The Credit Card Industry

Samuel BoocheverDhara ShahNicole Kelly

Payment Cards: Provide means to use "money" to complete a transaction between merchant and consumer ◦ Charge Cards◦ Debit Cards◦ Fleet◦ Store-Value◦ Credit Cards

Part 1: Industry Overview

Cash ChecksBulky to carry around Inconvenient to carry Limited Purchases with fixed cash

Not easily accepted by all merchants due to risk of NSF checks

Easy to stealHard to trace

Why Choose Payment Cards?

Network Joint Venture: “Cooperation among several independent businesses.”

Four Key Players: Merchants, Consumers, Financial Intermediaries, Payment Solution Companies

Complex interaction among players

Payment Card Framework

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

Credit Cards Defined

Advantages/Disadvantages to ConsumerAdvantages DisadvantagesPurchase Power and Ease of Purchase

Blowing Your Budget

Protection of Purchases High Interest Rates and Increased Debts

Building a Credit Line Fraud

Emergency Spending

Rewards Programs

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

Market Definition

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

Current Trends

Market Driver Movement Effect on Industry Growth

Predicted Movement

Households earning over $100,000

Increase Positive Increase

National unemployment rate

Increase Negative Decrease

Per Capita Disposable Income

Increase Positive Increase

Yield of 10 year treasury bonds

Increase Positive Increase

Aggregate Household Debt

Increase Negative Decrease

Market Drivers

Barriers to Entry

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)

Life Cycle Stage: Mature

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

Competition

Market Demographics Chart

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

Market Demographic Characteristics

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.

Revenue Model

Revenue Growth vs. Volatility

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

Cost Structure Benchmarks

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.

Threats

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.

Regulation

TARP

JP Morgan: $25.5bn Citigroup: $45bn Bank of America: $45bn

Industry Assistance

Pt. 2: Advertising Strategy

Raw Data Analysis

Total Television Advertising Expenditures◦ 2006 - $1,313,292,181 ◦ 2010 - $1,047,655,039

(20% decrease)◦ Caused by the recession

Market Advertising Expenditures Largest advertising

campaigns were New York, Los Angeles, Chicago, San Francisco, Philadelphia and Boston

ALBANY,NY DALLAS JACKSON,MS OMAHA SOUTH BEND0

2000000

4000000

6000000

8000000

10000000

12000000

14000000

16000000

18000000

20000000

Grand Total

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

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

SUN MON TUE WED THU FRI SAT0

50000000100000000150000000200000000250000000

Total Advertising Dol-lars

Top 4 Firms American Express Bank of America Citigroup J.P. Morgan Chase

Account for 61% of total television advertising expenditures within industry

Key Players in the Industry (by Advertising Expenditures)

American Express Co 26%

Bank Of America Corp 8%

Citigroup Inc 3%

JP Morgan Chase & Co 24%

Discover Financial Services 11%

Capital One Financial Corp 22%

Other Companies 6%

Subcategories of Credit Cards

Business Credit Cards 11%

Credit Cards, Corporate Promotion/Sponsorship 15%

Credit Cards, General Promotion & Multi-Category 4%

Debit/ATM/Check Cards 8%Personal Credit Cards 63%

Business Credit Cards; 0

Credit Cards, General Promo-

tion & Multi-Category; 0

Debit/ATM/Check Cards; 0Personal Credit

Cards; 1

Pre-Paid Cards; 0 Pre-Paid Gift Cards; 0

2006 2010

JPMorgan & Chase

Bank of America

Citigroup

American Express

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

Review: product attributes

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.

Review: types of advertising

Direct Mail Television Print Internet

Advertising Strategies

Informative Advertising• Detail the

terms and conditions of the card

Persuasive Advertising• Most used in the industry

• Differentiating card companies from each other

"Bank of America Cash Rewards"

Persuasive Advertising

"Citibank Identity Theft"

"Chase Fraud Alert"

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

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"

Celebrity Advertising

"American Express Delta Skymiles“ Each company partners with travel industry

◦ Airlines◦ Hotels

Advertising Partnerships

Charity Sponsors Tapping into social responsibility

Advertising Partnerships

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

Targeting Particular Niche Markets

Example: Citi

Brand ValueBrand Name

Rank

Country of Origin

Brand Value ($m)

Change in Brand Value

American Express

24 US 13,944 -7%

J.P. Morgan 29 US 12314 +29%Citigroup 40 US 8887 -13%

Perceptual Map

SelectivityAccessibility

AmericanExpress

Chase

Citi

B of A

Uniformity

Variety

2010 2009 2008 2007 20060.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

Bank of AmericaJP Morgan ChaseCitigroupAmerican ExpressIndustry

Year

Perc

enta

ge

• Industry Average is 7.6% and has grown over the last few years

Advertising to Sales Ratios

American Express

2006 -$246,878,428◦ Similar program distribution to the market –

except in 2010 the 2nd highest category was news forum/interview/varied format

◦ 89% of advertising was for national campaigns 2010 - $224,948,793 (decrease of 8.9%)

◦ 90% for national campaigns

Bank of America 2006 - $8,224,079

◦ Spent 2/3 of their advertising dollars on the Olympics

◦ 82% was national ad campaigns◦ Spent significantly more than their competitors

per ad in Chicago, New York and Los Angeles 2010 - $71,158,966 (increase of

765.25%)◦ Spent 1/3 of their ad dollars on professional

football ads, the rest followed the market

Citigroup

2006 - $94,440,669◦ Almost 100% was spent on national campaigns but

they did have campaigns in Seattle and Pittsburgh 2010 - $21,709,528 (decrease of 77%)

◦ 36% on national campaigns◦ Spent 1/3 of ad $ on college football, also a large

percentage on professional football◦ Spent an average of over $300,000 per ad (average

$4,000) for national campaigns, which based on decrease in overall advertising shows that they are targeting ads to prime markets/timeslots

J.P. Morgan Chase 2006 - $150,207,895

◦ 81% on national campaigns 2010 - $207,777,213 (increase of 38.33%)

◦ More spending in Texas than rest of market

Days of the Week

SUN MON TUE WED THU FRI SAT0

5,000,00010,000,00015,000,00020,000,00025,000,00030,000,00035,000,00040,000,00045,000,00050,000,000

American Express CoBank Of America CorpCitigroup IncJP Morgan Chase & Co

SUN

MON

TUE

WED THU FRI

SAT

DOW

020,000,00040,000,00060,000,00080,000,000

100,000,000120,000,000140,000,000

Grand Total

•Sunday was the most expensive for advertising, Friday the least

Part 3: Analysis and Recommendations

Venture Capitalist Perspective◦ Poor investment◦ Highly Saturated◦ Consolidated◦ Maturity Stage◦ Low Growth Potential◦ Regulation

Stock Market Analyst◦ Good investment◦ Strong brand valuations◦ Value is greater than revenues ◦ Strong P/E Ratios◦ Further consolidation expected◦ Stocks still on the up from recession

Investment

Integrate more combative advertising◦ Especially applies to JPMorgan & Chase, Bank of

America, and Citigroup◦ Highly saturated= difficult to attract new customers

Focus on customer service ◦ New differentiating characteristics

Focus on reputation, smart investing◦ Build back trust

Expand partnerships in terms of niche advertising Cannot give specific recommendations

◦ Lack of homogeneity in product line

Advertising Strategy