or more (identified based on growth in balances in these three accounts, excluding deposits acquired through M&A transactions) are listed below:
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The Outlook for Branch Banking
CPG asked executives representing seven banking institutions across the country, ranging in size from $1.5 billion to over $60 billion in assets, how their banks are adapting their branch networks to the current marketplace and their vision for the future.
The short answer: the branch role is not changing. If anything, the last several months have only reemphasized the branch as the superior channel for collecting core deposits. In addition, as electronic payment channels and technologies like remote deposit capture continue to peck away at bank check processing volumes, customer growth has effectively kept branch teller transaction volumes flat at many institutions.
Despite BofA’s recent announcement to shed 10% of its current branches, most bankers appear more focused on making their existing networks more productive than either opening de novos or closing existing branches. Across the industry, from July 2008 to June 2009, the total number of de novo branches declined by almost 20% on a projected basis to the lowest industry total since 2003. Altogether, while the ratio of de novo branch openings to branch closures in 2009 will be about 2:1, or close to the average for the decade, the aggregate number of openings and closures will be the industry’s lowest for the past eight years.
We see banks implementing both short-term and longer-term initiatives to help transform the performance of their branches. Many of the banks that have been able to weather the recession and banking crisis relatively well have implemented programs specifically intended to steal customers from struggling and distracted competitors. For example, as part of broad, bank-wide initiatives, a number of institutions have installed CPG’s Competitive Tracker sales tool to enable branch sales staff to explain, concisely and consistently, their bank’s strengths relative to those of
each major competitor in the market.
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