Banks have long known it is much easier to provide products to the customers they already have than it is to capture new ones. Today’s retail banks are in a unique position to create a mutually beneficial product—a bank-branded credit card, which can simplify customers’ often-fragmented wallets while also bringing the bank a wealth of new profits.

Credit cards, which now account for 30 percent of all retail spending in the United States, are more popular than ever thanks to merchants’ growing acceptance, consumers’ willingness to use cards for everyday purchases even when the transaction size is small, and the proliferation of digital, in-app, frictionless commerce. By 2020, US credit card spending is expected to rise by $1 trillion.

Amid this migration to plastic, banks could see significant returns. In fact, the average return on assets (ROA) for credit cards is more than double a bank’s average. In this paper, we discuss the appeal of bank-branded credit cards and how retail banks can integrate them into their spectrum of offerings to solidify their customer relationships.

A bright road ahead

The market for credit cards was once dominated by large cobrand, monoline, and single-service offerings, with the largest banks and issuers enjoying most of the growth.¹ Looking ahead, however, bank-branded cards and the next tier of banks are poised to enjoy significant gains—to the tune of $10 billion in additional revenue.

These mid-level banks can capture this revenue with more attractive rewards, fewer fees, and special features that are best provided by the institution where a customer already has a demand deposit account (DDA). For example, if a customer uses a bank-branded credit card, they might never pay a late fee because the minimum balance could be automatically paid from a checking account if they are late or miss a payment.

To better understand this revenue growth opportunity, we take a closer look at the industry, including market trends, the appeal of a credit card offering for issuers, and a market view of cobrand portfolios. Then, we present our projection for growth in bank-branded cards and discuss how retail banks can develop forward-thinking credit card strategies.

What’s the Attraction?

Credit cards are a large, well-penetrated product category with 83 percent of adult banked consumers already having at least one credit card. In 2015, they used their cards to spend almost $3 trillion, amassing $800 billion in outstanding debt, according to The Nilson Report. However, there is still room for growth and the potential for market share to shift. By 2020, US credit card spending is projected to be double the GDP growth with more than 35 percent of retail spending occurring on credit cards and overall spending rising to more than $4 trillion.

Of course there are risks, and although credit card economics are cyclical and complex, the best predictor of credit card losses is unemployment. The good news is that double-digit unemployment is not expected any time soon. As a result, credit card ROA, which has averaged 5 percent in the past five years, is expected to remain much higher than the average bank ROA,although banks are beginning to build up their reserves again, signaling a peaking of profitability.²

The number of cobranded cards has been shrinking, and their total percentage of spending has been consolidating. Today, their portfolios are concentrated, with the top 3 percent holding 39 percent of outstanding balances (see figure 1). The clear winners have been the large airline and hotel cobrands, which capitalize on the loyalty of the cobrand partner and consumers’ attraction to earning airline miles and hotel points.

The resurgence of bank-branded cards

In the past several years, the US market has seen a resurgence of bank-branded credit cards at the expense of single-service cards.³ Today, single-service cards are used for about 30 percent of credit card spending, down from around 45 percent 10 years ago. We expect this trend to continue as smaller issuers focus on their credit card business and the largest banks, many of which offer single-service cards, emphasize their own bank-branded offerings.⁴ For example, Chase is still pushing its Sapphire and Freedom cards, Citibank promotes a double-cash-back program, Bank of America has cards that offer cash or travel rewards, and Capital One offers the Venture and QuickSilver reward cards. In addition, American Express is seeking to replace millions of customers who had the cobrand cards they no longer offer with Costco and JetBlue.

Customers who move their credit card transactions to their primary bank stand to gain some compelling benefits. In addition to lower fees, higher rewards, and seamless bill paying, consumers can make more educated choices about their spending when they can see their purchases and balances all in one place. However, banks will need to educate consumers about these benefits.

Looking ahead, we expect bank-branded cards to gain share at the expense of cobranded offerings (see figure 2). And with a shrinking pool of marginal cobrands (those with weaker value propositions and less than $500 million in outstanding balances), the surviving cobrands, especially the large issuers with travel and entertainment rewards, will likely grow faster than the overall cobrand market.

Credit card volumes are highly concentrated in a few issuers (see figure 3). In particular, the six largest issuers’ share of credit card spending is 2.4 times their share of deposits. That same ratio is half for the next 30 banks by assets and under a third for the smaller banks. We refer to these three segments as the Top 6 (the largest credit card issuers: American Express, Bank of America, Capital One, Chase, Citibank, and Discover), the Next 30 (banks with more than $50 billion in assets not included in the Top 6), and other banks (those with less than $50 billion in assets). The Top 6 have 74 percent of the share of spending, but half of that is likely single-service card relationships not related to a demand deposit account.

We expect the Top 6 to continue to push their proprietary bank-branded cards, while the Next 30 invest in developing their card offerings and integrating them into their wider bank offerings, stimulating the growth of bank-branded cards at the expense of single-service cards (see figure 4).

Most segments of the market will grow over the next five years as credit cards eat away at the share held by other payment methods. The big winners will be the Next 30, which we expect to gain significant market share and double the amount of spend on their proprietary credit card offerings by acquiring new credit card customers and expanding their portfolios.

The strategic opportunity for the next 30

Historically, the Top 6 banks have fueled their growth with single-service cards, and national advertising campaigns for their bank-branded offerings, creating large credit card portfolios not connected to any DDA relationship. Going forward, the Next 30 retail banks will use access to customers and their data as well as the bank–customer relationship to expand their credit card offering and capture a larger share of card spending and receivables.

It is important to understand that smaller issuers are not economically disadvantaged compared with the larger banks. On the revenue front, credit card economics are driven by fees and the spread on receivables. The interchange rates set by the payment networks are the same for all issuers, regardless of size, and fees are based not on the provider but on the value offered by the card, such as reward points or cash back. And any bank can set their annual percentage rates based on their cost of funds to manage margins and risk. So, the activity of two identical customers will generate the same net revenue for the largest bank as it will for the smallest.

The same is true on the cost front. The largest components of credit card operating costs are less scale-sensitive than one would think since many core functions are outsourced, even by the large credit card issuers. And although the largest issuers do have lower network and processing costs, the difference is not enough to create a game-changing value proposition. In other words, the largest Top 6 issuer may have an operating cost advantage of as much as 25 basis points of spend versus the smallest Next 30 bank and have similar profitability if those savings were passed on to the customer. For example, with $10,000 of spend translating into only $25 a year per customer, this small difference might not be enough for a smaller bank’s DDA customer to prefer a card from a Top 6 bank if the smaller bank provides a competitive card.

The key differentiator is acquisition costs, and the larger banks do have marketing and advertising advantages. The Top 6 spend more than $1 billion a year in credit card ads, and they use direct marketing to get offers into consumers’ hands, while smaller competitors tend to rely on their network of branches to reach consumers. Our research shows that advertising can be a very effective way to encourage people to shop for a new credit card: consumers are more likely to act if they receive an offer as opposed to if they simply see an ad for a card (see figure 5).

However, smaller banks have different ways of competing with the larger players. Customer access, for example, is a powerful advantage for the Next 30 banks: their branches, websites, and contact centers with normal, everyday traffic are excellent sources for acquiring credit card customers. Given today’s regulatory pressure on branch sales tactics, the sales capacity of the Next 30 branch network could be declining, so these banks will need to quickly develop capabilities and programs to market targeted offers to their customers via direct marketing and online channels.

Because these banks have a relationship with their customers, they can target the most attractive customers by using bill-pay data and combining value propositions with other banking products and services. Branch offers are an effective way to reach consumers (see figure 6). In fact, a new Next 30 cardholder who got a new credit card after receiving an attractive offer is almost three times more likely to have received the offer at a branch than a Top 6 new credit card customer. However, this presents a risk for customers who rarely visit a branch and points to the pressing need for smaller banks to develop direct marketing and online sales capabilities.

As consumers migrate from single-service cards to bank-branded cards, the Next 30 issuers will pick up a larger share of the market. But these banks face a potential roadblock: even though Next 30 bank customers are getting new credit cards, they are less likely to get them from their primary banks (see figure 7). Wider promotion of credit card offerings and a more targeted effort by the smaller players—focusing on the right segment of their customer base and targeting their offers to the right customers—can result in significant growth and market share gains.

The Next 30 banks now have a substantial credit card opportunity. Across this segment, the average share of credit card revenues over share of deposit balances is 19 percent, meaning Next 30 banks capture only a fifth of their “fair share” of credit card revenues (see figure 8).⁵ Advanced Next 30 banks thus have a huge opportunity. For example, when we analyzed the share of credit card revenue for one high-performing Next 30 bank, focusing only on bank-branded offerings, we uncovered an opportunity to double credit card revenue as the share of revenue was only half its “fair share.” The reduced credit card revenue was driven by lower-than-average credit card balances given the portfolio’s average spend. In general, the Next 30 are underperforming in balance growth compared with their spend share, which drives the lower-than-expected share of credit card revenue.

Finally, these Next 30 are in a unique position because their cards can work seamlessly with their customers’ accounts—delivering a value that will be hard for card-only issuers to match. Whether it is helping customers see their balances and spending history in one place or linking products in a way that helps customers pay off their debt, a primary bank is in a better position to serve these customers while still providing attractive rewards. Considering that cross-selling programs driven by teller incentives and sales goals are becoming muted and less tenable, the path forward will require focusing on customers and delivering value.

The secret of success: it’s the relationship

Although many retail banks have avoided focusing on credit cards over the past decade, they are beginning to use their DDA relationships to reenter the market and get cards in their customers’ hands. And yet, too often, banks have a narrow view of the business potential— homing in on the percentage of customers who have a credit card. This can be limiting as the top-performing banks are approaching a point where more than 75 percent of the customers considered underwritable already have a credit card with the bank.

Focusing only on the card count ignores three important factors:

Customers having a card is different than them using it. In many cases, the share of spend— and more importantly, the share of outstanding debt—is low, meaning that although customers have a card with their bank, they are not using it as their main credit card. As a result, a bank that has 25 percent card penetration may only have a 10 percent share of its customers’ profit pool. A more effective approach is to focus on the share of wallet. (As an aside, many banks have led with rich cash-back reward cards, which are easy to sell, resulting in high card count and some growth in low-margin, modest-sized spend-only customers.)

One size does not fit all. Banks tend to have strict underwriting standards and, in many cases, a limited set of value propositions. Today, there is an opportunity to use customer data to determine their viability as a credit card holder. In addition, differentiated card offerings can capture more customers while maintaining profitability. For example, a bank could lower the lines of credit or offer secured card products and offer options for consumers to switch to a more attractive card when they meet certain criteria.

Not all consumers have the same needs. Banks tend to focus on capturing consumer spending and not balances. As a result, they compete like any other bank—on price, offering zero percent interest for up to 18 months. Our research shows that most customers want to pay off their debt, regardless of their FICO score or the amount of debt they have. So, retail banks can compete by capitalizing on the customer relationship—rewarding those who pay their debt with regular transfers from their bank accounts and providing tools to help them retire their balances. Given consumption patterns and human behavior, there is no cause for concern that everyone will retire all of their debt. And by competing on value rather than price with tools designed to help customers solve their debt problems, banks could be rewarded with balance transfers.

Consider this example: A large regional bank we worked with had a 40 percent credit card penetration among its DDA customer base. The bank claimed that growing the credit card business was a challenge because it could only underwrite 50 percent of its customer base.

However, our research showed that the bank had only captured a third of its credit card customers’ spending and outstanding balances (or at best, 50 percent when large travel and entertainment cobrands from competitors were excluded). Consequently, the share of wallet and the share of the profit pool of the underwritable DDA customer base was only 20 percent— not the 40 percent the bank originally thought. We helped the bank capture growth with a second card that focuses on higher-FICO-score DDA customers instead of trying to gain the 10 percent of non-card customers the bank had been willing to underwrite.

For another bank, our analysis shed light on the DDA relationship’s impact on credit risk. Given the bank’s broad customer relationship and loyalty and its access to customer information, we concluded that the DDA relationship is worth an additional 20 FICO points in underwriting, allowing banks to take advantage of proprietary knowledge that competitors don’t have to extend the underwritable customer base. In addition, adding products such as secure cards and low-limit cards can extend the target population to almost 75 percent of total customers.

While some banks may think they are reaching their limits in terms of the business potential, focusing on the right metrics and opportunities uncovers tremendous room for growth. Retail banks can seize the credit card opportunity with a handful of moves:

Treat credit cards as a core component of the banking relationship, not as a separate business. Connect the value propositions—for example, by awarding credit card reward points for monthly mortgage payments to the bank from a DDA account or offering relationship-based pricing that tailors rates based on a customer’s current or potential value to the bank. For instance, Bank of America’s Preferred Rewards program offers different benefits depending on the customer’s combined balance in their banking and investment accounts. The higher the balance, the better the incentives, including higher reward bonuses on credit cards.

Capitalize on a valuable asset: customer data. Use the wealth of customer information to grow the credit card business. For example, mine bill-pay data to determine who makes large payments to another credit card provider and then offer cards to those customers. Or use data to estimate customers’ income and identify potential new card users. Analyze the unique customer information that banks have access to—change of address, a new job, a change in marital status, or an application for student loans—to anticipate customers’ evolving financial needs and reach out to potential new card customers.

Avoid the “build it and they will come” philosophy. Having the right value propositions is not enough. Create marketing campaigns that raise awareness about the benefits of bank offers, and target customers who are most likely to get a new credit card, such as younger people and wealthier consumers.

Develop capabilities in direct marketing and online sales. The Top 6 already have strong direct marketing and online sales capabilities. As branch traffic declines and branch sales practices come under closer regulatory scrutiny, direct marketing and online sales are becoming essential components of successful retail bank strategies. Digital capabilities in particular are vital: in less than 10 years, the “digital natives”—people who grew up with the Internet—will represent more than half of the US population and 43 percent of the total spending power. And digital behavior isn’t limited to younger people: consumers between the ages of 45 and 54 use mobile devices forInternet access like 18- to 25-year-olds did just four years ago.

Streamline the credit card application process. Develop and promote simple online processes that allow customers to fill out credit card applications on a mobile device. Promote digital channels for opening a credit card, and train branch and call center personnel how to promote these digital applications. Customers who open credit cards at smaller banks rely more on branches to obtain a card, which highlights the need for banks to upgrade their acquisition and account-opening approaches (see figure 9).

Charting a path forward

Kearney’s ASSESS growth diagnostic methodology helps size the opportunity and identify the most attractive ways for banks to grow their credit card business by answering a range of important questions:

Analyze the current credit card business:

What percentage of our DDA customers have a credit card with our bank?
How does card penetration compare to the percentage of customers considered underwritable?
What percentage of our credit cardholders are active users?
What share of wallet (percent of spend and percent outstanding) do we capture?

Select target audiences and the value propositions:

Which customer segments do we want to serve with credit cards?
Are our credit card offerings adequate given the target customer segments?
What are our competitors doing, and how do our value propositions compete?
What are the appropriate underwriting standards for each target customer segment?
What changes do we need to make to our credit card offerings?

Size the market opportunity:

Given the revised offerings, how many credit card customers could we have for each offering?
What share of wallet can we capture with each offering?
What are the expected credit card economics given the value propositions?
Which products should we offer, and what adjustments do we need to make to our value propositions?

Establish the growth strategy:

What targeting mechanisms can we put in place to attract the desired customer to each offer?
What improvements do we need to make to our sales channels?
What account management mechanisms are needed to engage consumers?
What should our approach be to marketing and communication?
What should our distribution strategy look like?
How can the DDA and credit card be linked to solve our customers’ problems?

Set up the implementation approach:

What should the implementation road map look like?
How will we meet the requirements to deliver on this road map?
What should our internal and external communication campaigns be?

Supervise the results, and revise the strategy as needed:

Which success factors and metrics do we need to track?
How do we track them and analyze them?
Based on the results, should we make any changes to the strategy?

Amid mounting regulatory pressure about cross-selling tactics, banks will need to keep a close eye on their sales practices with a prudent five-step program:

Review sales practice and incentives, such as structure, absolute amounts, training, and communication.
Identify suspicious accounts and transactions, and put a mechanism in place to flag them.
Interview and survey staff to gauge cross-selling pressure and compliance.
Adjust communication and sales processes to shift the focus from selling a new product to replacing one with a better product.
Measure and track customer value improvement, not just products per household.

Capturing the opportunities

More consumers are relying on credit cards as a main form of payment. Banks that recognize this and develop attractive value propositions and go-to-market strategies will be able to capitalize on this trend. A successful strategy will require taking a fresh look at the credit card portfolio and approach to market and being open to revamping the credit card business. With the right approach, banks will be able to grow their business in a profitable way.

Banks know that existing customers are more valuable than recently acquired ones. As a result, banks can capture a wealth of value by serving their existing customers—solving their real problems and replacing their external credit cards with bank-branded solutions that provide measurable value. The only way for retail banks to capture their fair share of the $10 billion in additional revenue that the Next 30 banks are poised to gain is with a new approach that shifts the focus from cross-selling to problem solving, from branch-driven marketing to direct marketing and online sales, and from one-off single-service cards to a deeper customer relationship.