The pain in the US card market could get worse before it
gets better as unemployment reaches record highs, leading to a much
greater chance of defaults further down the line. But payment
players have responded swiftly, and there are signs that things may
not be as bad as first thought. CI reports.


The importance of consumer spending to the US economy cannot be
overstated and, despite a series of economic shocks over the past
two years (with the GDP growth rate for 2008 falling to just 1.1
percent), US consumers are still partial to plastic payments in all

A clear shift towards electronic payments in the US,
particularly debit card payments, is transforming the US payment
landscape at a time when economic pressures are also forcing a need
for re-evaluation of existing business models on the part of
issuers and payment networks.



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Credit card metric indicators

Net charge-off rate (%)




Bank of America*






JPMorgan Chase**



Capital One



30+ day delinquency rate (%)




Bank of America






JPMorgan Chase



Capital One



Average managed outstandings ($bn)




Bank of America






JPMorgan Chase



Capital One



US purchase volume ($bn)




Bank of America






JPMorgan Chase



Capital One



* includes US consumer, Europe and Canada credit cards, does
not include business, debit card and consumer lending ** excluding
Washington Mutual acquisition
Source: CI, company reports, Credit Suisse First Boston


Card usage and payment trends

The US population of 307 million has one of the highest levels
of payment card penetration anywhere in the world. According to
statistics from the Bank of International Settlements, as of 2007
there were 1.25 billion debit and ATM cards issued and 1.32 billion
credit cards, of which 618 million were retailer-issued credit

In terms of spending, debit card spending has been growing at a
much faster rate than credit cards, totalling $1.18 trillion in
2007, compared to $1.02 trillion in 2006. On the other hand, credit
card spending is flattening out in a long-established trend,
reaching $2.1 trillion in 2007, compared to $1.94 trillion in

According to a 2008 study of consumer payment preferences
conducted by BAI Research and Hitachi Consulting, US consumers
carry an average of four credit cards in their wallets. However,
only 2.2 of those cards are used to make purchases in any given

According to the study, nearly half of all active cardholders
revolve at least a portion of their total credit card balance each
month. Although a slight majority of cardholders (54 percent)
reported they pay all credit card balances in full, 46 percent
carry a balance on one or more cards.

US consumers are becoming more comfortable with debit card
payments in ever greater numbers, with the number of debit card
transactions totalling 30.2 billion in 2007, compared to 26 billion
in 2006. The number of credit card transactions totalled 23.6
billion in 2007, compared to 22.3 billion in 2006.

Overall, according to the US Federal Reserve, the number of
payments made by debit, credit or electronic benefit transfer cards
grew by 12.8 billion from 2003 to 2006.

Debit card payments grew faster than any other type, rising by
9.7 billion and contributing three times more to card growth than
any other type of cards combined during the same period.

In terms of average values, credit cards still far outweigh
other forms of cards. The average value of debit card payment
actually fell to $39 in 2006, whereas credit card payment average
value rose to $98 from $90 in 2003. What these figures indicate is
that a much greater proportion of small-value payments, everyday
spending or payments that would otherwise be made with cash, is
being placed on debit cards.

This shift has no doubt been helped by the advent of contactless
payment, which made its mark in 2004 and is now gaining significant
momentum. The lifting of regulations governing signature
requirements on card purchases for low-value payments has also
helped the migration away from cash, along with the implementation
of lower fees for some categories of quick-service merchants.

Another shift taking place is the move towards PIN debit
transactions over signature transactions. According to the US Fed,
although signature-based debit transactions are still showing
healthy growth rates (standing at 16 billion transactions in 2007),
the rate of growth for PIN-based debit payments is greater, 20.6
percent a year as of 2007, compared to 15.8 percent for

Also, the average value of a PIN-based debit card payment fell
from $38 in 2003 to $37 in 2006, indicating they are also being
used for more small-value payments and for a greater number of
transactions than previously.

According to the BAI/Hitachi study, signature and PIN debit now
account for a combined 37 percent of consumers’ in-store payments.
PIN debit is preferred by 45 percent of consumers, while 35 percent
prefer signature.

It is likely that as consumers flock to debit, issuers will be
seeking to boost the number of active cards and regular usage in
order to generate greater interchange revenue and fee income.

Issuers are also trying to drive a greater proportion of debit
transactions through the online channel – Bank of America’s ‘Add It
Up’ offering is open to both debit and credit cardholders who are
enrolled in online banking, and offers up to 20 percent cashback on
online purchases on top of merchant discounts and existing rewards
programmes in place.

Bundled packages that offer an accelerated level of rewards
across a range of banking services (debit card/current account,
credit card, savings account etc) are also being utilised by
issuers to drive more transactions through specified channels.

Citi’s ‘Thank You’ scheme is one such proposition and has been
rolled out to reward customers for having multiple products with


Non-cash payments





Number of signature debit transactions (bn)



Number of PIN debit transactions (bn)



Value of signature debit transactions ($trn, nominal)



Value of PIN debit transactions ($trn, nominal)




Number of general-purpose credit card transactions (bn)



Number of private-label credit card transactions (bn)



Value of general-purpose credit card transactions ($trn,



Value of private-label credit card transactions ($trn,



Source: CI, US Federal Reserve


Cash usage trends


According to the BAI/Hitachi 2008 study, 41 percent of US
consumers indicate they use cash less often today than they did two
years ago. Another indicator of the growth of card payments is the
number of ATM withdrawals, which has dropped slightly (5.9 billion
transactions in 2003, 5.8 billion in 2006).

The value of ATM cash withdrawals, however, has risen from $497
billion in 2003 to $579 billion in 2006, with the average value
rising from $85 in 2003 to $100 in 2006. Both metrics are
consistent with a trend of consumers gradually shifting away from
cash usage, although in the current recessionary environment it
will be interesting to see the figures for 2008.

These figures are likely to show a sharp spike upwards in both
metrics, and giving weight to the theory that consumers view cash
as a more trusted payment method in times of economic trouble.

However, another factor could be that consumers are turning away
from ATM withdrawals (particularly given the level of ATM fees some
US networks and issuers are charging) and instead making use of the
cashback facility on their debit cards at participating

Figures from the US Fed show that more than 1 billion PIN-based
debit card payments involved an average cashback amount of $31 in
2006, compared to 0.6 billion transactions in 2003.

Credit card debt and charge-offs

Although the scale of US consumer credit and debt has
skyrocketed in recent months, with revolving credit reaching a high
of $976 billion in the third quarter of 2008, a series of actions
by US issuers, including slashing back credit lines and rejecting a
greater number of card applicants, plus reined-in consumer
spending, has seen revolving credit fall back significantly over
the six months to $955.7 billion as of February 2009, or a 9.5
percent contraction compared to the year-ago period.

This was a much steeper fall than expected and indicates that
consumers are making concerted efforts to hold off on credit card
spending amid continuing worries over the health of the economy at
a time when the US unemployment rate stood at 8.5 percent (or 13.2
million) in March 2009, the highest rate for 25 years.

Since December 2007, around 5.1 million people have lost their
jobs, with around 3.3 million of that figure becoming unemployed in
the last five months alone. Issuer profits could be hammered well
into 2010, according to industry analyst Meredith Whitney, who is
predicting that credit card lines will be slashed by a further $2.7
trillion by then.

In tandem with the soaring unemployment rate, credit card
losses, charge-offs and delinquencies have risen, with more pain
expected to come in the months ahead. According to global credit
ratings agency Moody’s, credit card charge-offs rose to a record
level of 8.82 percent in February, the sixth consecutive month of
increases, and more than 300 basis points higher than the year-ago

Moody’s predicts that the charge-off rate will peak at around
10.5 percent in the first half of 2010, assuming a corresponding
unemployment rate of 10 percent.

Meanwhile, Credit Suisse First Boston (CSFB) predicts that card
losses will reach 10 percent by the end of 2009, before falling
back to the 9 percent range during 2010.

CSFB based its estimates on March 2009 data which showed credit
losses for the industry trending 50 basis points higher compared to
February 2009, with 30+ day delinquencies rising by 176 basis
points compared to the year-ago period, which CSFB stated was the
tenth consecutive monthly increase in such delinquencies.

Issuers themselves are bracing for further pain, although some
indicators suggest things may not transpire to be as bad as
originally thought.

American Express (Amex) said its annualised net charge-off rate
rose to 8.8 percent in March from 8.6 percent in February, but that
the 30+day delinquency rate fell to 5.1 percent from 5.3 percent in
the same period.

The US bank bail-out programme has certainly helped to stabilise
some of the largest US bank issuers over recent months, and
although it is hard to gauge whether the US economy is beginning to
stabilise, what is certain is that if loss rates continue to
outpace the unemployment rate, we can expect to see issuers taking
more extreme measures to curtail their exposure to riskier
cardholders, measures even more stringent than those that have been
applied already.


US card profit 2007-2008 comparison


Card revenue ($m)

Total revenue ($m)

Card revenue as %
of total revenue

Card net income ($m)








































Capital One










Source: CI, company reports

Balancing risks and reward


Measures such as fee hikes and APR increases have been swiftly
implemented across the board, with little distinction made between
credit-worthy and risky cardholders, much to the chagrin of the
former, who resent what they perceive to be punishment for the
behaviour of the latter.

However, issuers argue they have been left with little choice
and few options available to them to offset the eye-watering losses
that have been racked up so far, such has been the speed and
severity of the current recession. The rising cost of funding is
also making it more expensive for them to extend credit,
necessitating sweeping pricing changes for millions of

In a watershed moment for the cards industry, in April, banks,
including Bank of America, JPMorgan and Citi, hiked interest rates
on millions of cardholders carrying balances, including those with
good credit records, marking a departure from punitive measures
implemented only against riskier cardholders who saw credit lines
snatched away and accounts closed. Others, such as Bank of America
and Discover, have raised fees on credit card transfer balance
deals – from June 2009, Bank of America’s balance transfer fees
will rise to 4 percent of the balance transferred from 3

Issuers undoubtedly have an eye on the impact of forthcoming
Federal Reserve Regulations, due to commence in mid-2010, which
will restrict their ability to change their terms and conditions to
the detriment of cardholders and are trying to recoup as much
revenue as they can before the new rules take effect.

Payment players add that the new federal rules are also very
likely to restrict their ability to manage risk and will likely see
the disappearance of credit and promotional offers that US
consumers have come to take for granted. Also under consideration
is the implementation of annual service fees, shortening the
duration of introductory interest rates and rolling out higher
interest rates for new card customers.

It is a risky gamble – consumer rights groups argue that by
hiking fees and rates across the board, issuers may push an even
greater number of cardholders into delinquency which would push up
credit losses even further.


Issuer profiles

Bank of America (BofA)

US: Unemployment rateIn
the first quarter of 2009, which was also the first quarter in
which its debit card business was reshuffled to become part of its
global card services division, BofA reported a net loss of $1.8
billion due to higher credit costs, while managed net revenue fell
5 percent to $7.5 billion on the back of lower fee income.

Purchase volumes in its US credit card portfolio dropped to $48
billion in the first quarter from $56 billion in the fourth quarter
of 2008, while debit card purchase volumes fell slightly to $51
billion from $52 billion. In the first quarter of 2009, BofA
reported that unused credit lines had been cut by $200 billion or
26 percent, principally on inactive accounts.

In its 2008 annual report, BofA stated that it had modified
nearly 850,000 credit card loans during the year by lowering
interest rates, reducing monthly payments or eliminating fees in
some cases.



Citi’s US cards revenues for the first quarter of 2009 totalled
$2.7 billion, a 17 percent fall from the year-ago period due to
lower securitisation revenues, although managed revenues rose 6
percent, driven by a 252 basis point increase in the managed net
interest margin to 12.61 percent, as a result of higher interest
and fee revenues from higher revolving balances and re-pricing
measures. Having recorded net income profit of $537 million in the
year-ago period, Citi swung to a loss of $209 million in the first
quarter of 2009.

US credit costs rose by a staggering 91 percent, driven by a
$498 million increase in net credit losses and a $342 million
incremental net loan loss reserve build. Citi stated that rising
unemployment, higher bankruptcy filings and the housing market
downturn, were driving a sharp spike in delinquencies and an
acceleration in delinquent customers advancing to write-off.

The net credit-loss ratio increased 395 basis points to 8.88
percent in its Citi-branded portfolio and 508 basis points to 12.40
percent in its retail partner portfolio.


JPMorgan Chase

JPMorgan Chase bucked the trend by reporting an increase in
first quarter card net revenues to $5.1 billion compared to $3.9
billion in the year-ago period, but provision for credit losses
increased to $4.6 billion from $1.6 billion. This resulted in a net
income loss of $547 million compared to a profit of $609 million in
the year-ago period.

Managed loans grew to $176.1 billion, a rise of 17 percent
compared to the year-ago period, while average managed loans rose
by 19 percent to $183.4 billion, primarily due to the impact of
JPMorgan Chase’s acquisition of Washington Mutual last year.
Excluding Washington Mutual, end of period and average managed
loans were $150.2 billion and $155.8 billion respectively. Managed
credit loss provision rose by $3 billion to $4.7 billion, an
increase of 179 percent, reflecting a rise in charge-offs and a
$1.2 billion increase in loan loss provisions.


Capital One

Capital One’s US card segment delivered a profit of $2.4 million
in the first quarter of 2009, compared to net income loss of $175
million in the fourth quarter of 2008.

Capital One’s charge-off rate accelerated to 8.39 percent in the
first quarter and the company is expecting a further rise
throughout 2009 to cross the 10 percent threshold in the next few
months. Provision for loan losses was $1.5 billion in the first
quarter of 2009, a fall from the $2 billion in the fourth quarter
of 2008 but higher than the $1.1 billion in the year-ago



Payment card trends







Number of debit and ATM cards (bn)






Value of debit card spending ($trn)






Number of credit cards (bn)






Value of credit card spending ($trn)






Source: Bank of International Settlements, CI