Designing A Sustainable Card Model
16
McKinsey on Payments
March 2011
Designing a sustainable card model:
The growth challenge
In the face of dire predictions about the health of the global credit card industry, a number of issuers are rallying around new positioning, new products and new value propositions – seeking profits there rather than through risk-based charges and fees. The new positioning includes making finer distinctions among consumer groups. The new products range from family charge cards to “programmable” credit cards. And the new value propositions include richer incentives for affluent customers, innovative introductory offers for under- and unserved card customers, youth-friendly offerings for families, partnerships for card issuers and merchants, and high-tech solutions as smart cards and mobile payment systems. Together these models may help preserve credit cards’ status as one of the most profitable segments of the payments industry.
Philip Auerbach
David Chubak
Sameer Gulati
JJ Kasper
Maria Martinez
Industry dynamics require new issuer strategies
As we note in “U.S. payments trends: Enduring a turbulent passage” (page 3), regulatory uncertainty, shifts in consumer behavior and atypically high loan losses continue to erode the profitability of the U.S. and global credit card industry. We estimate U.S. credit card profits at $16 billion in 2012, down by nearly half from their 2006 peak. Pre-tax returns on assets, meanwhile, will rebound to the 2.5 to 3 percent range by 2013-14, but will likely remain below levels established in the middle of the past decade. A similar story is playing out
in Europe, where regulations enacted between
2004 and 2006 continue to depress the longterm outlook for profitability (Exhibit 1).
Asian markets offer even less profitability, reflecting low consumer demand and high levels of regulation.
For these reasons, quick fixes will not significantly boost future growth. In the previous issue of McKinsey on Payments we argued for a new model based on
McKinsey on Payments
March 2011
Designing a sustainable card model:
The growth challenge
In the face of dire predictions about the health of the global credit card industry, a number of issuers are rallying around new positioning, new products and new value propositions – seeking profits there rather than through risk-based charges and fees. The new positioning includes making finer distinctions among consumer groups. The new products range from family charge cards to “programmable” credit cards. And the new value propositions include richer incentives for affluent customers, innovative introductory offers for under- and unserved card customers, youth-friendly offerings for families, partnerships for card issuers and merchants, and high-tech solutions as smart cards and mobile payment systems. Together these models may help preserve credit cards’ status as one of the most profitable segments of the payments industry.
Philip Auerbach
David Chubak
Sameer Gulati
JJ Kasper
Maria Martinez
Industry dynamics require new issuer strategies
As we note in “U.S. payments trends: Enduring a turbulent passage” (page 3), regulatory uncertainty, shifts in consumer behavior and atypically high loan losses continue to erode the profitability of the U.S. and global credit card industry. We estimate U.S. credit card profits at $16 billion in 2012, down by nearly half from their 2006 peak. Pre-tax returns on assets, meanwhile, will rebound to the 2.5 to 3 percent range by 2013-14, but will likely remain below levels established in the middle of the past decade. A similar story is playing out
in Europe, where regulations enacted between
2004 and 2006 continue to depress the longterm outlook for profitability (Exhibit 1).
Asian markets offer even less profitability, reflecting low consumer demand and high levels of regulation.
For these reasons, quick fixes will not significantly boost future growth. In the previous issue of McKinsey on Payments we argued for a new model based on