Best Credit Card Program

Summary Analysis

redit card products have traditionally been very profitable for the big banks, and while the market did cool during and just after the financial crisis, as consumers were deleveraging, it is growing again—which is very good news for the 10 largest U.S. banks. “The market is growing, and a lot of that is being driven by the fact that consumers have incomes and jobs today, relative to right after the financial crisis,” says Sanjay Sakhrani, a research analyst at Keefe, Bruyette & Woods.

Banks are also more attuned to opportunities to book high interest loans at a time when low interest rates and intense competition in the commercial loan sector are putting downward pressure on their net interest margins. “Since the financial crisis when banks have been much more stressed for asset growth, there’s been a growing trend to bring credit card [loans] back on to the balance sheet,” says Scott Siefers, a research analyst at Sandler O’Neill + Partners.

In our evaluation of the credit card programs of the 10 largest U.S. banks, we considered such factors as the volume of each bank’s outstanding credit card loans, growth in those loans, and the number and types of cards that each bank offers, as well as the opinions of experts in the field.

JPMorgan Chase & Co. had the top ranked program—and also the second largest program, with $131 billion in credit at the end of 2016, according to the Federal Deposit Insurance Corp. It also offers a diverse suite of credit card products. “Over the last four or five years, you’ve seen more differentiation between the large banks,” says Sakhrani. “JPMorgan has gravitated toward affluent transactors and away from subprime/near-prime [customers] and private label [relationships]. You’ve seen them shed those assets and let those loans run off, and focus more [on] products like the Chase Sapphire Preferred and Reserve cards and co-branded deals that they are committed to.”

JPMorgan is also taking a relationship approach to its marketing efforts and sees the card as a critical component in a full relationship with its retail customers. “Right now, they’re the gorilla in the marketplace,” says Gordon Goetzmann, a managing director at the Novantas consulting firm. “[Credit card] is a high return-on-equity business that delivers incredibly attractive returns to the bottom line.”

Coming in second was Capital One Financial Corp., which is impressive considering that it’s a much smaller bank than the three megabanks that also dominate the sector, which includes Bank of America Corp. and Citigroup. Capital One had outstanding loans of $98 billion at year-end 2016. Despite a high volume of loans, it also exhibited a high level of growth over a two-year period, from 2014 to 2016, at 21 percent. Once a minor player in credit cards, Capital One has created a strong national brand through aggressive direct mail marketing, and most recently its “What’s in Your Wallet?” television advertising featuring such well-known actors as Samuel L. Jackson and Jennifer Garner.

“Capital One has a long history in the credit card market, and was the first to try out the teaser rate product,” says Sakhrani. “That was a big part of their growth story early in their lifetime. Over time, they’ve morphed into more of a full spectrum card issuer, with a particular core competency in the subprime space, which they supplement with a lot of super prime/transactor customers.”

Citigroup, which finished third in the rankings, has been getting a lot of traction with its Citi Double Cash Card, which is aimed at prime revolvers. (Revolvers are profitable for card issuers, as they tend to make the minimum monthly payment and pay on the interest owed, not the remaining balance.) Sakhrani considers Citigroup to be a full spectrum lender, and in February 2016, the bank acquired Costco’s co-branded credit card portfolio from The American Express Co., a deal which has been an important factor in the bank’s credit card growth over the last year and a half. Citigroup had $146 billion in credit card loans at the end of 2016, making it the largest program of the 10 banks in this ranking.

Coming in fourth was Bank of America, which had $92 billion in credit card loans at the end of last year. Despite this, most experts consider Bank of America’s credit card program to be relatively indistinctive. “Their strategy is less clear,” says Sakhrani. “They don’t have a big exposure to the co-branded marketplace. They’re not big in private label. They very much have a traditional credit card lending product.”

How They Ranked

Did You Know?

anking is a highly consolidated industry in the U.S., and credit cards might be the most consolidated bank product sector of all. The four largest bank credit card programs—JPMorgan Chase & Co., Bank of America Corp., Citigroup and Capital One Financial Corp.—accounted for 50 percent of outstanding credit card loan volume in 2016, according to The Nilson Report. The remaining six institutions in the top 10 largest U.S. banks accounted for just 6.5 percent of the credit card loan market at the end of last year.

How did the credit card market become so heavily concentrated? The same way the industry itself has become so consolidated—through a string of acquisitions starting in the late 1990s and continuing well into the 2000s that took player after player out of the market. The present day JPMorgan, for example, was formed through its 2004 acquisition of Bank One Corp. Both companies had sizeable credit card operations, which in Bank One’s case had been augmented by its acquisition of First USA, a monoline credit card company, in 1997. JPMorgan later acquired Washington Mutual in 2008 after the thrift failed during the financial crisis, which further increased its credit card market share. Bank of America is also the product of a long string of acquisitions during this same period of time, and its credit card program grew with each deal. Bank of America also acquired another monoline credit card company, MBNA Corp., in 2005. And Wells Fargo & Co., with the fifth largest program of the ranked banks, benefited from its 2008 acquisition of Wachovia Corp.

In such a heavily consolidated market, with each of the top four programs controlling an almost unassailable market share, what are the realistic growth expectations of the remaining six banks, and what strategies should they pursue?

The credit card is, for starters, an extremely profitable product that adds to a bank’s bottom line. It is also the third most purchased retail bank product after checking and savings accounts, and is central to a relationship strategy in the consumer banking sector. “It’s almost a must-have,” says John Grund, a managing director at Accenture. “If you’re going to offer checking accounts, you better offer a debit card and a credit card.”

The credit card market is also growing nicely, which provides the opportunity for all issuers to expand their numbers even if the overall market share percentages don’t shift appreciably. “The beauty of the U.S. market is that it’s large, and new consumers enter the credit card market naturally via life stage events, like college graduates entering the workforce,” Grund adds.

The best strategy for regional banks like U.S. Bancorp and PNC Financial Services Group, as well as Wells Fargo—whose program is small relative to its size as the third largest U.S. bank—is to focus on those customers who don’t already have one of their credit cards. “As long as you don’t have aspirations to go outside your credit box and try to gain new customers by leading with your credit card, it does make sense to try to capture as much of your existing customers’ financial activity as you can,” says Scott Siefers, a research analyst who covers regional banks for Sandler O’Neill + Partners. The regional banks “are hanging their hat on a relationship-based strategy, and their ambitions are manageable,” says Grund. “They’re not trying to compete with the national credit card banks.”

One peripheral player among the 10 largest banks that had been aggressively trying to expand its credit card operation through a relationship-based strategy was Wells Fargo. But the credit card was one of the products at the center of the bank’s account opening scandal, and that effort has since stalled.

What we most likely won’t see is a big shift in market share among the 10 largest banks through acquisitions, since the opportunities to strike a meaningful deal are limited. For example, Barclays, a U.K.-based multinational bank, has a 3.1 percent share of outstanding credit card loans in the U.S., and Synchrony Financial, a nonbank consumer finance company, owns a 2.4 percent share. After those two, market share percentages fall sharply. Even a merger of two large regionals like U.S. Bancorp and PNC would hardly move the needle, since U.S. Bancorp has a 4.3 percent share and PNC just 0.7 percent.

“It’s really unlikely that any of the regional banks will become a top credit card player,” says Siefers.