ALC - Epic

test

Epic Predictions!

Jim Stewart

Three Things We’re Hearing

  • Reward category tiers rule!
  • Epic predictions!
  • Chase dominates DDA mailing

A four-minute read

If the Epic Report was forwarded to you, click here to add your name to the mailing list

Reward Category Tiers Rule!

  • Epic surveyed 1,123 consumers regarding their credit card rewards preferences, revealing consumers favor rewards programs with tiered cash back rewards in multiple categories

Epic Predictions!

  • Before we dive into 2023, let’s first review our 2022 predictions from the January 2022 Epic Report
  • We first predicted that “several retail banks will enter the personal loan market”
  • It seems like every issue of The Epic Report laments the absence of retail banks among the top 20 mailers
  • Retail banks have at least two significant advantages over fintechs:
  • 1. well recognized brands thanks to large media budgets, branch presence, and length of time in the market; and
  • 2. access to less expensive and more stable deposit funding than the wholesale-funded fintechs
  • Despite these advantages, fintechs dominated the top 20 personal loan mailers in 2021, with only Citi and Wells Fargo appearing among the top 25 mailers
  • As for our 2022 prediction, we were early (meaning wrong, so far)
  • Citi doubled its ’21 volume in ’22 and is the fifth largest mailer through November
  • Wells Fargo is the 18th largest mailer in ’22
  • Although Santander appeared in the top 25 mailers later in the year, retail banks continue to cede this product to the fintechs with no other significant new retail bank entrants
  • Next, we predicted “BNPL will level off in its popularity and remain a niche product with low, single-digit market share”
  • While BNPL payment volume continues to increase, monthly average usage among five large providers started to flatten in 2022
  • Despite the insane amount of publicity it receives, BNPL remains a niche product, as Statista reports, with only 4% market share in the U.S.
  • Staying with the “BNPL is a bubble” theme, our last prediction for 2022 was that “at least one BNPL issuer will blow up”
  • We were early (notice a theme here?) on this one too (we’re not aware of any BNPL explosions),
  • However, valuations have plummeted
  • Klarna completed a funding round last summer that was 85% lower than a year earlier
  • Affirm’s stock price recently traded 94% lower than its November ’21 all-time high
  • Stay tuned…
  • We also polled our readers in December 2021 to see what you thought might happen in 2022, and our readers had a mixed record
  • And now, we present our Epic predictions for 2023
  • At least one large bank CEO will announce their departure
  • We have no inside information, but it has been a while since a top job has turned over
  • Given the tenure of the top execs, one is bound to retire or step down for other reasons
  • Credit card mail volume will outperform other lending products, and 2023 mail volume will be higher than 2022, even in an era of rising interest rates and deteriorating asset quality
  • At least one BNPL issuer will blow up – okay, so we were early on this one in ’22 but we are sticking with it in ’23 for the same reasons as last year
  • BNPL is a relatively new product, with many BNPL companies led by those with more “tech” experience vs. “fin” experience
  • Credit models and underwriting criteria developed in this historically benign credit environment will fail, resulting in high levels of credit losses that severely impact at least one player in the segment
  • The result will perhaps lead to additional, or more uniform, credit reporting requirements for all players

Chase Dominates DDA Mailing

  • DDA direct mail is up 60% YTD through November vs. the same period in 2021
  • Chase continued its year-long domination of the mail channel with over 50 million pieces in November – half of total industry DDA mail volume
  • Citi was a distant number two with 20 million pieces
  • Chase has had an extremely strong consumer DDA incentive in the mail for quite some time, currently offering up to $600 to open both a checking and savings account
  • Credit card cash back offers have grown as a percentage of all direct mail offers, appearing in 53% of 2022 mail pieces, up 29% from 2019 – primarily at the expense of offers featuring miles or points, which are present in only 14% of all mail pieces, down 46% from 2019
  • Personal loan direct mail volume has fallen each month since June
  • Best Egg has been the top mailer for most months in the past year, mailing 285 million pieces in the past 12 months – 47% higher than number two Lending Club
  • OneMain, Discover, and Upstart complete the top five
  • Best Egg’s advertised rate was 7.99%
  • Discover is the only lender with meaningful volume at or under the 6.99% price point
  • Upgrade, Payoff, and Goldman had headline rates under 6.99%, albeit with small volumes

Quick Takes

  • Online savings rates continued their steady rise with the market leaders offering 3.30% - 4.00% — a dramatic rise from the ~.50% rates of less than one year ago
  • A Walmart-backed fintech, called One, plans to offer a buy now, pay later pay option
  • The start-up is majority owned by Walmart and led by former Goldman Sachs executives
  • The venture is targeting to launch its own version of the payment service as soon as 2023
  • Walmart currently offers BNPL through Affirm
  • Google Trends data predicts a decline in HELOC originations
  • The Equifax data shown in the chart below reveals that the number of new HELOC loans grew in the first half of 2022
  • However, online search volume, usually a leading indicator of future originations, dropped significantly in recent months, likely due to higher interest rates
  • Given the 60+ day period between application, funding, and bureau reporting, the drop should appear in the next few months
  • Some fintechs are feeling the squeeze of higher interest rates and a tightening of access to capital
  • In November, Affirm abandoned plans to issue a $350 million bond due to the market demanding higher interest rates
  • Many of the consumer lender fintechs were launched in the past ten years or less and have not operated in an environment with higher interest rates
  • Big banks still dominate savings accounts – despite interest rates being the highest since 2008, the five largest banks (Bank of America, Citi, Chase, U.S. Bank, and Wells Fargo), which collectively hold about half of all savings and money market deposits, pay an average of 0.4% on their savings accounts
  • The highest online savings rates are offered by non-traditional banks and pay interest rates of 3.75% - 4.00%
  • The difference amounts to lost interest of over $600 billion for consumers since 2014 when the FDIC started tracking these type of deposits
  • We have previously commented on the relatively underappreciated brand value held by branch-based banks – even those banks with less than average market share in a particular area
  • The evidence of this comes in looking at thousands of marketing campaigns for hundreds of banks over the past 30 years and measuring response rates “in-footprint,” where banks have relatively high brand recognition, vs. “out-of-footprint,” where they have less
  • A rough rule of thumb has the response rates for in-footprint mailings at 2x those of out-of-footprint – the only difference being the geography of the prospective customer and associated degree of brand awareness
  • We use the same proxy for fintechs and other national non-branch-based lenders, as their brand recognition generally falls much lower than that of a local bank
  • As a result, fintechs require more sophisticated and successful models to effectively compete
  • It turns out that all those branches with signs, general media advertising, and stadium sponsorships, the value of which may be hard to quantify, ultimately create an impression of trust that unknown brands lack
  • Many branch-based bank marketers may not realize they have this sizable benefit!

The Epic Report is published monthly, with the next issue releasing on February 4th.

Thank you for reading.

Jim Stewart
www.epicresearch.net

Email me with your comments and suggestions on future topics or to have someone added to our distribution list.

Epic Research is a marketing company that helps our financial services clients acquire new customers via organic growth. Click here to find out how we can help you.

To read our previous newsletters, click here. 

What Business Owners Want in a Card

Jim Stewart

Three Things We’re Hearing

  • Small business credit card preferences
  • Consumer delinquencies moving up
  • Growth in cards and loans

A four-minute read

If the Epic Report was forwarded to you, click here to add your name to the mailing list

Small Business Credit Card Preferences

  • Epic surveyed 1,010 small business owners and managers regarding their credit card preferences, revealing that nearly half prefer to learn about card offers via mail

Consumer Delinquencies Moving Up

  • Despite a weakening in the economy, lenders have continued to report consumer delinquencies at the low end of historical levels
  • As shown in the chart above, consumer delinquencies have typically correlated with unemployment; however, in the past two years, the negative effects on asset quality of the (relatively temporary) spike in unemployment were offset by massive government subsidies and reduced consumer spending
  • Recently, consumer bank card delinquencies have begun to increase back towards historical norms
  • Much of the increase in bank card delinquencies comes from more recent vintages
  • Personal loan delinquencies are also rising…
  • With increases similarly stemming from recent vintages
  • Q2 ’22 subprime balances were up 92% year-over-year, and sub-prime delinquencies (60+ days past due) for this segment have now risen for four straight quarters
  • The 3.37% Q2 ’22 delinquency reading is up 47% from last year, though it remains near pre-pandemic levels

Growth in Cards and Loans

  • Year-to-date personal loan mail volume sits 11% above the same period in ’21
  • Best Egg ramped up its direct mail significantly, with volume far above others – 27 million mail pieces in October vs. number two SoFi with 16 million pieces
  • Among retail banks, Citi had a larger presence than previous months, with Wells Fargo and Santander joining the fintechs in the top 25 mail rankings
  • Fintechs continue to originate a large percentage of new personal loans
  • Overall, total personal loan originations have resumed the upward trend established prior to the pandemic
  • Chase significantly increased its DDA mailings – 2022 volumes through October soared 958% above 2021 levels (326MM in 2022 vs. 31MM in 2021)
  • Comperemedia reports that the percentage of its panelists applying for a credit card in Q3 ’22 reached a three-year high
  • Q2 ’22 bank card origination volume was the second highest on record
  • Digital and mail channels proved the most prevalent sources of card offers for respondents
  • Half of the card offers included cash back rewards, and “points” came in second with 19%
  • Google Trends shows a sharp increase in online search volume for “0% credit cards” in recent months as rates have risen
  • Overall mail volume for the consumer finance products we track was 116% above the same period last year

Quick Takes

  • Square’s new card will be available to Square merchants and “integrate directly with Square’s broader ecosystem of solutions, empowering sellers to organize their finances and manage their cash flow from the same platform they use to run their business”
  • Additional details about the card and benefits will be announced in 2023
  • The mid-year top credit card issuer rankings reflect the return of balance growth, with most showing solid double-digit gains over 2021
  • Funnel vision!
  • One of the primary differences between “monoline” issuers of lending products and less specialized retail banks is monoline issuers’ attention to the acquisition “funnel” – the progression of applicants through the process to becoming approved loans
  • Many legitimate reasons exist for preventing an applicant from becoming a customer – e.g., poor credit scores and potential fraud – however, many credit and fraud policies remain overly broad and inefficient (what is the lost NPV of all of the accounts lost to multiple fraud checks?)
  • Although requiring attention to detail and a commitment to testing, the cumulative effect of funnel improvements can vastly increase approval rates and turn a large number of applicants who may have previously been lost into “free” customers
  • Give it a try!

The Epic Report is published monthly, with the next issue releasing on January 7th.

Thank you for reading.

Jim Stewart
www.epicresearch.net

Email me with your comments and suggestions on future topics or to have someone added to our distribution list.

Epic Research is a marketing company that helps our financial services clients acquire new customers via organic growth. Click here to find out how we can help you.

To read our previous newsletters, click here. 

Digital Wallet Opportunity!

Jim Stewart

Three Things We’re Hearing

  • Digital wallet opportunity!
  • Student lending rebound?
  • Checking and HELOC lead the pack

A three-minute read

If the Epic Report was forwarded to you, click here to add your name to the mailing list

Digital Wallet Opportunity!

  • Epic surveyed 1,158 consumers regarding their digital wallet usage and found the vast majority of respondents use digital wallets
  • Although most consumers keep multiple cards in their digital wallets, 41% always use the same card for purchases, leaving an opportunity for greater penetration

Student Lending Rebound?

  • Many lenders have abandoned issuing new private student loans (PSLs) over the past 15 years, and they have now become a niche product with four major players – Sallie Mae, College Ave, Discover, and Citizens
  • New loan originations increased each year since 2010/11 until falling in the pandemic-affected 2020/21 academic year (the last full year available), with new loans down 17% from the prior year
  • College enrollment has declined for three straight years, likely driving a portion of the decline
  • However, early data for 2021/22 shows a slight increase in loan volume over the same period in the prior year
  • Sallie Mae, the lone publicly traded student lending monoline, reported YTD 2022 loan originations of $5.2 billion, up 10% from the same period last year
  • The other major PSL players – Discover, Citizens, and College Ave – do not publicly announce their PSL loan origination volumes
  • Direct mail is not the primary driver of new loan volume for PSLs, unlike for other consumer financial products, with direct college relationships, digital channels, and serial borrowing by existing customers driving most new loans
  • Total PSL mail volume through September was down 18% from 2021
  • Among the largest PSL mailers:
  • Discover continued to dominate direct mail volume in the segment, however it had the largest year-over-year decline, down 34 million mail pieces or 22%
  • College Ave’s volume was flat to last year
  • Sallie Mae’s mail volume was down 50% from ’21, however on a much lower volume of 15 million pieces
  • Interest rates remained mostly steady over the past year, until starting to tick up in mid-2022
  • While major PSL players Discover and Citizens already offer a variety of other products, pure play lenders in the segment have indicated a desire to expand their product and service offerings within the student demographic

Checking and HELOC Lead the Pack

  • September data shows checking (+76%) and HELOC (+52%) with the largest year-over-year increases in mail volume
  • Although personal loan mail volume is up 16% year-to-date, the past three months have shown a sharp decline as rates have increased
  • Best Egg continues as the largest personal loan mailer – OneMain, LendingClub, and Upstart remain among the top mailers, but all have cut recent months’ volume by ~50% from earlier in the year
  • Goldman Sachs, a top personal loan mailer in past years, abruptly disappeared from mailboxes in August of 2022
  • Personal loan APRs have risen substantially in the past month, demonstrated by the proportion of mail by leading headline rate:

Quick Takes

  • Partner deals with Apple and General Motors will now be managed by the transaction banking unit and other consumer lending business will report into wealth management
  • The move is widely seen as a move away from the broad consumer strategy that was previously in effect
  • With interest rates, delinquency, and competition rising, many have predicted pain for BNPL providers
  • The CFPB recently issued a report detailing each of these risks
  • As a publicly traded company, Affirm is one of the few BNPL providers that offer visibility into their numbers, recently reporting that delinquencies had doubled in the past year, and its stock currently trades 90% lower than the peak of one year ago
  • Meanwhile, consumer delinquencies are trending upward for most non-mortgage portfolios
  • With consumer delinquencies in a cyclical uptrend, be on the lookout for two guaranteed reactions:
  • Lenders will underestimate the pace and magnitude of increased losses (on the other end of the cycle, they also underestimate how fast losses will decrease)
  • Credit card portfolio executives will inevitably get the mandate from above to “Hire more collectors!!!” – even though it typically is an inefficient way (i.e., a waste of money) to control losses

The Epic Report is published monthly, with the next issue releasing on December 3rd.

Thank you for reading.

Jim Stewart
www.epicresearch.net

Email me with your comments and suggestions on future topics or to have someone added to our distribution list.

Epic Research is a marketing company that helps our financial services clients acquire new customers via organic growth. Click here to find out how we can help you.

To read our previous newsletters, click here. 

Near-Prime Card Marketing Swells!

Jim Stewart

Three Things We’re Hearing

  • Growth for near-prime cards
  • Consumer checking account preferences
  • Uneven growth in various loan categories

A four-minute read

If the Epic Report was forwarded to you, click here to add your name to the mailing list

Growth for Near-Prime Cards

  • Capital One has dominated the near-prime market for years, however monoline subprime and near-prime issuers have grown to the point where they now account for four of the top 20 cards mailed in 2022
  • Combined mail volume for subprime and near-prime mailers rose to 16% of total credit card mail volume in 2022, up from just 9% in 2020
  • Over the past three years, Credit One, Mission Lane, and Ollo have been the leading mailers in this segment, followed by more recent entrants Mercury and Best Egg
  • Credit One Bank – Headquartered in Las Vegas, Credit One offers its Platinum Visa for rebuilding credit
  • Mission Lane – Headquartered in Virginia, with over two million credit cards issued, Mission Lane has raised $675M in funding over four rounds
  • Ollo – Founded in 2016 and headquartered in Wilmington, Delaware, Ollo is issued by Fair Square Financial, which was recently acquired for $750 million by Ally Financial
  • Mercury Financial – Headquartered in Austin, and owned by alternative investment firm Varde Partners, Mercury entered the credit card sector several years ago via a purchase of Barclays’ near-prime card portfolio
  • Best Egg – Headquartered in Wilmington, Delaware, Best Egg has been a major player in the personal loan market and launched its credit card in 2021
  • Best Egg leads in search and display ad spend by a large margin, followed by Credit One
  • The top subprime and near-prime mailers share some general characteristics:
  • APRs in the mid-20s
  • Mostly no annual fees
  • Initial credit lines of $5,00 - $2,000
  • Free credit reports
  • $35 - $40 late and returned payment fees
  • Few balance transfer promotions and 0% intro rates
  • Low acquisition costs (~$40 - $75) and higher ROAs than prime
  • Typically use advanced response and credit modelling
  • Credit quality is more stable in downturns than most think
  • Proactive credit line management is important for retention and overall profitability
  • Other than Capital One, the majority of marketing in the segment is done by fintechs, as commercial banks have historically lacked the perceived risk appetite and specialized skills needed to profitably acquire and manage customers in this sector

Consumer Checking Account Preferences

  • Epic recently surveyed 1,290 consumers regarding their checking account preferences
  • The findings align with those from a similar survey we ran in July 2020, with some interesting new insights from younger consumers, who are more likely to switch checking accounts than those in the older demographic

Uneven Growth in Various Loan Categories

  • Best Egg maintained the number 1 position in personal loan mail volume, nearly doubling the volume of second place contender SoFi
  • Goldman Sachs, whose consumer unit is reportedly under duress, has severely cut its personal loan direct mail activity since launching Marcus
  • Goldman, which regularly mailed 30 – 50 million monthly personal loan pieces in recent years, has scaled back dramatically in 2022, averaging around 7 million pieces per month
  • August’s panel showed no personal loan direct mail for Goldman
  • Credit card originations have rebounded to pre-pandemic levels
  • Personal loan, HELOC/HELOAN, and private label originations are also higher than in recent years, with auto, mortgage, and student loans reporting lower origination levels
  • Mail volume for most consumer loan categories remained consistent in recent months

Quick Takes

  • The prevailing prime rate for the recent average was 5.50%, 2.75% lower than the 8.25% rate during the previous high in 1996
  • This comes as credit card ROAs are higher and credit losses lower than historical averages
  • Possible factors driving today’s higher spreads are:
  • A portion of low rate revolving balances have moved from cards to personal loans
  • Rewards cards, which feature relatively high APRs, are more prevalent now than in past years
  • There are a number of recent announcements in the credit card co-brand sector
  • The CFPB fined Credit Karma $3 million for “falsely advertising credit card pre-approvals”
  • Capital One is the highest rated bank for “digital trust,” as reported by Insider Intelligence
  • Banks spend millions on branding, whether on TV commercials, print advertising, stadium sponsorships, or other media
  • Direct marketing response rates prove the value of brand investment – offers with in-market bank brands typically have twice the response rate of unknown or lesser-known brands
  • One exception: when banks leverage an even better-known brand – in past years we tested our precious bank branded card offer against a generic “Visa” offer, and the Visa offer response was 20% higher!
  • We shifted to “Visa,” but heard of similar tests at other big banks that, while showing comparable results, were ignored due to management’s ego or other, less objective reasons
  • Try it!

The Epic Report is published monthly, with the next issue releasing on November 5th.

Thank you for reading.

Jim Stewart
www.epicresearch.net

Email me with your comments and suggestions on future topics or to have someone added to our distribution list.

Epic Research is a marketing company that helps our financial services clients acquire new customers via organic growth. Click here to find out how we can help you.

To read our previous newsletters, click here. 

Fintechs Dominate Personal Loans!

Jim Stewart

Three Things We’re Hearing

  • Fintechs dominate personal loans
  • Consumers respond to higher interest rates
  • Direct mail volume higher than pre-pandemic levels

A three-minute read

If the Epic Report was forwarded to you, click here to add your name to the mailing list

Fintechs Dominate Personal Loans

  • As mentioned in previous Epic Reports, the personal loan business has become dominated by monolines and fintechs – defined here as lenders without branches
  • Since 2018, fintechs have consistently accounted for 70% – 85% of direct mail offers
  • Only three of the top mailers in the past five years are “traditional” retail banks with branches
  • Two of the three branch-bank top mailers, BBVA Compass (acquired by PNC) and Citizens, have not been in the mail during the past year, and many of the top fintech mailers are not household names
  • Once lofty valuations have fallen back to earth, with some publicly traded fintech stocks down 39% - 94% from their peaks, and some privately held companies struggling to raise money at previous levels
  • Less is known about privately held lenders; however, some, such as Best Egg, have experienced sustained growth with large rounds of capital infusions:
  • Best Egg – secured $225M in Series E capital round in March 2022
  • Upgrade – raised $280M in Series F capital round in November 2021
  • Prosper – Prosper is backed by Sequoia Capital and Credit Suisse NEXT Fund, among others. Prosper Marketplace raised a total of $415.5M in funding over 17 rounds
  • Other privately held subprime players continue to invest significant marketing dollars:
  • Personify Financial – online lender owned by Applied Data Finance, offers personal loans in 25 states for subprime borrowers with interest rates up to 199.99% APR
  • Big Picture Loans – formed by the Lac Vieux Desert Band of Lake Superior Chippewa Indians in Michigan, operates pursuant to tribal lending laws and offers loans up to $5,000 with an APR range of 35% to 699%
  • Happy Money (formerly Payoff) – offers its Payoff Loan for credit card consolidation with fixed rates between 5.99% and 24.99% to consumers with a 600 minimum FICO score
  • Pure play lenders have advantages over commercial banks due to their focus on one product, however the extremely favorable funding and credit environment of the past 10+ years is returning to “normal,” and only those lenders showing profitability, good credit quality, and access to tighter funding markets will emerge as winners

Consumers Respond to Higher Interest Rates

  • Epic surveyed 1,123 U.S. consumers regarding the effect of higher interest rates on their financial behaviors
  • The results showed an expected hesitancy towards making major purchases, such as a new home or car
  • The respondents were also generally cautious about taking out new loans, and were more likely to open a high yield savings account and to pay down credit cards and take new loans to refinance their credit card debt

Direct Mail Volume Higher than Pre-Pandemic

  • All product categories we track have YTD mail volumes that are higher than the same period last year
  • Checking and HELOC still lag 2019 mail volume, with card, personal loans, education refinance, and in-school student loans all running above pre-pandemic levels
  • Other than education refinance, cost per click rates increased across the board the last few months

Quick Takes

  • Online demand for home equity lines of credit (HELOCs), having remained relatively consistent for the past several years, has doubled since the beginning of the year, likely due to the rise in first mortgage interest rates and the increase in home equity seen during the pandemic-era spike in home values
  • HELOC demand has historically not correlated with interest rates
  • Wells Fargo is launching the Autograph Card, which offers 3X points on top spending categories for everyday living and day-off adventures, including restaurants, travel, gas stations, transit, popular streaming services, and phone plans
  • We have done many product, offer, and creative tests over the past three decades and like to highlight some of the more interesting results, this blast from the past illustrates that sometimes the more things change, the more they stay the same!
  • In the early ’90s, we were one of the first card issuers to offer “introductory rates”
  • We started with a 5.9% introductory rate on a card that went to 16.9% after six months, and response rates doubled from the straight 16.9% offer
  • In tandem with the intro rates, we began offering the option of transferring balances from other issuers, which dramatically increased the average balance for a new card
  • Following this success, we tested various intro rate offers – 2.9%, 3.9%, 4.9% – as well as the duration of the introductory rate – 3 months, 6 months, 9 months – with notable response differences at each level
  • The most interesting result came when we tested an offer of “0% for 18 months” against a stated expiration date (e.g., “0% until July 31st”), which provided only 15 months of the 0% intro rate
  • The shorter, stated expiration date offer resulted in no meaningful decrease in response compared to the “18 months” offer, saving us three months’ worth of lost finance charges
  • Try it!

The Epic Report is published monthly, with the next issue publishing on September 10th.

Thank you for reading.

Jim Stewart
www.epicresearch.net

Email me with your comments and suggestions on future topics or to have someone added to our distribution list.

Epic Research is a marketing company that helps our financial services clients acquire new customers via organic growth. Click here to find out how we can help you.

To read our previous newsletters, click here.