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?