2016 Payments Year in Review

Retail2016Payments The Year in Review

2016PaymReetnatisl Table of Contents The Year in Review Introduction Economy Payments Landscape Reward, Redemption, and Loyalty Advertising, Marketing, and Customer Acquisition Conclusions

INTRODUCTIONThis is the sixth edition of Retail Payments: The US economy experienced modestThe Year in Review. The last year proved to growth in 2016, with GDP increasingbe one of ups and downs, but the payments by 1.6%. This is the lowest annual GDPmarket was the beneficiary of strong overall growth figure that we’re reported onperformance, and saw the introduction of over the past three years, but growth ininnovative products and a maturation of the second half of 2016 provided somedigital channels. momentum as we enter the new year. Inflation increased by 2.1%; this is the firstThis report is organized into six sections: time that Americans have experienced annual inflation above 2% since mid-Introduction 2014, a trend that reflects rising gasoline prices and steady consumer demand.Economy Real personal consumption increased byPayments 1.4% through November, a decline from the 3.1% increase reported in 2015.Rewards, Redemption and LoyaltyAdvertising, Marketing and CustomerAcquisitionConclusions 1

Job growth continued throughout Entering 2017, many economists are 2016 with employers adding 2.2 focused on the impact of policy changesmillion jobs in 2016. The unemployment proposed by President Trump. Forecastsrate was 4.7%, an improvement from for the leading economic indicators arethe 5% reported in 2015. December based heavily on whether or not themarked the 75th consecutive month changes discussed during the election areof job creation, marking the longest actually implemented.stretch of job growth on record back to1939. Economists consider the a sub-5% 2016 was a year of unpredictable politicalunemployment rate “full employment,” events, with Brexit and the election ofso while job growth was slower than Donald Trump causing volatility in the2015, a larger share of the population is capital markets. The stock market endedemployed. the year with solid gains; the Dow Jones Industrial Average ended the year just shy of the 20,000 milestone, an increase of 13.4% for the year - its best performance since 2013. The S&P 500, meanwhile, grew by 9.5% in 2016 – one of its strongest years ever. Considering that both indexes saw slight declines in 2015, the solid finish to the year shows the resiliency of investors. Big round numbers gather attention, and Dow @ 20,000 will certainly be a level people notice. 2

ECONOMYThe outlook for growth. Total GDP for 2016 ended at 1.9%,representing modest growth for theyear. GDP actually grew by 3.5% in thethird quarter, its best rate in two years,but declined to an estimated 2% in Q4,reducing overall growth for the year.Part of the strength came from exports,which is not expected to continue. Somegood news was that business spending oninventories went up, not down as feared.That may be a sign of improving businessconfidence.Consumer spending grew at a decent2.8% in the third quarter following astrong second quarter. Purchases of motorvehicles surged 20% at an annual rate;but this pace of growth, however, is notexpected to continue.At the end of 2015, the Federal Reserve 1 BEA advance estimateraised the federal-funds rate for the first 2 US DOLtime in nine years. Almost a year later, 3 Data is for Yoy for Q3, December update available 1/30/17in December 2016, the Fed announced 4 Conference Boardthat it would be raising the rate again. 5 Fitch Prime Credit Card Chargeoff IndexThe agency also indicated that it plans on 6 Total revolving credit from G.19 increase in 11/2016. Federal Reserve, released 1/9/17raising rates another 0.75 percentage pointin 2017, likely in three separate quarter-point moves.The rate increase indicates that the U.S. The Fed’s rate hike “should beeconomy no longer needs the Fed’s viewed essentially as good news—crutches and consumers and businessescan afford to pay more to borrow. America the Fed sees enough strength”has added jobs for 75 consecutive months — Standish Mellon Assetand the country’s unemployment rate has Managementfallen to 4.7%, its lowest level since 2007.The U.S. economy has expanded for sevenyears, even though the pace of growth hasbeen slow. 3

The Global Economic Picture Developments in the U.S. economy,because of its size and internationallinkages, have substantial implications forthe global economy. While the United Statesplays a critical role in the worldeconomy, activity in the rest of the world isalso important for the United States.Politics played a significant role in the global 2017 GDP Forecast by Countryeconomy in 2016. While global marketsare often shaped by market conditions, Goldman Sachs global and regional forecasts for 2017two events in 2016 were actually driven byvoters rather than investors: the UK’s Brexitvote and the election of President Trump.The inward-looking result of the UK’s Brexitreferendum was considered a risk for theglobal economy, and forecasters scaleddown their already subdued expectationsfor 2016. The Organization for EconomicCo-operation and Development (OECD)trimmed its world growth forecast for 2016to 2.9%, down from 2015’s 3.1% and wellbelow the long-run average of about 3.75%.The International Monetary Fund (IMF)predicts a recovery in 2017, forecastingglobal growth of 3.4%.China was also the topic of great concernentering 2016, with the country sufferingfrom a stagnating economy driven bysignificant debt and production overcapacitybuilt by years of expansion. Governmentstimulus programs help stabilize China’s Source: Goldman Sachs Asset Managementeconomy throughout the year, and the Consumer Debtnation is looking for expansion in 2017. Aggregate household debt balancesDomestically, the promise of increasedemployment may come at the cost ofsome international relations. The potential grew in 2016. As of September 30, 2016,for large trade tariffs, as proposed by the total household indebtedness was $12.35Trump administration, will have a major trillion, a 2.3% change from the sameimpact trade with the US. As we enter 2017, period a year ago. Overall household debtthere are still many unanswered questions remains 2.6% below its Q3 2008 peak ofregarding domestic policy, which will have a $12.68 trillion, but is now 10.7% above thedirect impact on the global economy. Q2 2013 trough. 4

Source: Federal Reserve Bank of New York • Foreclosures: There were a total of 933,000 foreclosure filings inMortgage balances, the largest 2016 – a decline of 14% from thecomponent of household debt, saw a 1% year before and marking a 10-increase compared to 2015, increasing year low in filings. Stricter lendingto $8.35 trillion as of September 30. requirements, an improvingBalances on every type of non-housing economy and governmentdebt grew in the second quarter: auto regulations should bode well for theloan balances increased again, by 7.8%; most recent crop of mortgages. Butcredit card balances increased by 4.4%, this means it’s also getting tougher toand student loan balances increased buy a home, particularly for first-timeby 6%. A few of additional signs that buyers because of rising home prices,consumer debt is healthy: interest rates and lenders’ expectations of borrowers’ credit scores. • Bankruptcies: About 213,000 consumers had a bankruptcy notation added to their credit reports in the third quarter, which is 6% fewer than in the same quarter last year. • Credit Inquiries: Also during the third quarter (latest available data), the number of credit inquiries within six months increased by 6 million from the previous quarter, to 175 million. Credit inquiries are an indicator of consumer credit demand, pointing to signs that consumers have an appetite for more credit.Source: Federal Reserve Bank of New York 5

Credit Card Debt from the record of 2.43% achieved in October. The general health of credit card Credit card delinquencies rose slightly in Q4,lending is best measured by the growth according to TransUnion, with 1.71% of creditof receivables and consumers’ repayment card accounts 90 or more days past due at theof debt; both metrics were positive end of the year. TransUnion also reported thatthroughout 2016 and are expected to mortgage delinquencies have continued theirremain strong in 2017. Revolving debt steady decline, with past due rates dropping- credit card balances that carry from every quarter since Q3 2013. Mortgagemonth to month - steadily grew after the delinquencies stood at 2.21%, down from the2009 recessionary fall-off. Delinquencies peak 7.21% in Q1 2010.continue to be held to historically lowlevels, but a sudden change in theavailability of credit, an increase ininflation, or a shift in unemployment canforce the metrics to go awry.Indications are that revolving debt in *Forecast for Q4 2017the U.S. will increase and surpass the Source: TransUnion2008 high water mark of $1 trillionas households gain confidence indiscretionary spending and card issuerscontinue to aggressively build theirCreceivables. harge-offs and Delinquencies Credit card charge-offs remainedlow throughout 2016, with yet anotherrecord low for Fitch’s Prime Credit CardChargeoff Index coming in the year. Theindex ended the year at 2.54%, up slightly$1,004 $986 $1,002 $938 $916 $892 $839 $841 $845 $858 **Forecast for 2017Source: Mercator Advisory Group analysis of Federal Reserve Bank G-29 Report 6

ISource: CreditCards.com card offers climbed to an all-time record in nterest Rates the first week of 2017, indicating that lenders Card issuers have tied the interest on the are responding to rising interest rates. Rising bulk of their portfolios to the prime rate as a interest rates may serve as a deterrent to way of protecting margins on credit cards; as consumers acquiring new cards. the prime rate increases, card interest rates follow suit. Therefore, the risk to margins is The other important factor to consider low, as issuers are unlikely to see any change is consumers’ overall debt portfolio. in their income as a result of the federal-funds According to Mercator Advisory Group rate increase. director Brian Riley: The impact of the increase in issuers’ prime rate on consumers, however, could be \"It is not the rise in minimum due significant. Consumers will see their interest payments on consumer credit cards rates increase, which can have a trickledown that will affect credit card quality, effect on several key card indicators: available since the product aligns very closely credit, payment rates, acquisition rates with household budgets. Rather, it and delinquencies. Revolvers carrying large balances may be the most impacted by the is the confluence of other factors, change, but even a 1% increase in the prime such as rising costs for mortgages, rate will be of minimal consequence to consumers. On a $4,000 credit card balance student loans, and inflationary at 18.5%, the increase would add just $3.50 factors such as the increase of to the minimum due at a 19.5% rate. gasoline, that set household budgets into disarray.\"The national average interest rate on new 7

Employment record lows toward the end of the year. The labor market is hitting on all Economists view this uptick as a positive cylinders right now. The 2.2 million jobs sign, signaling that folks outside the labor added in 2016 were from across the force came back in to look for work and so spectrum, with strong growth in health were newly classified as unemployed. care and hospitality, and decent numbers in manufacturing and government. The Look for the job market to continue number of persons who were working tightening next year as demand for part-time because of slack business or skilled workers exceeds their availability. couldn’t find a full-time job continued to Employment growth in 2017 will slow to decline, along with the number of long- an average of 160,000 jobs per month, term unemployed individuals. from 180,000 per month in 2016, but the unemployment rate will edge down further A total of 472,000 health care jobs to 4.5%. The four-week average of initial were added in 2016, by far the largest unemployment claims is close to its lowest segment of employment growth. The level since 1973. financial services industry also benefitted from job growth, with 159,000 jobs Wage gains picked up to a 2.9% growth added in 2016; the number of people rate, the highest since 2009. Wages will working in financial services expanded to be on an upward trend in 2107, given the its largest number since 2006. tightness of the labor market, and will continue to provide fuel for consumer The unemployment rate ended 2016 spending growth going forward. at 4.7%, actually creeping up from 8

Two trends that economists are monitoring Consumer Spendinginclude:• The Gig Economy: a 2016 survey of Consumer spending is the largest of human resources decision makers and the four components of GDP, accounting freelancers found that 60% of companies for more than two-thirds of U.S. economic plan to hire more freelancers than activity. Spending throughout 2016 was full-time employees. The high cost of irregular, with first quarter spending insuring regular employees, as well as down year-over-year, then spiking by 4.3% the flexibility that comes with hiring and 3% in the second and third quarters skilled freelancers for specific projects respectively.are the key drivers behind the growth of Consumers set another record for big ticketthe gig economy. items in 2016, purchasing 18.4 million• Automation: Whether it is driverless vehicles. This is an increase of more than cars or computers capable of identifying 5% over 2015’s record. This translates into broken bones, what determines increased confidence in the economy as vulnerability to automation is not so consumers are taking on more longer-term much whether the work concerned is debt.manual or white-collar but whether or There are some risks to this growth,not it is routine. Automation will not however. The average new vehicle loanhave a significant impact on employment amount jumped from to $28,936 toin the very near term, but economists $30,022 over the past year, with consumersare closely watching this trend for the extending their financing terms tolonger term influence of technology. unprecedented lengths. The average loan period stands at a record 68 months, with many buyers taking out loans for as long as 84 months. These lengthier loan periods increase risk for lenders, with a greater number of financed vehicles “under water.” 9

Holiday Spending Amazon accounted for more than one-third Retail sales occurring during the of online shopping receipts from November final 5-weeks of the year can represent 1 to December 16. as much as 20-30% of retailers’ revenues for the year, so holiday spending is In-store holiday sales grew by only 1.4% particularly important. Total holiday sales from a year ago, little better than 2015’s in 2016 rose by 3.4% from a year ago, anemic 1.2% rate and much weaker than the better than 2015’s 2.7% rise. But sales post-recession average. The holidays were didn’t come close to matching the 4.8% not kind to some brick and mortar retailers, growth logged in 2014. with Macy’s announcing that it would close 100 stores after poor holiday performance. Online sales grew by 14% compared Macy’s store closures come after a rough with a year ago—the fastest growth in year for brick & mortar retailers, with five years. Amazon stood out as a strong Sports Authority shuttering its stores, while performer, with the online retailer Walmart, Sears/Kmart and Aeropostale are shipping more than 1 billion items closing hundreds of retail stores. worldwide over the holiday season. Data from Slice Intelligence reports that Debit cards were the most popular form of payment for holiday in 2016, used by On average, holiday sales have 39.7 percent of shoppers, edging out credit increased 2.5 percent for the last 10 cards, which were used by 38.7 percent years. So while 2016 holiday sales of consumers. One in five (19.5 percent) said they would pay with cash for holiday did not match the previous year, purchases, and a similar number - 19.9 sales did outperform the average. percent - planned to use PayPal when purchasing holiday gifts this year. 10

PAYMENTSLANDSCAPEThe payments industry had a strong is primarily attributable to the shift of theyear, with issuers leveraging improved Costco portfolio to Citibank. Amex was alsoconsumer confidence by expanding the leading brand on the Fidelity Investmentstheir marketing and customer cobranded card portfolio, which migrated toacquisition efforts. While technological U.S. Bank’s Elan Financial Services unit. Amex’sinnovation stagnated, issuers focused still managed to grow charge volume in line withon creating attractive new offerings and some leading competitors, in spite of the loss offorging new partnerships. these major portfolios.Chase was responsible for two ofthe bigger product launches during Citi certainly benefited from the transfer of thethe year, both extensions of existing Costco cobranded card, leading the top issuersproduct lines. Chase Sapphire Reserve, in outstandings growth, though the transitiona premium card with a premium was not without its own set of challenges that$450 annual fee was met with strong come with moving such a large number ofdemand, driven by its generous offer cardholders to a new issuer.incentives. Chase also launched theFreedom Unlimited card, an extensionof the Freedom card line, whicheliminates revolving reward categoriesand has a flat 1.5% cash back rate.American Express was faced withsome challenges, losing 14% of itsoutstandings year-over-year. ThisSource: Nilson Report 11

Mobile payments very positive, but consumers report that The leading mobile payment they are not comfortable leaving their platforms - Apple Pay, Android Pay and wallets at home in favor of a smartphone. Samsung Pay – managed to keep the All three major mobile payment platforms status quo from a year ago. Payment still suffer from the same challenges that growth across these platforms was tepid, they had from the start: they are not and the anticipated growth of mobile device agnostic. Android phone owners payments resulting from consumers’ that want to use Apple Pay can’t, and frustration with EMV cards never really consumers that love the idea of Samsung materialized. Pay’s wider acceptance are unable to use it What does this mean for the future of unless they have a Samsung device. mobile payments? The outlook remainsSource: First Annapolis Consulting 12

Closed-loop mobile wallets Apparel retailer Kohl’s also leapt into Starbucks reported in September the closed-loop digital wallet spacethat 26% of in-store purchases were with Kohl’s Pay, hoping to increasecompleted using its mobile app. The loyalty, create greater volume oncoffee retailer has set the bar high its private label card and reducein terms of payment features and transaction costs.functionality, and 2016 was the year With MCX’s CurrentC mobile walletthat other brands successfully emulated scheme officially going dark in JuneStarbucks. Walmart Pay – actually 2016, any plans of a standardized,announced in December 2015 – was multi-retailer product are gone. Werolled out to all of its stores by mid-year should expect to see more closed loopand was met with strong demand. The wallets in 2017, with Target likely toretailer announced that Walmart Pay make the biggest splash.has been embraced by its customersnationally and across all age groups –defying its speculation that Millennialswould be the early adopters. 13

P2P Innovation Financial institutions have long The payments industry has built a been trying to move consumers to reputation of innovation over the past P2P as a low-cost method of moving several years, and 2016 continued this money, but it has not caught on across theme. Cool new products like Mastercard’s all demographic segments. Despite Selfie Pay and Capital One’s bill payment innovation and promotion by banks, through Amazon Echo are just a few only about 5% of consumers have examples of cutting edge products launched used a P2P payment system, like Chase during the year. QuickPay or Venmo, to pay money APIs – application programming interfaces owed to family, friends, or others. – were a major area of innovation in 2016, Banks redoubled their efforts in the with Visa and Mastercard both improving new Zelle partnership. U.S. Bank is on their toolboxes for developers to among the 24 partners in Zelle, which connect applications with the payment promises to bring faster payments. networks. There are more than 1,500 Zelle is expected to launch in early 2017 payments-related APIs, and this number will and enable the more than 76 million increase over the next year as demand for customers of participating banks a way more inter-connected applications grows. to send money using an email address Technologies like virtual reality and machine or mobile phone number. learning are certainly on the radar of Zelle appears that it will have many of payments players, but these are not likely the features of Venmo, which continues to yield real-world applications in 2017. to be a popular method of payment Nearer-term innovations include additional among college students and Millennials. advances in biometrics and use cases for PayPal-owned Venmo grew by 131% in blockchain. the third quarter, processing $4.9 billion in transfers between users. “The typical Venmo user opens the app four-to-five times per week, but not to make payments. \"They are just seeing what their friends are doing.” - PayPal CEO Dan Schulman. 14

EMV Update 600 million chip cards have been placed in With the EMV liability shift occurring the hands of consumers since the October in the latter part of 2015, the past 2015 migration date. The Payments Security twelve months have been busy for banks Task Force has projected that 98% of all reissuing cards, merchants upgrading cards in the U.S. will feature EMV chips by equipment and consumers getting the end of 2017. accustomed to “dipping” over the more More good news is that the networks have familiar swiping. been working on reducing friction from chip As expected, the transition was not card transactions. Consumer and merchant without its hiccups. Many merchants were frustration over 10-15 second processing not fully prepared for the October 2015 times should see improvements as new migration, so even some larger retailers faster technologies roll out. Mastercard’s and quick service restaurants were M/Chip Fast and Visa’s Quick Chip for EMV open to increased risk as they worked were rolled out by the networks to speed on implementation. Even at the end up processing time. of 2016, Visa was reporting 1.7 million and Mastercard 2.3 million merchants accepting chip cards – just 38% of all US merchants. The good news is that issuers ramped up quickly throughout the year, and replaced cards with new, chip-enabled cards. AboutPercent of cards presented at U.S. merchants containing EMV chipsSource: CardFlight 15

Regulatory and Litigation Update allegations of deceptive selling practices, but The last year marked one of this is an issue on the radar of all financialfewer new regulations, but the industry institutions.is continuing to adapt to rules put inplace prior to 2016. The broadest new The ongoing battle between retailers andrule announced during the year was payment networks continued. Two leadingthe Consumer Financial Protection retailers - Walmart and Kroger – separatelyBureau’s broad-ranging rules covering sued Visa over the right to choose howprepaid cards. The majority of the customers authenticate chip card payments.CFPB’s rule addresses requirements for The retailers contend that they should be ableconsumer disclosure and protections to choose the verification method – signaturearound reloadable prepaid cards, a tool or PIN – and be subject to additional fees.widely used by low-income consumersand those without bank accounts. The &ACFPB notes that its final rule also covers There were a few major dealsnonbank accounts that can be loadedMwith funds to enable purchases, ATMcash withdrawals and person-to-person announced in 2016, the most significanttransfers, which could mean changes being Visa’s completion of the acquisition offor mobile wallet giants like Venmo and Visa Europe. The combined, global companySquare whose products hinge on P-to-P. provides digital payment products, services and processing to about 17,100 financial institutionWells Fargo was involved in a widely clients and partners, 40 million merchantpublicized case which revealed outlets, and 3 billion Visa cards worldwide.deceptive selling practices by branchsales staff that went on for years. The As part of Bass Pro Shops’ acquisition ofbank agreed to pay $190 million to sporting goods retailer Cabela’s, Capital Onesettle claims that bank employees set paid $200 million for Cabela’s banking arm,up as many as 2 million phony bank and World’s Foremost Bank. Capital One willcredit cards accounts in order to meet become the issuer of Cabela’s cobranded card,sales goals. Wells has since fired more while Bank of America will continue to offerthan 5,000 employees and eliminated Bass Pro Shops cards.its sales goals in branches. No otherbanks have been implicated in similar 16

ADVERTISING,MARKETING, ANDCUSTOMERACQUISITIONConsumers appetite for loyalty and The majority (57%) of marketers intend torewards has never been higher. allocate more of their budgets to customerConsumers participate in an average loyalty in 2017 – a sign that consumer brandsof 29 loyalty programs, including recognize the weaknesses in existing offerings.credit card programs. Getting a card Smartphones and mobile wallets have enabledto the front of the wallet often means marketers to create more compelling offeringsproviding customers with rich rewards that are easier for consumers to use. Whatthat are easy to redeem. More than is the point of having a rewards program ifhalf (58 percent) of credit cardholders redemption is difficult for the merchant and thesaid they preferred cash back rewards, participant?topping interest in travel rewards, storepromotions and introductory interestrates or bonus rewards.Matching customer actual needs with Eight out of ten U.S. cardthe products that they have can lead to holders believe co-brandedincreased usage and loyalty. J.D. Powersurvey data found that more than 20% cards offer as much orof customers have a card with fees or more value than bank-rewards not aligned with their actual issued rewards cards, butpurchase habits. While their levelsof satisfaction are not dramatically they want more.different, customers who have a wrong — Oliver Wymancard, compared with those with a cardbetter suited to their needs spend lessper month on their primary card ($783vs. $1,035), and are more likely toswitch cards (21% vs. 9%). 17

Chase Sapphire Reserve many consumers to jump on the offer, Chase announced the launch of the but the reality of the annual fee may beChase Sapphire Reserve card in August, the a deterrent in its second year. Sapphirenewest entry to the luxury card market, Reserve was featured on message boardsand it was well received by consumers. focused on “churning” -- the process ofConsidering the $450 annual fee, its early opening card accounts for the bonus,success came as a bit of a surprise to then closing the accounts to avoid fees.industry observers. But the rich acquisition It will be worth observing how Sapphirebonus of 100,000 bonus points, equivalent Reserve fares in August 2017 as many newto $1,500 towards travel, was incentive cardholders prepare to renew their card.enough for many consumers. Pointsredeemed through Chase Ultimate Rewards Chase’s Sapphire Reserve intensifiedfor travel include a 50% redemption bonus. the arms race among large credit card issuers, which are introducingThe card features three points per $1 spenton travel, including airfare, cruise lines, increasingly lavish rewards programshotels and car rentals. An annual travel credit to capture affluent consumers whoof $300 and $100 Global Entry/TSA Pre- spend large sums on travel andCheck incentive are also a perks of Sapphire recreation, but no longer want toReserve. be bound to one particular hotel or airline’s affinity program.The challenge with cards that feature such —New York Timesgenerous sign up bonuses is customerretention. The rewards may have prompted 18

Outlays on advertising for much of Source: Kantar, Panoramic Reseach analysis 2016 was strong, with the leadingissuers and networks combining to spendmore than $700 million over the first threequarters of the year. Spending actually sawa deep decline in Q3 as most brands in thequarter cut expenditures. This decrease inQ3 spending was partially offset by a surgein expenditures by Visa attributable to itssponsorship of the Olympic Games in Rio.Visa spent $45 million during the quarter, anincrease of 274% compared to Q3 2015.Capital One, the second biggest spenderduring the quarter, continued to usecelebrity spokespeople, including SamuelL. Jackson, Jimmy Fallon, Alec Baldwin andJennifer Garner, to promote the brand.Through the first 10 months of 2016,American Express was on top of the list fortotal advertising expenditures, followedclosely by Capital One.Mastercard debuted a logo in July thatdeemphasizes the “card” as it expandsin digital payment services. Though itis keeping its red and yellow circles,Mastercard is simplifying the overall designwith a new font, all lowercase letters and acleaner look.Source: Kantar 19

Source: Kantar works best for a given goal. Citi changed strategy in Q3 2016 for its AAdvantageDirect mail volume Platinum offers, shifting 2 million offers Issuers sent an estimated 4.5 billion carrying a 50,000 mile incentive to one direct mail pieces in 2016, the majority carrying 40,000 miles plus a secondary of which were new card solicitations. 10,000 mile reward earned after a one year Mail volume has consistently declined spend milestone. The goal was to increase throughout 2016, but direct mail remains retention beyond the initial three-month a significant channel for customer bonus cycle. acquisition. One reason why mail is so Citi was the leading mailer in at the end of effective is marketers’ ability to quickly 2016, increasing its direct mail activity year- design a campaign in response to market over-year by 36%. Citi inherited a healthy changes. For example, Capital One began portfolio in its Costo cobrand acquisition, and heavily promoting its Quicksilver card with is continuing to promote the card; Costco card a $100 incentive following the introduction mail grew from a marginal 50,000 mailing in of Chase’s Freedom Unlimited. Q2 to a 1.5 million mailing in Q3. Issuers can also test different offers relatively inexpensively to see what 20

Customer Acquisition Trends Source: Comperemedia A March 2016 survey found thatjust 10% of consumers are respondingto offers via mail, with the internetaccounting for 42% of applications. Directmail has traditionally been a leadingindicator of issuers’ card acquisitionstrategies, and this remains true today.While consumers are applying online,well-designed mail pieces can influenceconsumers and prompt them to useanother channel to apply for a card.Despite the decline in direct mail andthe rising cost of this medium, it isstill an effective channel for customeracquisition.Rewards continue to be a driver forcustomers, and issuers mail messagingreflects this appetite. In November, 70%of credit card offers were for rewardscards. Incentives and introductoryoffers were also big drivers for customeracquisition. Cash incentives continuedto be a major tool for issuers, who usedgenerous offers to new customers. Share of Credit Card Offers Featuring an Incentive, by FICOSource: Comperemedia 21

ConclusionsCustomers want greater rewards and legislative changes go into effect and we see theirincentives ultimate impact on consumer spending.Competition for new credit card customers Consumer appetite for creditis fierce. Consumer confidence is high and Consumers have shown an increased appetitecustomers are comfortable taking on more for credit, but there are some risks that comecredit. Card issuers have worked to fan the with expanding loan portfolios. Fortunately,flames of this demand as outstanding revolving delinquencies – a leading indicator of charge-offscredit is nearing the pre-recession peak of $1 – remain at historically low rates. Consumers aretrillion as companies have raised credit limits, taking on more debt, but doing so responsibly.increased incentives, and issued cards to more But the industry should monitor other loanborrowers. Now, with the market again at classes, specifically auto and student loans;a mature phase following a strong pullback consumers taking on too much debt could impactduring the recession, lenders have to increase card repayment rates.incentives and rewards in order to attract the This could be P2P’s breakout yearmost creditworthy borrowers. With Venmo growing in popularity and ZelleMobile wallets need some differentiation expected to hit the market in the first partfrom each other and other forms of payments of 2017, P2P may see a surge in popularity.The last year was fairly stagnant for the three Consumers have shown that they are slow tobig mobile payment schemes. Consumers adopt non-traditional payments, but Venmo’sreally have no compelling reason to use their quick rise as a viable solution to a problem facedsmartphone to make a payment at the point by its target audience could mean that there isof sale rather than pulling out a credit card. some hope for another P2P provider to create aCreating a compelling offer – whether earning compelling offer for the mass market.cash back or retailer incentives – have the EMV extends to most cards and merchantspotential to increase Apple Pay, Android Pay Issuers, merchants and consumers are makingand Samsung Pay use. If these companies the necessary adjustments to chip-enabledaren’t able to align with retailers, closed loop cards. We should see more widespreadwallets and apps will fill the void. adoption of EMV by merchants over the nextWait and see on the economy 12 months, while nearly all consumer paymentThere are a lot of open questions when it cards will feature chips. Mobile wallets did littlecomes to the economy, not the least of which to disrupt EMV in 2016, and this will likely beis the impact that the new administration will the case in 2017.have. Economists are actually optimistic, but itmay take months before some of the proposed 22

For more information: [email protected] (612) 973-2126Sources: Factiva, FICO, Federal Reserve Bank of New York, First Annapolis, Kantar, Mercator Advisory Group, Mintel Compermedia, New York Times, Nilson Report, Panoramic Research, PaymentSource, U.S. government sources, and competitor generated materials.