the credit card industry
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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. - PowerPoint PPT PresentationTRANSCRIPT
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
Merchant/Retailer
Merchant Bank /
Processor
Card Association
Issuing Bank
Consumer
Issuing bank forwards the original charge to the consumer who pays the balance due ($100)
Cardholder Purchase ($100)
Submit charge to merchant bank and then on to 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)
Card network submits payment minus a fee (%) back to merchant bank ($98)
Merchant bank gives payment to retailer minus fees($97.50)
Consumer(you) Card
associations
Merchants (shops)
Card issuers (issuing banks)
Processors
Card Issuer Industry Structure
‡ Giunta, Nanda, & Burkard
Porter’s Five ForcesAn industry framework used to determine attractiveness and competitive intensity of an industry
The Credit Card Issuer Market is Highly Concentrated
JP Morgan26%
AmEx23%
Bank of America18%
Citigroup17%
Other16%
Market Share (Revenue $)
JP Morgan AmEx Bank of AmericaCitigroup Other
A credit card issuer’s main activity is to provide a line
of credit
HHI = 2072
N = 192 players
C(4) = 85%
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
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
Top Dog Fat cat
Lean and Hungry
Puppy DogBa
rrier
s Ex-
Ante
Aggressive Behaviors
High
High
Low
Low
Source: Ibisworld
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
Consumer Bargaining Power
• Firms• People
Medium bargaining power
Medium bargaining power
Source: Ibisworld
The credit card issuer industry is HIGHLY PROTIABLE due to the upward pressure on profits from these five forces
Rivalry
Barriers
Buyer
Substitutes
Supplier
Medium Bargaining Power
Huge Barriers To Entry
Medium Bargaining Power
No Substitutes
High Concentration
Card Associations Industry Structure
‡ Giunta, Nanda, & Burkard
The card association industry is extremely concentrated
Visa37%
Mastercard 24%
AmEx8%
JCB2%
Discover1%
Diners Club28%
Market Share
Visa Mastercard AmExJCB Discover Diners Club
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
HHI = 3894
N = 6 players
C(4) = 98%
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
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
Top Dog Fat cat
Lean and Hungry
Puppy DogBa
rrier
s Ex-
Ante
Aggressive Behaviors
High
High
Low
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
Consumer Bargaining Power
• Commercial banks• Credit card issuer• Public
administration
Low bargaining power Medium bargaining power
Source: Ibisworld
The credit card association industry is deemed VERY PROFITABLE based on these forces
Rivalry
Barriers
Buyer
Substitutes
Supplier
Low Bargaining Power
Impossible to enter
Medium Bargaining Power
No Substitutes
High Concentration
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
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-20%
-15%
-10%
-5%
0%
5%
10%
Credit Card Issuing Revenue Credit Card Associations Revenue Consumer Spending ($)
Perc
ent C
hang
e in
reve
nue
-16% in credit card issuing
Notification Requirements of 45 days
Grace Period on Interest Rate Increases
No Fluctuating Fees and Charges
Student Cards Require Cosigners
Dodd Frank Wall Street
Reform
Source: Ibisworld, Bloomberg, Seeking Alpha
Advertising Strategies and Raw Data Analysis
‡ Giunta, Nanda, & Burkard
2008 2009 2010 2011 20120
1000
2000
3000
4000
5000
6000
7000
Credit Card Industry Market and Advertising Expense Over Time
Adve
rtisin
g Ex
pend
iture
(Mill
ions
)After the financial crisis, there has been a significant decrease in consumer spending and advertising allocation…
…resulting in more practical marketing choices
Example Impact
Less consumer spending
• Less pizzazz, more practical marketing
• Quick, concise messaging
Less consumer confidence
• Market reward programs for consumers with ideal credit score
Increased regulation in industry
• Market credit cards with lower signing interest rate
• Shorter agreements
Effects of financial crisis
realized
Source: Bloomberg: Company 10-Ks
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
Make it just FOR ME
It better be SIMPLE
I better think it’s a GOOD DEAL
Source: Consumer Bureau
Humor Advertising
Iconic Advertising
Increase in purchase volume within a year
16%
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.
Low price point
High price point
Narrow customer base
Broad customer base
Large transactions > fewer customers > better customer
service
Many small transactions > connection with banks (no
vertical integration)
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-sellIts advertising
strategy is a paradox, but
not reallyHumor
Information/Rewards
"For You"
Celebrity appearance
0% 20% 40% 60% 80% 100% 120%Source: Bloomberg News
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
Its advertising strategy is
purely complement
aryComplementary
Information/Rewards
"For You"
Celebrity feature
0% 20% 40% 60% 80% 100% 120%Source: American Express
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
Emotional
Mentioned Money/Price
"For Others"
Celebrity feature
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Humor
Information/Rewards
"For You"
Celebrity feature
0% 10% 20% 30% 40% 50% 60% 70% 80%
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 Advertising Program Distribution
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
‡ Giunta, Nanda, & Burkard
NEUTRAL
• Bottom line improvement has been accounted for in stock prices
• Clear audience target
• Extensive expense cuts
BUY
• 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-to-quarter
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?