For Credit Card Issuers, It’s About “Spend, Spend, Spend”

By Kevin Sullivan

For years, average annual transaction volume and total outstandings (borrowed) on a bankcard account were pretty close -- $2,000 or so revolved and $2,000 or so spent. The same card.

In 1996, outstandings were 64% of total annual sales, according to the Nilson Report.

Visa and Mastercard issuers talked a lot about being the “top of wallet” card for usage but far preferred the interest income of an account revolving a balance and paying the minimum due each month.

Things have changed. Today, borrow is 25% of spend and keeps dropping. Here’s why:

• Consumers are trained to expect a valuable reward for the transaction (miles, cash back). Ability to research and compare rewards online to get super-rich rewards
• Near ubiquity-level of acceptance coverage -- supermarkets, home contractors, healthcare. Consumers can use their account for nearly everything
• Greater capability to use a credit account to pay on a recurring basis for subscriptions like internet, content streaming and insurance
• Growth of business credit cards with high levels of transaction volume
• More options to borrow at lower rates such as point-of-purchase financing or installment loans which drive lending away from credit card
• Population trend: the great credit card generation is 60+ and doesn’t need to borrow

To compete with other top players with massive scale, issuers can’t just sweeten rewards and sit back. When rewards expense drifts above interchange, P&L trouble looms. Recent vintages of super high-value reward cards are under water. Issuers look the other way because these accounts “average into” older vintage accounts in the same portfolio with lower per-account rewards cost. And players like Goldman Sachs/Apple are playing a data-based strategy and willing to absorb a long “J Curve” to profitability. 

What To Do

Make the spend model work. Focus on whatever it takes to make that account the top choice for daily spending:

• Find and offer rewards with high perceived value; ancillary partners (not receiving full revenue share) can assist
• Go all-in promoting recurring payments with tools to manage these arrangements like an account updating service (when a new card account number is assigned) as well as promotions to encourage setting up the recurring payment. I counted 22 credit card RPs in my household. This effectively discourages attrition. I can’t find the 4 hours needed to unwind these set-ups
• Promote stored credential: be the account your customers pick for in-app and ecomm payments such as Wallmart.com, Lyft, Grubhub
• Make sure your accounts work seamlessly in Google Pay, Amazon Pay, 3-D Secure, PayPal and others to ensure it’s a snap to buy something online with your account. Remind customers of the reward value they’ve received on the statement
• Encourage profitable cross-border usage: this revenue can complement interchange income (as long as you’re not already waiving the fee)
• Find More Value in the Relationship: Why let Goldman Sachs/Apple have all the fun? Max out the rewards and great service. But also, really use that spend data to sell awesome services to the household and keep the customer longer

It ain’t easy. But all too much, credit card issuers wander away from portfolio marketing programs that deliver transaction volume -- for the glory of new account acquisitions and balance build. It’s time to shift these priorities.