Opportunities for Growth in US Credit Card Issuing

SUMMARY

Much has been written about the declining growth rates of credit card receivables in the US. In both 2003 and 2004, annual growth rates were near or below 5%. In previous reports, the Mercator Advisory Group has expounded on the effects of this slowing on the card issuing industry as well as on the broader US and Global banking businesses by extension. Mercator has also discussed a variety of alternative strategies and products for improved profitability, including corporate cards, prepaid cards, and new systems to improve operations.

This report approaches the issuer from a different perspective: what can issuers do to make up for slowing loan growth? Despite the slowing of the industry's core profit engine, opportunities still exist in the US Consumer Credit issuing space. There is plenty of fertile ground for US card issuers to explore, both in growing their charge volumes, and in reviving their slowing growth rate.

Interchange revenues are becoming an increasingly important part of issuers' businesses, although they still make up a relatively small share as compared to interest (Figure 1, below). While growth has stalled, charge volumes continue to grow at double-digit rates. By winning recurring bill business from cash and checks, and micropayments from cash, issuers can continue to grow these volumes and their interchange revenues at healthy rates.

TABLE OF CONTENTS

• Table of Figures.............................................................................................................................3
• Introduction...................................................................................................................................4
• The Challenges of Slowing Receivables Growth.........................................................................6
• Growing Charge Volumes.............................................................................................................7
• Issuers' Recurring Bill Programs..............................................................................................13
• Billers -- Regulated Monopolies.............................................................................................13
• Billers - Competitive Industries.............................................................................................14
• Consumers.............................................................................................................................14
• Micropayments -- Growing Charge Volumes and Protecting the Industry's Turf.....................15
• What Do Micropayments Mean to the Credit Card Industry? More Than Just Charge Volumes...................................................................................................................................................16
• New Products...............................................................................................................................20
• Hybrid Cards............................................................................................................................20
• Rewards Innovation...................................................................................................................21
• International Opportunities........................................................................................................25
• Conclusion...................................................................................................................................28

Table of Figures

• Figure 1: 2004 US Card Issuer Revenues........................................................................................6
• Figure 2: Charge Volumes and Interchange, 1990-2004.................................................................8
• Figure 3: Interchange Revenues for US Credit Card Issuers, 1990-2004........................................9
• Figure 4: New Market Opportunities for Payment Cards..............................................................10
• Figure 5: Recurring Bills Promise a Rich Source of New Interchange Revenues.........................12
• Figure 6: Five Micropayment Models............................................................................................17
• Figure 7: Consumers are Using Credit and Debit Cards More Often for Small Dollar Purchases19
• Figure 8: Citi's Unique "Points for Grades" Rewards Redemption Schedule................................24
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