The Credit Card Industry RYAN BURKARD, GIAMPIERO GIUNTA, AND RUCHI NANDA Why Credit Cards? • Complex industry • Well-known advertising campaigns • Relevant to everyone A card association earns revenue from a merchant fee and an interchange fee Cardholder Purchase ($100) Consumer Merchant bank gives payment to retailer minus fees ($97.50) Merchant/ Merchant Bank / Retailer Processor Submit charge to merchant bank and then on to card association Issuing bank forwards the original charge to the consumer who pays the balance due ($100) Issuing Bank Card network submits payment minus a fee (%) back to merchant bank ($98) Card Association Card association forwards charge to card’s issuing bank Issuing bank submits payment back to association minus an interchange fee (% of transaction) ($99) Consumer (you) Card associations Merchants (shops) Card issuers (issuing banks) Processors Card Issuer Industry Structure Porter’s Five Forces An industry framework used to determine attractiveness and competitive intensity of an industry The Credit Card Issuer Market is Highly Concentrated Market Share (Revenue $) A credit card issuer’s main activity is to provide a line of credit Other 16% JP Morgan 26% HHI = 2072 Citigroup 17% AmEx 23% N = 192 players Bank of America 18% JP Morgan AmEx Bank of America Citigroup C(4) = 85% Other Source: Ibisworld The Credit Card Industry has got huge barriers to Entry Barriers to entry • High fixed entry cost and minimum capital requirements • Many companies have already established brand reputation and loyalty • High aggressive behaviors between firms after entry Source: Ibisworld The credit card issuer follows a TOP DOG strategy in order to survive Aggressive Behaviors High Low • High fixed entry cost and minimum capital requirements • Many companies have already established brand reputation and loyalty • High aggressive behaviors between firms after entry Source: Ibisworld Barriers Ex-Ante Barriers to entry High Top Dog Fat cat Low Lean and Hungry Puppy Dog Suppliers and consumers in the industry have medium bargaining power, putting downward pressure on profitability Supplier Bargaining Power • Commercial banks • Industrial banks • Investment banks • Credit Unions Medium bargaining power Consumer Bargaining Power • Firms • People Medium bargaining power Source: Ibisworld The credit card issuer industry is HIGHLY PROTIABLE due to the upward pressure on profits from these five forces Huge Barriers To Entry Barriers Supplier Rivalry Buyer Medium Bargaining Power High Concentration Substitutes No Substitutes Medium Bargaining Power Card Associations Industry Structure The card association industry is extremely concentrated Market Share A credit card association industry plays the role of a middleman; adhering a set of security standards for managing credit card data and reducing credit card fraud Diners Club 28% Visa 37% HHI = 3894 C(4) = 98% Discover JCB 1% 2% AmEx 8% N = 6 players Mastercard 24% Visa Mastercard AmEx JCB Discover Diners Club Source: Ibisworld The credit card association plays the role of a FAT CAT Barriers to entry • It is impossible to enter this industry because it benefits from having a standardized set of security rules and any entrant is quickly wiped out Source: Ibisworld The credit card association plays the role of a FAT CAT Aggressive Behaviors High Low Top Dog Fat cat Lean and Hungry Puppy Dog Barriers to entry • It is impossible to enter this industry because it benefits from having a standardized set of security rules and any entrant is quickly wiped out Barriers Ex-Ante High Low Source: Ibisworld Suppliers have low bargaining power and consumers have medium bargaining power, putting insignificant pressure on profitability Supplier Bargaining Power • Computer & packaged software wholesaling Low bargaining power Consumer Bargaining Power • Commercial banks • Credit card issuer • Public administration Medium bargaining power Source: Ibisworld The credit card association industry is deemed VERY PROFITABLE based on these forces Impossible to enter Barriers Low Bargaining Power Supplier Rivalry Buyer High Concentration Substitutes Medium Bargaining Power No Substitutes 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 Credit Card Issuing Revenue Credit Card Associations Revenue Consumer Spending ($) 10% Notification Requirements of 45 days PERCENT CHANGE IN REVENUE 5% 0% 2007 2008 -10% -20% 2010 2011 Dodd Frank Wall Street Reform -5% -15% 2009 -16% in credit card issuing 2012 2013 2014 2015 2016 2017 Grace Period on Interest Rate Increases No Fluctuating Fees and Charges Student Cards Require Cosigners Source: Ibisworld, Bloomberg, Seeking Alpha Advertising Strategies and Raw Data Analysis After the financial crisis, there has been a significant decrease in consumer spending and advertising allocation… …resulting in more practical marketing choices Example Credit Card Industry Market and Advertising Expense Over Time Advertising Expenditure (Millions) 7000 6000 Less consumer spending 5000 4000 Less consumer confidence Effects of financial crisis realized 3000 Impact • Less pizzazz, more practical marketing • Quick, concise messaging • Market reward programs for consumers with ideal credit score 2000 1000 0 2008 Source: Bloomberg: Company 10-Ks 2009 2010 2011 2012 Increased regulation in industry • Market credit cards with lower signing interest rate • Shorter agreements 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. 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 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 Make it just FOR ME It better be SIMPLE I better think it’s a GOOD DEAL Humor Advertising Iconic Advertising 16% Increase in purchase volume within a year Source: Mastercard 10-K (2002) Card appeal Personal pictures Exclusive groups Philanthropy Sponsorship 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. 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 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 Celebrity appearance "For You" Information/Rewards Humor 0% 20% 40% 60% 80% 100% 120% 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 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 Celebrity feature Its advertising strategy is purely complementary Source: American Express "For You" Information/Rewards Complementary 0% 20% 40% 60% 80% 100% 120% 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 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! MasterCard and Visa attract the largest audience by being very involved in all American events and using memorable advertising strategies Celebrity feature Celebrity feature "For Others" "For You" Mentioned Money/Price Information/Rewards Emotional Humor 0% 20% 40% 60% 80% 100% 0% 10% 20% 30% 40% 50% 60% 70% 80% 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 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 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 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 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 Investment and Advertising Recommendations NEUTRAL BUY • Bottom line improvement has been accounted for in stock prices • Clear audience target • Extensive expense cuts • Robust revenue growth • Reasonable debt levels • Somewhat weak P/E growth BUY • No debt • The stock is up 33.4% from last year • Strong market cap and high P/E growth NEUTRAL • Relative underperformer compared to peers and sector • Earnings are increasing quarter-toquarter Source: Seeking Alpha The credit card industry should advertise new technologies to connect with young consumers on a new level 30% average life in spending in 12 month period post contactless adoption Focus on enabling the merchants: 42% of smart phone users use comparison shopping 59% of unbanked consumers have access to a mobile phone Source: Wired.com Questions?