Published by First Annapolis Consulting,...

January / February 2013

1 of 8 © 2013 First Annapolis Consulting, Inc.January / February 2013 Navigator

Published by First Annapolis Consulting, Inc.

Navigator

Since the Great Recession, the U.S. consumer has been put under the microscope in an attempt to understand the “New Normal.” One of the more popular topics has been the notion that households are deleveraging in the aftermath of the housing bubble and the collateral damage it caused to the... More

Green Dot Makes Waves With GoBank

Based on our analysis of recently released data from European central banks, First Annapolis estimates that European card market growth rates continue to rebound in 2012 from a low point in 2009, and credit card volumes had especially robust growth.

In Western Europe, nominal growth rates for card volumes are... More

European Card Market Growth Continues to Rebound

A Closer Look at the U.S. Household Debt Burden

2012 Holiday Sales Register Mixed Results

Payments Industry Stock Price Tracker

Many wondered about Green Dot’s long term plans when it purchased Bonneville Bank last year. The obvious answer to that question was to further its vertical integration in the delivery of its flagship GPR product. However, Green Dot clearly had bigger things in mind as witnessed by the January 15th... More

Holiday sales for U.S. retailers were mixed at best. Well before formal results were released, there was cause for concern given the lingering effects of Hurricane Sandy, unfavorable weather patterns, non-stop coverage of the “fiscal cliff,” and so on. Retail stocks tumbled on December 26 when MasterCard Advisors’ SpendingPulse report... More

The Payments Industry Stock Price Tracker measures current stock prices and market caps (as of January 31, 2013) as well as movement over the last month, and year-to-date (from January 2012). After positive results in December, the companies we track across the payments value chain experienced fairly static results overall... More

Debit in 2013: Life after Durbin

As the first full year with the Durbin Amendment in effect, 2012 was a transformational year for the debit card market. Regulated debit issuers experienced a significant reduction in revenue, experimented with new fees, and shifted priorities from transaction growth to cost optimization. With rapidly evolving market forces, a dynamic regulatory environment, and new technologies on the horizon, the outlook for 2013 is expected to be just as volatile. We see five key issues for debit issuers in 2013: growth, value proposition, fraud management, network routing, and EMV migration.

Growth

First Annapolis is forecasting that total debit transaction growth will... More

Q4 2012: U.S. Credit Card Issuer Performance Snapshot

After a protracted decline beginning in mid-2009*, weighted average industry loss rates experienced a plateau in the fourth quarter of 2012. Purchase volumes increased compared to both the prior year and, for the seventh consecutive period, the prior quarter. Credit card issuers continue to struggle with receivables growth as year-over-year... More


Debit in 2013: Life after Durbin

By Ryan Feeley

As the first full year with the Durbin Amendment in effect, 2012 was a transformational year for the debit card market. Regulated debit issuers experienced a significant reduction in revenue, experimented with new fees, and shifted priorities from transaction growth to cost optimization. With rapidly evolving market forces, a dynamic regulatory environment, and new technologies on the horizon, the outlook for 2013 is expected to be just as volatile. We see five key issues for debit issuers in 2013: growth, value proposition, fraud management, network routing, and EMV migration.

Growth

First Annapolis is forecasting that total debit transaction growth will range from 6% to 9% in 2013. PIN debit transaction growth will likely continue to modestly outpace signature growth as cardholders adapt to the elimination of signature-only rewards programs and PIN debit transaction fees. The biggest drivers of debit transaction growth will be small ticket transactions (e.g., fast food restaurants) and Card Not Present merchant categories such as ecommerce and bill pay.

While issuers are likely to be less aggressive in promoting debit, there are still benefits to encouraging increased activation and usage at new and emerging acceptance locations (e.g., small ticket). Further, most issuers can increase profitability through scale economies in debit issuance.

Value Proposition

While predictions of the end of debit rewards may have been premature, the Durbin Amendment has dramatically changed the debit rewards landscape. Many exempt issuers continue to offer traditional points-based debit rewards programs; however, most regulated issuers have discontinued these rewards. A few regulated issuers, including Capital One and Key Bank, have made rewards a feature of premium checking accounts or a value-added service for an additional fee. Many other issuers have launched merchant-funded programs through which cardholders earn cash back by opting in to personalized offers. As these offerings do not rely on interchange revenue for funding, they remain economically viable within the context of post-Durbin card revenues. It is too soon to tell if these rewards programs are perceived as valuable by consumers. Additional cardholder education is required to achieve broader awareness and adoption.

With rewards programs being deemphasized, issuers are promoting other benefits of debit cards in their communications with cardholders. Several financial institutions, including Wells Fargo and Citizens, waive checking account fees based on debit card usage thresholds. Additionally, a number of issuers, including PNC and Wells Fargo, integrate the use of debit cards into Personal Financial Management tools to help cardholders better track and analyze spending.

Fraud Management

Given the material reduction in program revenues, many issuers are seeking to reduce overall program costs. Among these actions, fraud prevention regularly tops the list of issuers’ most pressing concerns. To guard against an increase in loss rates, issuers must regularly review all practices and policies that relate to fraud. Processes for scoring, queuing, and investigating high risk transactions must be accurate and efficient. Best-in-class issuers also incorporate other types of DDA transactions into scoring models. Authorization strategies must balance the need to protect against fraud with the importance

of minimizing false positives. Issuer policies for plastic issuance, activation, and authentication should be designed to minimize risks of compromise. Best-in-class issuers are learning from their experiences with mass data breaches to become more sophisticated and targeted in their reissuance strategies in response to these events. Finally, electronic communications channels are increasingly being leveraged by issuers in order to accelerate notification cycles with cardholders, improve the customer experience, and minimize costs.

Network Routing

With the implementation of Durbin routing and exclusivity rules in April 2012, the network routing environment has been completely transformed. To comply with the Durbin Amendment’s requirement that cards must support multiple unaffiliated networks, 16 of the top 25 debit issuers added a new PIN debit network last spring. On April 1st, issuers ceded control over network routing decisions to merchants and acquirers. Concurrently, Visa launched PIN Authenticated Visa Debit (PAVD), which enables merchants to route PIN debit transactions on Visa debit cards regardless of whether or not the issuer participates in Interlink. With these market changes, many issuers observed volatile routing patterns for much of 2012. While routing has by most accounts stabilized, issuers are still observing significant monthly swings in the routing preferences of specific merchants.

In 2013, the network routing environment will remain dynamic and unpredictable. Acquirers and merchants vary widely in the sophistication of their routing capabilities, ranging from a simple ranking of network preferences to more granular transaction-level decisioning. These capabilities will continue to progress as acquirers and merchants invest in their routing systems. Additionally, networks will continue to refine their approach to merchant incentives as they seek to secure routing volume. A key question for 2013 will be whether other debit networks respond to Visa’s PAVD program with their own authentication initiatives.

EMV Migration

EMV has arguably superseded the Durbin Amendment as the most talked about topic in the debit industry (see Recap of First Annapolis EMV Forum in the November 2012 Navigator). With network liability shifts scheduled to take effect in 2015 and many unanswered questions remaining, issuers are struggling to define EMV strategies. While some credit card issuers are moving forward with targeted EMV support, debit card issuers are generally taking a wait-and-see approach. Issuers need to resolve several key implementation questions, including: (A) whether to support Chip & PIN, Chip & Signature, or both; (B) whether chips should be contact or dual interface; and, (C) whether to support offline PIN authentication.

Another concern of issuers is the lack of industry consensus around how multiple debit networks will be supported by EMV chip application identifiers (AIDs). While no issuer wants to be among the last to convert, they are also reluctant to be early adopters given the difficulty in justifying the short term business case for EMV. Nevertheless, issuers need to ensure that they are taking a structured and strategic approach to EMV migration.

For more information, please contact Ryan Feeley, Senior Consultant specializing in Deposit Access and Payment Strategy, [email protected]

Q4 2012: U.S. Credit Card Issuer Performance Snapshot

By James Watts

After a protracted decline beginning in mid-2009*, weighted average industry loss rates experienced a plateau in the fourth quarter of 2012. Purchase volumes increased compared to both the prior year and, for the seventh consecutive period, the prior quarter. Credit card issuers continue to struggle with receivables growth as year-over-year totals were down for the fourth consecutive time in the last quarter of the year (since 4Q ’09).1. Receivable Levels Showing Initial Signs of Improvement: Consistent

with seasonality trends from years past, industry receivables were up 3.0% quarter-over-quarter, but down 2.1% year-over-year. A few major issuers, such as Wells Fargo, Discover, and American Express posted year-over-year receivable growth rates in excess of 4.0%. Conversely, Chase, Citi, and Bank of America have now posted receivable declines for every year-over-year period since the second quarter of 2009; however, the declines appear to be fl attening as 2012 was the fi rst year since the credit crisis that none of the aforementioned issuers experienced double-digit year-over-year growth declines.

2. Stable Returns: Issuer returns declined on both a quarterly and annual basis by 52 basis points and 19 basis points respectively. As measured by our composite, the industry posted an after-tax return on assets of 3.05% for the quarter (annualized). A large portion of the annual decline was driven by American Express, which incurred quarterly charges for restructuring its Business Travel segment, modifying its cardholder

rewards reserve, and settling litigation with Visa. Excluding American Express, issuer returns would have been nearly fl at on a year over year basis.

3. Purchase Volume Growth: Although purchase volume growth appeared to be normalizing as of the end of the third quarter of 2012, the industry posted quarter-over-quarter growth of 5.6% and, more importantly for seasonality reasons, year-over-year growth of 5.5%. While purchase volume trends are nearly always driven by the largest issuers, in this case Chase and American Express, growth on an annual basis was nearly ubiquitous in the fourth quarter. Both Chase and American Express consistently discuss strategies, including rewards and new product innovation, which have driven outperformance of the industry over the last fi ve years.

4. Flattening Loss Rates: Industry messaging suggesting that loan loss provision releases are nearing an end proved to be the case as loss rates were nearly fl at on a quarter-over-quarter basis. The trend of 2012 loss rates proving more favorable than 2011 continues as annual totals were down by 105 basis points. As mentioned in our last report, 2013 will be an interesting year to monitor from a loss rate perspective as loan growth may require new account underwriting further down the credit risk spectrum.

* Note: General trend; many loss rates temporarily spiked in early 2010.For more information, please contact James Watts, Senior Consultant specializing in Credit Card Issuing, james.watts@fi rstannapolis.com

Note: 1 Includes income from acquiring business and private label receivables and volume. Restated from previous quarter which included income from auto and student lending.2 Restated splitting between Citibranded North American and Citi Retail Services beginning 1Q 2012. Purchase volume includes cash advances.3 Receivables, purchase volume, and net loss rates are for U.S. consumer cards. After-tax ROA restated to include “Card Services” only; U.S. consumer and business services. Period amounts have been reclassifi ed to conform to current period presentation.4 U.S. card business, small business, installment loans only. Purchase volume excludes cash advances. 2Q12 Results include the impact of May 1, 2012 closing of HSBC transaction resulting in approx $28.2 billion in receivables at closing.

5 Receivables and charge-offs are for U.S. Cardmember Lending business only. Purchase volume is for U.S. Card Services segment, consumer and small business. * Restated: Average earning assets is defi ned as all cardmember receivables (charge) and loans (revolving credit).6 Includes US domestic receivables and purchase volumes only. ROA includes merchant services and implied U.S. Cards tax rate of ~40%.7 Wells Fargo began reporting purchase volume in 4Q 2013. 8 After Tax ROA refl ects Payment Services line of business income and average loans.9 After Tax ROA excludea Wells Fargo. Credit specifi c income not reported. Refl ects any previous quarter restatements and includes addition of US Bank.10 Excludes Capital One. Capital One experienced year-over-year purchase volume growth of 9.4% (excluding the HSBC portfolio), while ending loans were fl at (year-over-year, excluding HSBC and run-off Installment Loans).

Source: Issuer quarterly reports and First Annapolis analysis.


A/R Purchase Volume Net Loss Rate After-Tax ROA

Issuer ($B) 4Q12

Change(vs.

4Q11)10

Change(vs.

3Q12)

($B) 4Q12

Change(vs.

4Q11)10

Change(vs.

3Q12)4Q12

Change(vs.

4Q11)10

Change(vs. 3Q12) 4Q12

Change(vs.

4Q11)10

Change(vs. 3Q12)

Chase1 $128.0 -3.3% 2.8% $101.6 8.8% 5.2% 3.50% -79 bps -7 bps 2.36% -39 bps -12 bps

Citigroup2 $111.5 -4.8% 2.5% $62.0 -1.0% 7.3% 4.49% -143 bps -24 bps 2.85% 8 bps -70 bps

Bank of America3 $94.8 -7.3% 1.8% $51.6 1.4% 7.1% 4.19% -136 bps -41 bps 4.06% 65 bps 44 bps

Capital One4 $83.1 46.9% 3.1% $48.9 41.4% 9.8% 4.35% 28 bps 131 bps 2.38% -53 bps -96 bps

American Express5 $56.0 4.3% 5.9% $123.3 7.6% 6.9% 2.00% -30 bps 10 bps 2.29% -180 bps -159 bps

Discover6 $49.6 6.4% 3.1% $26.5 6.0% -2.6% 2.29% -95 bps -14 bps 4.13% 6 bps -78 bps

Wells Fargo7 $24.6 7.9% 4.0% $12.6 14.0% 4.5% 3.71% -92 bps 4 bps

U.S. Bank8 $17.1 -1.4% 4.3% $26.1 4.5% -3.1% 3.86% -85 bps -15 bps 5.41% -15 bps -100 bps

Sum/Wtd Avg9 $564.8

-2.1% 3.0%$452.7

5.5% 5.6%3.66%

-105 bps 3 bps 3.05%

-19 bps -52 bps

2011 by 14% and 15.2%, respectively. Several retailers described particularly solid e-commerce sales in December 2012 relative to the same period in 2011:

• Amazon’s unit sales by U.S.-based merchants increased by 40%

• Kohl’s e-commerce sales grew by 46%

• Macy’s online sales rose by 52%

In the coming weeks, we will see the margins associated with 2012 holiday sales, as retailers were keen to liquidate inventory and consumers were hunting for bargains. Initial commentary from retailers suggests that margin outcomes will vary. In its December sales release, Kohl’s lowered earnings guidance and indicated that heavy discounting was used to move merchandise. Margin pressure increased for Family Dollar too, driven by growth in lower-margin consumables. Other retailers signaled that margins would hold steady or improve over 2011. Target, whose sales were flat relative to 2011, indicated that margins were up due to pricing discipline. Limited Brands also indicated that overall margins were up relative to 2011, but lower than company targets. Ross Stores, which recorded 6% comparable store sales growth in December, increased its earnings projections thanks to better-than-expected margins. In any case, there are plenty of mixed messages in the market and 2012 sales reflect the same.

For more information, please contact Cara Weikel, Consultant specializing in Credit Card Issuing, [email protected]

By Cara Weikel

Holiday sales for U.S. retailers were mixed at best. Well before formal results were released, there was cause for concern given the lingering effects of Hurricane Sandy, unfavorable weather patterns, non-stop coverage of the “fiscal cliff,” and so on. Retail stocks tumbled on December 26 when MasterCard Advisors’ SpendingPulse report indicated a dismal 0.7% increase in holiday sales compared to 2011, the worst performance since 2008.

Holiday sales results, listed in Figure 1, confirm the uneven sales performance that was signaled in the weeks leading up to the year’s end. As expected, several retailers indicated that sales were influenced by consumer caution and an uncertain economic environment. A number of retailers also pointed to the after-effects of Hurricane Sandy as the culprit for their soft sales performance, particularly during November. Additionally, retailers that shared results on a regional basis consistently cited the Northeast and/or Mid-Atlantic regions as having weak same-store holiday sales compared to 2011.

On January 15, the Commerce Department published sales estimates for December 2012, indicating that core retail sales, a category that excludes automobiles, gasoline and building material sales, rose 4.4% relative to the same period a year earlier. The auto sector also improved, exceeding December 2011 sales by 7.6%. According to other estimates, e-commerce was particularly strong during the 2012 holiday season; comScore and Chase’s HolidayPulse estimate that holiday sales in 2012 exceeded those in


2012 Holiday Sales Register Mixed Results

1 U.S. sales after adjustments for currency fluctuations. 2 U.S. sales. N/R = not reported.Source: Retailer press releases.

Figure 1: 2012 Holiday Retail Sales Results

RetailTotal Sales Growth Same-Store Sales Groth

Nov/Dec Nov Dec Nov/Dec Nov Dec

Costco Wholesale Corporation 10% 9% 12% N/R 6% 9%

The TJX Companies, Inc. 9% 7% 10% N/R 3% 6%

Ross Stores, Inc. 9% 6% 11% N/R 2% 6%

Nordstrom, Inc. 7% 2% 9% 5% -1% 9%

Limited Brands, Inc. 5% 6% 4% N/R 5% 3%

Gap Inc. 4% 3% 5% N/R 3% 5%

Macy’s, Inc. 2% -1% 4% 3% -1% 4%

Tiffany & Co.1 2% N/R N/R -2% N/R N/R

Kohl’s Corporation 1% -5% 4% 0% -6% 3%

Target Corporation 0% 0% 1% 0% -1% 0%

Best Buy Co., Inc.2 -1% N/R N/R 0% N/R N/R

Toys“R”Us, Inc. -5% N/R -2% -5% N/R -2%


European Card Market Growth Continues to Rebound

By Maria Popova and Erik Howell

Based on our analysis of recently released data from European central banks, First Annapolis estimates that European card market growth rates continued to rebound in 2012 from a low point in 2009, and credit card volumes had especially robust growth.

In Western Europe, nominal growth rates for card volumes are back to pre-

crisis (2007) levels, and in 2012 credit volume grew at a faster rate than debit card volume. On a normalized basis (adjusting for growth in consumer expenditures), we estimate that both Western European debit and credit card volumes grew at a faster rate in 2012 than 2011.

In Central and Eastern Europe (“CEE”), we estimate that credit card volume growth rates were significantly higher in 2012 than 2011, while the rate of nominal debit volume growth declined. However, negative growth in CEE

Countries included: Austria, Belgium, Cyrpus, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Spain, Sweden, U.K.

Sources: European Central Bank, Swedish Bankers Association, Federation of Finnish Financial Services, Rijksbank, DNB, National Bank of Belgium, Banca d’Italia, Banco de Espana, Banco de Portugal.

Figure 1: Card Market Growth in Western Europe (EU Members)

Green Dot Makes Waves With GoBank

By Josh Gilbert and Sarah McCroy

Many wondered about Green Dot’s long term plans when it purchased Bonneville Bank last year. The obvious answer to that question was to further its vertical integration in the delivery of its flagship GPR product. However, Green Dot clearly had bigger things in mind as witnessed by the January 15th introduction of GoBank. This FDIC-insured bank account is notable in that sales, distribution, and servicing are accomplished primarily through the mobile channel, although web access is also available. The account provides the expected features of a bank account (debit card, ATM access, bill payment), but also offers more mobile-specific functionality including:

• Mobile remote deposit capture• P2P payments via email, text, and Facebook messages• Mobile bill pay• Online checkbook

None of these individual features are ground breaking, but GoBank stands out in its seemless integration within a user-friendly mobile app. The other prominent feature of GoBank is its price. Customers are able to self-select their monthly membership fee, which ranges from free to $9. This novel approach, which Green Dot states tested well in research, is selected on a monthly basis by the consumer through the app. The desired intent is for consumers to be delighted with the Bank’s service and choose to pay for it

rather than setting a standard fee that may deter adoption. Early users of GoBank will have their monthly fees set to $0 as a default. Other, market standard ancillary fees apply to the account.

For Green Dot, GoBank represents a significant bet on mobile. The technology powering the product was developed in-house, leveraging the capabilities obtained with the Loopt acquisition in March 2012. By adding flexibility with many self-service options, the product targets a younger, mobile-centric generation keen on technology and usability. The company is counting on the innovative design and pricing approach to attract a customer base that does not quite fit into a GPR card, but may be wary about beginning a relationship with a bank.

Green Dot clearly has a lot riding on the success of GoBank. The company’s stock price has stumbled as competition has increased in GPR. Further, the company has seen its primary partner, Walmart, diversify its financial services business with the launch of the Bluebird product with American Express. Regardless of the outcome, Green Dot has provided the industry with a bold vision of what the conversion of mobile and banking could be.

For more information, please contact Josh Gilbert, Principal specializing in Deposit Access and Payment Strategy, [email protected]; or Sarah McCroy, Analyst specializing in Deposit Access and Payment Strategy, [email protected]


Countries included: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia.Sources: European Central Bank, Magyar Nemzeti Bank, Czech Bankcard Association, Latvijas Banka, Lietuvos Bankas, Eesti Pank, National Bank of Poland,

ZBK, Banca Nationala a RomanieiNote: Normalized growth rates calculated by subtracting the growth rate of national consumer expenditures from the growth rates of national card volumes.

Figure 2: Card Market Growth in CEE (EU Members)

Countries included: Austria, Belgium, Cyrpus, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Spain, Sweden, U.K, Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia.

Sources: European Central Bank, Swedish Bankers Association, Federation of Finnish Financial Services, Rijksbank, DNB, National Bank of Belgium, Banca d’Italia, Banco de Espana, Banco de Portugal, Magyar Nemzeti Bank, Czech Bankcard Association, Latvijas Banka, Lietuvos Bankas, Eesti Pank, National

Bank of Poland, ZBK, Banca Nationala a Romaniei.

Figure 3: Growth of Number of Cards (EU Members)

consumer expenditures in 2012 contributed however to higher normalized debit card volume growth in 2012 vs. 2011. In normalized terms (adjusted for the growth rate of consumer expenditures) both debit and credit card volume growth was significantly higher in CEE than in Western Europe: 17% normalized debit volume growth in CEE vs. 6% in Western Europe, and 13% normalized credit volume growth in CEE vs. 10% in Western Europe.

Although the number of ATM transactions in both Western Europe and CEE

continued to grow slightly from 2011 to 2012, the long term shift away from ATM transactions continued, and has been especially pronounced in CEE: year over year ATM transaction growth declined from 11% in 2007 to 6% in 2012.

As may be expected, the performance of individual countries varied significantly. In recent years the Nordics saw both growth in consumer expenditures and an upward trend in debit and credit card spend, while several CEE markets


Figure 1: Household Debt1 as a % of Disposable Income

1Includes non-profits.Note: Historical quarterly figures may not reflect restatements.Source: Federal Reserve, First Annapolis Consulting analysis.

A Closer Look at the U.S. Household Debt Burden

By Jeffrey Kalski

Since the Great Recession, the U.S. consumer has been put under the microscope in an attempt to understand the “New Normal.” One of the more popular topics has been the notion that households are deleveraging in the aftermath of the housing bubble and the collateral damage it caused to the economy and consumer sentiment. Data from the Federal Reserve’s Flow of Funds Accounts of the United States shows a significant decline in the percentage of debt held by households relative to disposable income. The debt to disposable income ratio hit its peak of 138%1 in Q4 2007 but has since dropped to 112% in Q3 2012, its lowest point since the Great Recession. Recessions tend to force consumers to rethink the way they handle their finances. However, there have been mixed signals on the extent of true deleveraging considering that defaults on mortgages, credit cards, and other consumer loans hit record highs and account for a significant portion of the overall decline in consumer debt since 2008.

According to the National Delinquency Survey conducted by the Mortgage Bankers Association, the serious delinquency rate, measured as the percentage of mortgage loans that are 90 days or more past due or in the process of foreclosure, reached a high of 9.67% in Q4 2009, 264 basis points higher than Q3 2012. The S&P / Experian consumer credit default

index, a composite index of auto, credit and mortgage defaults, hit a high of 5.51% in May 2009 but has now dropped to 1.46%2. Credit card issuers experienced widespread spikes in loss rates hitting record highs in the 2009-2010 timeframe. So, according to these statistics, even as consumers began to demonstrate a greater sense of fiscal responsibility post-Great Recession, a large portion of household deleveraging can be attributed to defaults on loans, such as mortgages and credit cards. In fact, according to economists and various industry articles, about two-thirds of household deleveraging can be attributed to such defaults. Mustafa Akcay, an economist at Moody’s, says that “nearly 80% of deleveraging is caused by defaults,” while the remaining 20% is caused by “voluntary deleveraging,” (i.e., consumers paying down debts faster than they borrow). Karen Dynan, VP and Co-Director of Economic Studies at Brookings, stated that “the dollar volume of such defaults since the beginning of the financial crisis is about two-thirds as large as the total decline in household debt.”

If the majority of the household debt decline over the past five years was due to loan defaults, then it is safe to say that the larger part of the “deleveraging” process is over. While some economists, such as Nathan Sheets of Citigroup, contend that debt as a share of disposable income will continue to fall as households further deleverage (Sheets forecasts the ratio to drop to about

(Poland, Romania, and Slovakia) had strong card growth but weaker consumer expenditure growth. Not surprisingly, the sharp economic downturn in Greece led to a worsening in cards markets over the past two years, especially in credit, where the country was among the worst performers in Europe (17% and 12% year over year decline in 2010 and 2011 respectively). Ireland also fared poorly in terms of card growth. Germany, viewed as an engine of economic growth, posted moderate growth in consumer expenditures (3% in 2011) but strong debit and credit card volume growth (both 11%). In the U.K., the largest cards market in Europe, normalized debit card volume growth slowed down to 7% in 2012, while credit card spend increased significantly to 13%. In general, card markets displayed high positive correlation with GDP

and consumer expenditure growth patterns, with credit card growth more sensitive to economic swings than debit.

Our outlook for European cards market fundamentals is more positive in 2013 than it was in 2012. Despite economic volatility and regulatory headwinds, the continuing trend away from cash, increasing acceptance, increasing e-commerce volumes, and issuers’ renewed focus on marketing credit cards provide a foundation for at least modest growth.

For more information, please contact Maria Popova, Associate specializing in Card Issuing, [email protected]; or Erik Howell, Senior Manager specializing in Card Issuing, [email protected]


1:1, or 100%), many economists agree that consumers are poised to again make long-deferred purchases on credit. As household balance sheets were boosted by a surge in stock prices and early signs of housing market stability, household net worth as a percentage of income rose from 477% in Q1 2009 to 527% in Q2 20123. It is clear that loan defaults played a large role in the statistical measures related to a lower debt burden since the credit crisis. Credit tightening and consumer caution also contributed. However, going forward, the degree to which consumers have truly become more fiscally prudent remains to be seen especially in light of early signs of stability in the housing market, momentum in the stock market, and record low interest rates.1 May not reflect restatement of quarterly figures.2 Standard and Poors.3 Bloomberg BusinessWeek.

For more information, please contact Jeffrey Kalski, Analyst specializing in Credit Card Issuing, [email protected]

1∆ from Q3 2008 to Q3 2012 YoY.Note: Yearly totals differ from figures referenced in above line graph.

Source: FRBNY Consumer Credit Panel, Equifax.

Figure 2: Household Debt Balance by Type

Debt Balance TypeBalance ($T) as of Q3

% ∆1

2008 2010 2012Mortgage $9.29 $8.61 $8.03 -13.6%

HE Revolving $0.69 $0.67 $0.57 -17.2%Auto Loan $0.81 $0.71 $0.77 -5.1%Credit Card $0.86 $0.73 $0.67 -21.5%

Student Loan $0.61 $0.78 $0.96 56.5%Other $0.41 $0.34 $0.31 -24.4%Total $12.68 $11.84 $11.31 -10.8%

By Collin Bauer

The Payments Industry Stock Price Tracker measures current stock prices and market caps (as of January 31, 2013) as well as movement over the last month, and year-to-date (from January 2012). After positive results in December, the companies we track across the payments value chain experienced fairly static results overall in January.

In summary:

Stocks within the issuing sector remained unchanged in January as a whole despite varied results across issuers. In addition to Chase and Citi, commercial card issuers WEX and FleetCor performed equal to or better than the market last month. Many of the issuers’ January stock prices fluctuated with their respective fourth quarter earnings releases, as the two biggest drops this month came from Capital One and Bank of America.

The processor / acquirer sector showed positive results in January, posting an overall gain of 2%. On the heels of a tough year in 2012, Global Payments started off 2013 with a 7% gain in its stock price after beating analyst targets and announcing an accelerated share repurchase schedule. Heartland’s stock price jumped 5% in January after a strong performance and its recent acquisition of the payroll-outsourcing company Ovation Payroll.

MasterCard and Visa posted similar, positive gains in January that mirrored the overall market. In aggregate, the sector was up 2% from last month and 49% from January 2012.

For more information, please contact Collin Bauer, Analyst specializing in Credit Card Issuing, [email protected]

Payments Industry Stock Price Tracker

Figure 1: Monthly Average Stock Price Tracker

Companies Jan. 31, 2013 Month Δ YTD Δ Current Market Cap ($Billions)

IssuersAmerican Express $58.81 0% 22% $64.99Bank of America $11.32 -6% 95% $122.01Capital One $56.32 -8% 29% $32.62JPMorgan Chase $47.05 5% 35% $179.11Citi $42.16 2% 49% $127.70Discover $38.39 -3% 59% $19.12FleetCor $59.84 8% 96% $5.06U.S. Bank $33.10 0% 20% $61.86WEX $78.61 3% 44% $3.04 Weighted Average - 0% 48% -

Acquirers / ProcessorsFIS $37.11 4% 39% $10.88Fiserv $80.31 -1% 37% $10.72Global Payments $49.26 7% 2% $3.88Heartland $31.76 5% 30% $1.19TSYS $23.25 4% 17% $4.29Vantiv $20.82 1% N/A $2.94

Weighted Average - 2% 28% -

NetworksMasterCard $518.40 2% 41% $64.42Visa $157.91 2% 53% $105.66

Weighted Average - 2% 49% -

Market IndexS&P 500 $1,498.11 2% 17% -Note: Weighted Averages are based on current market caps.

Source: Yahoo Finance, First Annapolis Consulting research and analysis.

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