Faced with
stagnant credit card growth, US issuers aim to boost plastic’s
share of consumer spending, improve credit card lending quality and
expand into debit and prepaid in order to generate new profits.
Justin Bandy reports on the current state of the
US market

Though credit and debit cards outnumber people by more than
three to one in the US, there is still significant room for
increased consumer spending on them. According to figures from
American Express, US consumer spending is expected to increase from
$7.1 trillion in 2006 to $8.8 trillion by 2010. During this time,
plastic spending is expected to increase from 40 percent of
consumer spending to 56 percent, while cash and cheques will see
their share of spending fall from 50 percent to 29 percent. Plastic
spending is estimated to grow at a compound annual growth rate
(CAGR) of 12 percent per year over this time period.

Credit cards are no longer the most important drivers of growth in
the US cards market. According to Visa USA, in 2006 spending on
debit cards grew by 23 percent and spending on corporate cards grew
by 26 percent, while spending on credit cards grew by only 10
percent. Credit card spending accounts for only 45 percent of all
cards spending on Visa cards, with debit, prepaid, and corporate
cards making up the remaining 55 percent (see Figure 1).

With 503 million cards in force, Visa USA is the dominant cards
network. Its cards are accepted at 6.3 million locations and had a
sales volume of $1.3 trillion in 2006, an increase of 17 percent
over 2005. MasterCard is second, with approximately 375 million
cards; its cards account for approximately 29 percent of all POS
spending. Discover has roughly 50 million cards and 5 percent of
POS spending, and American Express has just over 40 million cards
and 17 percent of POS spending.

US interchange rates vary widely depending on the type of
transaction, though rates are generally higher than in Western
European countries and Australia. Beginning in October 2006, Visa
USA began publishing its interchange rates for different types of
transactions on its website. Visa’s interchange rates are typically
structured as a percentage of the total transaction value plus a
flat fee. The values range from 0.62 percent + $0.13 (with a $0.35
cap) for certain supermarket transactions, to 2.7 percent +

Credit card growth is sluggish

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The US is the world’s biggest credit card market. Outstanding US
credit card debt amounted to more than $879 billion in January
2007, according to estimates based on Federal Reserve figures. This
represents 5 percent of all consumer debt outstanding. There are
more than 640 million credit cards in circulation in the US.
However, credit card lending growth has been sluggish for the last
several years. Between the end of 2002 and the end of 2006,
revolving credit lending increased by only 17 percent, or just 4
percent per year. Over the same time period, Americans increased
their non-revolving debt by 23 percent, highlighting the trend
among Americans to use lower interest home-equity loans and
mortgages for their credit needs rather than credit cards.

Though credit card lending levels are stagnant, the quality of
credit card loans has improved in recent years. According to the
Federal Reserve, in the fourth quarter of 2006, charge-off rates
for credit card loans in the US stood at 3.96 percent, their lowest
level since 1994. However, this still represented 38 percent of all
consumer lending charge-offs (see Figure 2). In addition to
improving loan quality, the composition of claimants on credit card
receivables has changed dramatically over the past ten years. The
size of pools of securitised credit card receivables has increased
by 219 percent over the past decade. Credit card-backed securities
are now the largest recipients of credit card payments, followed by
commercial banks and then finance companies (see Figure 3).

Interest rates on credit cards have remained fairly constant in
recent years, fluctuating within 50 basis points of 13 percent per
year since 2002. However, interest rates on credit card accounts
bearing interest have risen since 2002 from 13.11 percent to 14.73
percent (see Figure 4). This trend is a result of two factors: the
increased movement of US card issuers into subprime lending; and
the expiration of teaser offers that lured revolvers into schemes
that would charge a high rate of interest after an initial period
of low or no interest.

Credit cards are not evenly distributed throughout the US
population. One in seven Americans has more than ten credit cards,
according to Experian Consumer Direct’s latest National Score Index
study. About 14 percent of the US population uses at least 50
percent of their available credit, Experian says.

Visa USA: Performance of Visa USA product lines, 2006

Cards market snapshot: US by numbers

Loan charge-off rates, Q4 1994-2006

Credit card receivables distribution, January 2007

Debit cards to dominate

There are an estimated 288 million Visa- or MasterCard-branded
debit cards in the US. According to Mintel, a market research
organisation, debit purchases grew from $421 billion in 2001 to an
estimated $1 trillion in 2006. According to a 2006 survey by
Mintel, 76 percent of respondents owned or used a debit card, up
from 73 percent in September 2005. Close to one-quarter of survey
respondents reported using debit cards for purchases worth between
$2 and $10 throughout the year, and 10 percent of respondents
reported using debit cards for purchases under $1. “Consumers are
more accustomed to using debit cards in their everyday lives,” said
Susan Menke, senior financial analyst for Mintel.

Though spending with debit cards grew at approximately 20 percent
in 2006, there is still a lot of room for increased debit card
usage. According to Trish Preston, MasterCard’s group head of debit
product management, 45 percent of consumers with current accounts
were either not using their debit cards or did not have one. Debit
cards are seen as having a high potential for growth among
small-ticket items, and among customers that do not use the credit
facility on their credit cards or do not have credit cards. Debit
cards are also seen by US retail banks as being key elements for
customer relationship building. Though the average US consumer has
several credit cards in their wallet, they usually have only one
debit card, making the debit card a more exclusive bond with a
consumer than a credit card.

Banks are increasingly adding loyalty programmes to debit cards to
promote their usage. Nearly one-quarter of respondents in the
Mintel survey reported having some sort of reward programme linked
to their debit card.

Average credit card interest rates, commercial banks, 2002-2006

Prepaid cards’ continuing

The prepaid cards industry has grown in size and prominence in the
past several years, and this growth is projected to continue in the
near future. According to a recent report from the US research
consultancy Mercator Advisory Group, the total spend on prepaid
products, both open- and closed-loop, was $165.02 billion in 2005.
Mercator projects the prepaid card market to grow at a CAGR of 9.37
percent to reach $236 billion by 2009.

Currently, the prepaid market in the US is dominated by gift cards
and government benefits cards, which, combined, control roughly 70
percent of the total market.

Card marketing in the US is an enormous enterprise. According to
consultancy Auriemma, the number of card solicitations averages
10.9 per consumer per month. In a survey, 22 percent of all
respondents replied that they had received “too many solicitations
to count”. The inundation of consumers with credit card marketing
material is part of a broader trend affecting the entire retail
financial services industry. According to research from Mintel,
nearly 4.2 billion credit card direct mail pieces were distributed
to US consumers during the first half of 2006, significantly more
than last year’s estimates, which reached close to 3.9 billion
pieces during the same time period. The mailings include
acquisition, cross-selling and follow-up mailings. The top mailers
remained the same as last year: Chase, Capital One Bank, American
Express, Citibank and HSBC.

Loyalty programmes are important elements of many successful cards
schemes in the US. American Express reported in a presentation to
investors in February 2007 that spending on rewards cards was four
times higher than for non-rewards cards for US consumers. American
Express also reported that voluntary attrition was 15 percent lower
for rewards cards than for non-rewards cards.

Private-label cards still important

Private-label cards’ share of the revolving credit market has
fallen for the past decade and now stands at roughly $106 billion,
or 15 percent of outstanding credit card receivables. Receivable
are estimated to grow at rates of roughly 5 percent per year to
reach $131 billion by 2010. Three issuers – Citigroup, GE Money and
HSBC – control a combined 81 percent of market share.

The US market has seen a wave of consolidation in the private label
cards industry in the last few years. Recent deals have included
JPMorgan Chase’s acquisition of the retail card programme of
Kohl’s, a department store, Citigroup’s acquisition of the May and
Federated Department store portfolios, and GE Money’s acquisitions
of the Dillard’s and Mervyn’s retail portfolios. Private-label
cards in the US typically have an interest rate premium of 5
percent to 7 percent above prime credit cards, and are often
targeted at near-prime customers and mass-market customers. The
higher interest rates are partially offset by higher delinquency
rates on private-label cards. HSBC reported that its private-label
portfolio had delinquencies of 5.61 percent at the end of September
2006 compared with 4.48 percent for the credit card

Regulation favours the market

The US has a favourable regulatory environment for credit card
issuers and networks. Interchange rates are much higher in the US
on average than in Western Europe or Australia, and there is no
sign that there will be any regulatory pressures to reduce rates,
as is happening in many other developed markets. Also, despite the
recent concentration of the market – the top three issuers control
roughly 60 percent of outstanding credit card debt – there is no
sign of any antitrust investigation in the credit card industry
(see Figure 5).

The card processing industry has undergone substantial change in
the last few years, as major industry players have realigned their
processing businesses. Industry consolidation has led major issuers
to reconsider their processing arrangements. JPMorgan Chase
switched from First Data to TSYS in 2006, and Bank of America has
said it will leverage the processing platform it acquired as part
of the MBNA acquisition for its processing needs. Despite the
competitive market conditions, First Data recently confirmed its
commitment to the processing business when it sold money transfer
service Western Union in January 2007 and renewed its focus on
processing. First Data has approximately 425 million customer
accounts, more than half of which are retail card accounts.

Domestic players predominate

The cards market in the US is overwhelmingly controlled by domestic
issuers. However, several UK banks have made forays across the
Atlantic. Through its subsidiary, Citizens Bank, Royal Bank of
Scotland has a strong presence in the north-eastern states, and
HSBC and Barclays are also present in the US. Spanish giant BBVA
has recently entered the US market through acquisitions in Texas
and nearby states, and France’s BNP Paribas has two subsidiaries in
the western US: First Hawaiian Bank and Bank of the West.

Major players

Bank of America

Bank of America’s blockbuster acquisition of MBNA in the summer of
2005 catapulted the bank into the top spot in the US in terms of
credit card outstandings, with 20.1 percent of the market. The bank
has more than 52 million banking customers in the US, nearly half
of all households. It operates over 5,700 branches and 17,000 ATMs
in 30 states and the District of Columbia. The bank claims to have
37 percent of all online banking customers and 65 percent of online
bill payment customers. The Bank of America brand has 40 million
active credit card accounts and $140 billion in managed

The bank has recently launched a new array of prepaid cards,
including Visa-branded emergency relief cards that will assist
corporations and governments in preparing for catastrophic

JPMorgan Chase

JPMorgan Chase is the second-largest issuer of credit cards in
terms of outstanding debt, with 19 percent of the market. The bank
has 112 million credit cards in force. According to CEO James
Diamond, JPMorgan Chase lost $200 million from its credit cards
business in 2006, after posting an $800 million gain in 2005. The
issuer was hit particularly hard by the deterioration of its
subprime cards portfolio. JPMorgan Chase has been a leader in
technological innovation. Its Blink card is the leading contactless
payments solution in the US, with roughly 7 million blink-enabled
cards in force.

Market share by lending outstandings, top ten issuers, 2006


With an estimated 19.1 percent of all credit card balances (14.5
percent excluding Diners Club cards), Citibank is the third-largest
credit card player. Citigroup’s US consumer credit card business
posted net income of $1 billion in the fourth quarter of 2006,
compared to $444 million in the same period of 2005. Revenues rose
to $3.6 billion in the fourth quarter of 2006 from $2.7 billion a
year earlier. Citi issues a range of cards in association with
retailers and also has an issuing relationship with American
Express. As of the end of 2006, Citi had over 109 million credit
cards issued in the US, behind Bank of America’s 121 million

Citi’s Thank You rewards programme is available to credit card and
retail banking debit card customers. Cardholders can collect points
from multiple activities so they can earn points and redeem them
for rewards more quickly. As of November 2006, there were over 10
million members in the Thank You programme; the most recent
merchant participant is global online travel website Expedia.

Capital One

With 8 percent of credit card receivables, Capital One is the
fourth-largest player. Until recently, it was a major monoline
issuer, with other players such as MBNA, Providian and Metris
having been swallowed up by larger banking groups. Though still
primarily a credit card issuer, Capital One has diversified its
operations by acquiring regional banks. In 2005 Capital One
acquired Hibernia National Bank, a Louisiana regional bank, for
$5.35 billion, and in 2006 it acquired NorthFork Bank, a regional
bank in the greater New York area, for $14.6 billion.

Earlier this month Capital One announced it would launch its first
reloadable prepaid debit card programme in a partnership with
NetSpend, an Austin, Texas-based processor and marketer of prepaid
debit cards.


With 6.1 percent of all credit card loans, Discover is the
fifth-largest credit card issuer in the country. In 2006,
Discover’s pre-tax income was up 72 percent to $1.6 billion,
generated from roughly $50 billion in credit card balances and
loans. Discover has been actively growing its market share.
According to research by Auriemma Consulting Group, Discover
acquired 15 percent of all new credit card accounts in the US in
October and November of 2006, the highest rate for any

Discover is part of Morgan Stanley, a financial institution that
primarily concentrates on investment banking, brokerage services
and asset management, although it is due to be spun off later in
American Express

With 4.5 percent of credit card outstandings in the US, American
Express is the sixth-largest player in the credit card market. It
is, by far, the most effective major credit card issuer in the
world at turning cards spending into profits.

According to CEO Kenneth Chenault, the company has a “spend
velocity” of 6:1, meaning that for every $6 of billings it
generates $1 of receivable balances. American Express claims to
have three times the spend velocity of its nearest

American Express also has very high spending rates per card, with
the average US cardmember spending $11,521 in 2006. American
Express grew solidly in 2006: the number of cards in force
increased 10 percent, cardmember spending increased 7 percent and
managed cardmember loans jumped 17 percent. The issuer has 43
membership rewards programmes in 98 markets worldwide, including 13
airline co-branded programmes.