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Credit Card industry in USA spurred by growing Ecommerce

An average American has about 6 credit cards in their wallet and $8,733 of credit card debt. The average debt accumulating from the credit card loan is up to billions of dollars.

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Definition / Scope

Credit card or plastic money is issued by financial companies known as credit unions or usually banks. The idea of credit card is that it provides access to its holder to pay for the goods & services on credit with an obligation to pay for them at a later date. These credit cards have become a common means of payment at present and in the field of personal finance particularly. Its popularity can be reflected by the number of people who are credit cardholders.[1]

The credit card Industry in USA is one of the largest financial market which is serving the needs of consumers. It is gaining a good momentum and is growing at a faster pace than the overall economy. Credit card debt is continuously increasing and the buying volume with credit cards has plummeted and is showing no signs of slowing down. At present the credit card debt in USA accounts 5% of the total GDP.[2]

Market Overview

An average American has about 6 credit cards in their wallet and $8,733 of credit card debt.

The average debt accumulating from the credit card loan is up to billions of dollars. In 2017 alone the amount of consolidated credit card debt in USA was up by $92 billion. As of 2016, the highest amount of the loan that is sanctioned are the credit card loans with 65 percent of the share of total loans disbursed. Followed by car loan (26 percent) and mortgage loans (10 percent) respectively.[2]

Key Metrics

Metrics Value Explanation
Base Year 2018 Researched through internet


Market Risks

A survey found that 70 percent of the Generation Y or Millennial's prefer debit card over credit cards to make purchases because they grew up when the financial crisis hit the world in 2008. At this time, the consumer debt reach 127 percent of disposable income. Their families must have faced a serious crisis. Also, as a student's their debt burden must continue to grow because in USA the segment that borrows credit card debt at high frequency are the college students. So, these factors discourage them to get credit card at first place.[2]

The prepaid debit cards are getting good response among the millennial's and they are growing at a faster pace than credit cards. The total transaction which was 3.3 billion in 2015 reached 10.6 billion by 2016.[2]

Generally the low interest rate charged in the credit cards till a fixed period after which the companies levies a much higher rate e.g. up to 30 percent and if the payment is missed continuously, customers become so indebted that they are compelled into financial difficulties and ultimately bankruptcy.[1]

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Top Market Opportunities

According to a survey, the most attractive attribute that consumers require in a credit card is the type of rewards that the card provides to the consumers with 59% consumers wanting innovative loyalty schemes from the card issuers.[2]

Building relationship and trust with consumers is very essential because consumers no longer focus on the transactional nature of the product but with the goodwill and long term relationships with the companies. This can be done by creating a personalized experience for the consumers or providing a product with values that is worth the money spent, reducing the decision cycle of the consumers while transacting etc.[3]

All credit cards are same for consumers and they own multiple credit cards for different purposes. However, there is absence of a single credit card that is bigger and better at present context. Thus, credit cards issuing companies should focus on various innovative and differentiation strategies.[3]

Market Drivers

After Banking, credit cards are the most popular segment in the financial product portfolio. This consumer demand is mainly driven by the low losses and a good net interest margin which is driving the profitability of the companies involved in the industry. As the American economy have improved and the unemployment has reduced the consumers are more confident to take card debt and this is bringing a positive growth of the industry.[4]

The growth of e-commerce and mobile technology has made consumers to increase their shopping and businesses to sell online which has driven the card based transaction volume in comparison traditional cash and businesses increasingly comfortable with shopping and selling online.[5]

It is essential to develop a synergy effect by integrating the issuing and acquiring business within credit card industry. This integration will not only improve operations within the manufacturing industry but will also unite the card acquirer, merchant and card issuer. Thus, this ERP system will help in providing innovative solutions that can boost the growth of the entire industry.[3]

Market Restraints

At present context, the credit card industry is in struggle to move into another level or it is in continuous process of value migration. The credit card business is profitable but the growth is stagnant. There has been no new innovation in the field of product offering. It is not even at a current level and there are other payment products outside of the industry which are already in a future level. This is a big threat to the credit card industry if they fail to migrate the value in customers eye.[3]

Recently, there is tendency of consumers to trust these financial firms especially credit card issuers less as consumers are unable to track their balance and debt outstanding. There have been recent cases of fraud by banks and this has led to formation of negative image among the consumers. Floating of such incidences in media has led the consumers to develop less trust towards these firms.[3]

Industry Challenges

With a number of competitors in the market the credit card issuing companies continue to introduce new products for every market segment. This has led to proliferation of products and tendency to copycat. For instance, Citibank has six products within credit card segment which provides points, cashback, low rate and premium products. Other issuers are doing the same and this increases the number of products with same feature in the market.[4]

At the present context, the industry lacks a differentiated product which will lead to a breakthrough within the credit card industry. Thus, the top market players and other small players in the industry should search that innovative idea which will fulfill all the payment related attributes required by a customer such as small, convenient, secure etc. and create a transforming product.[3]

Technology Trends

Credit card Issuers are investing good amount of money to enhance technology and use it to support their consumers stay out of distress and manage their debt well. For instance, Capital One’s Inform app helps customers manage their spending and understand the impact of their payments on balance and interest charges.[4]

In 2015, some major shifts were encountered where merchants started using another technology called EMV and chip cards. More than 70% individual consumers accepted that they owned a chip card in their wallet and already 37% of merchants were EMV ready after months of its introduction. This also lead to reduction in use of POS machine by many merchants as VISA merchants reported that after EMV implementation there was an 18% decrease in fraudulent activities. Top credit card issuers like VISA and MasterCard are also trying to implement the chip technology in their cards to solve the merchant and customer problems at present.[4]

Pricing Trends

Based on the credit scores of the consumers, they receive credit limit. Basically there are three categories based on the credit score ranges which are below:[2]

  • Super prime (781 to 850 credit score): $10,396
  • Prime (661 to 780 credit score): $5,692
  • Subprime (500 to 600 credit score): $2,566
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Regulatory Trends

The U.S. government has levied regulations upon the credit card issuers by cutting down the fees charged by the credit cards. The law which guides the credit cards is known as CARD Act which has been established for the purpose of protecting the interests of consumers and merchants by increasing pressure on card issuers to cut costs and services. The CARD Act was meant to regulate the interest rate on card balances. Fee and interest revenue generated on credit cards are now more tightly controlled.[6]

These revenues of the companies were constricted by a few key changes such as:[6]

  • There has been a removal of double-cycle billing i.e. charges must be related with purchases made in the current cycle rather than going back to the previous billing cycle to calculate interest charges.
  • One-time late fees has been capped at $25.
  • The promotional activities of credit cards have been made transparent, the act advises the companies to display all the card terms much like FDA nutrition labelling.

Other Key Market Trends

The tendency of the credit card issuing companies is generally to stand out by providing unique product. For instance, Citi's 'Double Cash' card provides 1% earnings on purchases whereas Discover's 'It' card offers Cash back as an accumulated bonus after first year of card holding. Rather than the reward points, customer prefer cash back due to which all companies are providing cash back in their own way and creating a value proposition in the minds of consumers. At present the trend is to provide cash back.[4]

Market Size and Forecast

As of 2018, the consolidated revenue of the credit card industry is $100 billion. The credit card market has grown at a CAGR of 1.1 percent from 2013 to 2018. There are 919 businesses involved with the industry and it generates a total of 85,851 employment opportunities. Further, the industry is expected to contribute 2.4 percent growth in the economy.[5]

Market Outlook

As of 2017, the credit card interest rate has reached an average of 14.99%.[2]

Consumers with an income above $75 K prefer to use credit card to debit cards. The usage amount increases for the upper tier income whereas, the low income segment use debit cards more. Statistics reveal that 50 percent of consumers belonging to income group- 25K-50K use debit cards whereas 56 percent of those earning above 150K use credit cards.[2]

As of 2016 44% of the families carry credit card with balance.[2]

As of 2017, only 2.48% of credit card accounts had an outstanding debt for more than 30 days.[2]

44.1% of urban credit card holders maintain a balance whereas rural 42.5% in rural areas maintain a balance. Thus, the usage gap in both areas are narrowing down.[2]

As of 2017, the credit score of 56% population using credit card is 720 or more and 62% of consumers have a credit limit of more than $5,000 in their credit cards.[2]

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Technology Roadmap

When credit cards were introduced for the first time, they were considered as a new form of cash, a technology through which cash was easier to carry. Increase in usage of credit cards led people to understand that it was secure form of payment and since these were handled by banks and regulated companies there was less chances of frauds.[3]

At present context, having credit cards is a common thing, it is a mass product. Thus people started demanding a more prestigious product within the credit cards which was not only means of payment but a show of status. As the industry started getting competitive, consumers started demanding value out of these products such as cashback, reward points etc.[3]

From here to future, the level of value is now driven by technology and digital channels of payment like internet and mobile phones. Gradually, these technologies are replacing the plastic cards and are becoming the new means of payment. The trend is to have such a technology where people can use a single device or object to perform multiple tasks, if credit cards couldn't meet up to the current standards of technology it may soon become obsolete. [3]

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Distribution Chain Analysis

Among all the stated in USA, New Jersey has the highest amount of credit card penetration with an average of 3.49 credit cards per household. The second position is occupied by New York with 3.34 and Third by Rohde Island with 3.26 credit cards per household respectively. The least penetration is in Mississippi with an average of 2.57 credit card per household.[2]

According to the region, the one that has highest amount of credit card debt outstanding is Alaska with $8,515 and lowest is Iowa with an outstanding debt amount of $5,155 respectively.[2]

Competitive Landscape

Visa remains the definite market leader with a market share of over 53%. This single company's credit card transaction volume is growing at a faster rate than the entire credit card industry. After Visa, MasterCard, American Express and Discover are the evident companies competing in the industry. Visa is growing at a comparatively higher rate than the rest of its three rivals. The year on year growth rate of visa always exceeds 10 percent whereas that of the other three companies remain roughly around 10 percent.[7]

In terms of the credit card debt Citigroup Inc. holds the largest amount debt with an outstanding amount of $14,622 billion followed by JP Morgan Chase and Capital One with $13,123 billion and $9,841 billion respectively.[8]

In terms of the most active credit card accounts held by each Bank Citibank has an active cardholder accounts of 95.4 million followed by JP Morgan Chase & Co. with 82.8 million and finally American express with 62.7 million active cardholders respectively.[8]

In terms of largest credit card network, Visa is the largest with $1.549 trillion in purchases processed in 2016. Second is American Express with $0.695 trillion, third- MasterCard Credit with $0.693 trillion and finally discover with $0.121 trillion purchases handled.[8]

Competitive Factors

American Express debit card provides 1% cash back on every purchase the consumers make. This trend has been copied by other companies by offering benefits like purchase and price protection, incentives that previously were set aside to credit card holders.[2]

American Express is coming up with a new growth strategy. It has targeted the wealthy class segment and at the same time acquired many new merchants by lowering fees on the card usage. This step is expected to make American Express second largest credit card issuer after Vis by 2019.[7]

Companies like Wells Fargo, U.S. Bank, and Barclays have been able to increase the number of active user accounts at a faster rate. On average, these companies acquired 66% more active user accounts in the last 5 years, through co-branding opportunities whereas Citibank and Chase increased the number of active accounts by only 3%.[8]

Credit card is an important part of the financial payment mechanism however there is an external emerging player in fintech also known as mobile wallets. Despite the brick and mortar banking payment mediums such as cheques and branches are in verge to extinct, no mobile wallet exists that has disrupted credit cards. Still, the network of mobile wallets is not that extensive as of the credit card issuing companies.[4]

Capital one is one card issuer offer automatic credit limit increases on their cards which is targeted at people with bad or average credit.[2]

The competitors who are in the industry since last few decades have been successful and are profitable, this in return is attracting new players in the industry and making the overall pie smaller.[3]

Key Market Players

According to the number of cardholders, the top credit card issuers in USA are following:[9]

  1. VISA
  2. Mastercard
  3. Chase
  4. American Express
  5. Discover
  6. Citibank
  7. Capitalone
  8. Bank of America
  9. Wells Fargo
  10. US Bank
  11. USAA
  12. Credit One
  13. Barclays US
  14. Sychrony Financial
  15. PNC

Strategic Conclusion

Credit Card issuing industry is expected to rise, because of the economy of the country which is prospering. As the unemployment rates are all time low and increasing disposable incomes of consumers built more confidence to own a credit card and make purchases through it in USA.

The credit card interest is peaking and this could possibly put pressure on consumers who have a credit card balance. Similarly, the millennial's don’t have a positive outlook for the credit cards. This problem has to be attended by the credit card issuers by coming up with rewards and other benefits to serve this segment as they are getting older and are the new generation consumers.

References

  1. 1.0 1.1 https://www.statista.com/topics/1118/credit-cards-in-the-united-states/
  2. 2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 2.11 2.12 2.13 2.14 2.15 https://www.supermoney.com/2018/04/credit-card-industry-report/
  3. 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 https://www.linkedin.com/pulse/credit-card-issuing-challenges-opportunities-saket-mathur/
  4. 4.0 4.1 4.2 4.3 4.4 4.5 https://thefinancialbrand.com/60263/credit-card-payments-trends/
  5. 5.0 5.1 https://www.ibisworld.com/industry-trends/market-research-reports/finance-insurance/credit-intermediation-related-activities/credit-card-issuing.html
  6. 6.0 6.1 https://economics.mit.edu/files/14225
  7. 7.0 7.1 https://www.forbes.com/sites/greatspeculations/2018/08/17/purchase-volume-for-u-s-credit-card-industry-could-cross-1-trillion-in-q4/#4d30025e1f07
  8. 8.0 8.1 8.2 8.3 https://www.valuepenguin.com/largest-credit-card-issuers
  9. https://www.cardrates.com/news/credit-card-companies/


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