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
Cardholder
Purchase
($100)
Consumer
Merchant bank gives payment to
retailer minus fees
($97.50)
Merchant/
Merchant
Bank /
Retailer
Processor
Submit charge to
merchant bank and
then on to card
association
Issuing bank
forwards the
original charge to
the consumer who
pays the balance
due ($100)
Issuing
Bank
Card network
submits payment
minus a fee (%) back
to merchant bank
($98)
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)
Consumer
(you)
Card
associations
Merchants
(shops)
Card issuers
(issuing banks)
Processors
Card Issuer
Industry
Structure
Porter’s
Five Forces
An industry framework used
to determine attractiveness
and competitive intensity of
an industry
The Credit Card Issuer Market is Highly Concentrated
Market Share (Revenue $)
A credit card issuer’s main
activity is to provide a line of
credit
Other
16%
JP Morgan
26%
HHI = 2072
Citigroup
17%
AmEx
23%
N = 192
players
Bank of America
18%
JP Morgan
AmEx
Bank of America
Citigroup
C(4) = 85%
Other
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
Aggressive Behaviors
High
Low
• 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
Barriers Ex-Ante
Barriers to entry
High
Top Dog
Fat cat
Low
Lean and
Hungry
Puppy
Dog
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
Medium bargaining
power
Consumer
Bargaining Power
• Firms
• People
Medium bargaining
power
Source: Ibisworld
The credit card issuer industry is HIGHLY PROTIABLE due to the upward pressure on
profits from these five forces
Huge Barriers To Entry
Barriers
Supplier
Rivalry
Buyer
Medium Bargaining Power
High Concentration
Substitutes
No Substitutes
Medium Bargaining Power
Card Associations
Industry
Structure
The card association industry is extremely concentrated
Market Share
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
Diners Club
28%
Visa
37%
HHI = 3894
C(4) = 98%
Discover
JCB
1%
2%
AmEx
8%
N = 6 players
Mastercard
24%
Visa
Mastercard
AmEx
JCB
Discover
Diners Club
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
Aggressive Behaviors
High
Low
Top Dog
Fat cat
Lean and
Hungry
Puppy
Dog
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
Barriers Ex-Ante
High
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
Low bargaining power
Consumer
Bargaining Power
• Commercial banks
• Credit card issuer
• Public
administration
Medium bargaining
power
Source: Ibisworld
The credit card association industry is deemed VERY PROFITABLE based on these
forces
Impossible to enter
Barriers
Low Bargaining Power
Supplier
Rivalry
Buyer
High Concentration
Substitutes
Medium Bargaining Power
No Substitutes
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
Credit Card Issuing Revenue
Credit Card Associations Revenue
Consumer Spending ($)
10%
Notification
Requirements of 45 days
PERCENT CHANGE IN REVENUE
5%
0%
2007
2008
-10%
-20%
2010
2011
Dodd Frank
Wall Street
Reform
-5%
-15%
2009
-16% in credit
card issuing
2012
2013
2014
2015
2016
2017
Grace Period on Interest
Rate Increases
No Fluctuating Fees and
Charges
Student Cards Require
Cosigners
Source: Ibisworld, Bloomberg, Seeking Alpha
Advertising Strategies and Raw
Data Analysis
After the financial crisis, there has been a significant decrease in consumer
spending and advertising allocation…
…resulting in more practical marketing choices
Example
Credit Card Industry Market and Advertising Expense Over Time
Advertising Expenditure (Millions)
7000
6000
Less consumer
spending
5000
4000
Less consumer
confidence
Effects of
financial crisis
realized
3000
Impact
• Less pizzazz, more
practical marketing
• Quick, concise
messaging
• Market reward
programs for
consumers with
ideal credit score
2000
1000
0
2008
Source: Bloomberg: Company 10-Ks
2009
2010
2011
2012
Increased regulation
in industry
• Market credit cards
with lower signing
interest rate
• Shorter
agreements
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
Source: Consumer Bureau
Make it just FOR
ME
It better be
SIMPLE
I better think it’s a
GOOD DEAL
Humor Advertising
Iconic Advertising
16%
Increase in
purchase
volume within a
year
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.
Narrow customer base
Large transactions > fewer customers >
better customer service
High price point
Low price point
Many small transactions >
connection with banks (no
vertical integration)
Broad customer base
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-sell
Its advertising
strategy is a
paradox, but not
really
Source: Bloomberg News
Celebrity appearance
"For You"
Information/Rewards
Humor
0%
20%
40%
60%
80%
100%
120%
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
Celebrity feature
Its advertising
strategy is purely
complementary
Source: American Express
"For You"
Information/Rewards
Complementary
0%
20%
40%
60%
80%
100%
120%
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
Celebrity feature
Celebrity feature
"For Others"
"For You"
Mentioned Money/Price
Information/Rewards
Emotional
Humor
0%
20%
40%
60%
80%
100%
0%
10%
20%
30%
40%
50%
60%
70%
80%
MasterCard Advertising Program Distribution
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
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
NEUTRAL
BUY
• Bottom line
improvement has
been accounted
for in stock prices
• Clear audience
target
• Extensive
expense cuts
• 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-toquarter
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?