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SWOT's up, doc? The business of credit cards

by Peter Andrew

Credit card companies--in fact, pretty much all major companies--are likely to keep a SWOT (strengths, weaknesses, opportunities, threats) analysis up to date and widely available to senior executives. It's a great tool that not only provides a snapshot of where an enterprise is, but also can help managers devise strategies that allow a business to meet future challenges and make the most of opportunities.

So what might one of these look like for the credit card industry as a whole?

Credit card companies' strengths

  1. Profitability. When times are good, credit card issuers are amazingly effective at generating profits. As The Street, an investment website, put it at the end of July: "The purest credit card lenders are posting very strong earnings results, despite the weak economic recovery, and investors should pay heed." In fact, if you can't make money right now from the credit card companies' business model, you should probably go off and find a job in academia.
  2. Low maintenance. They don't have to care too much about their customers. Many, many credit card users are likely to be outraged by their card issuer's behavior at any one time. So they close their accounts and get a card from another company. But each company is pretty much as bad as any other, so it's a merry-go-round. And at the end of the year, every company has roughly the same number of customers as they did at the beginning. The industry even has a name for this process: "churn."
  3. Credit card use irresistible. Credit card users may not care for individual companies, but they love their plastic. According to Richard Barrington, writing for IndexCreditCards.com, there were 1.4 billion credit cards in circulation in America in 2010. They were held by 181 million consumers, which is 77 percent of the adult population. Amazingly, that averages out at 7.7 cards per cardholder.
  4. Customers not price-sensitive to credit card rates. At the time of writing, the federal funds rate is close to zero, and the Federal Reserve is indicating that it won't raise it before mid-2013. Average credit card rates, by contrast, are 16.5 percent. Nice margins, eh? But, at the same time, other Fed data shows that credit card debt is climbing again (see Credit card debt on rising trend). So presumably, many customers don't care how high rates go.
  5. Credit card regulation. You may think of this as a weakness or threat, and card issuers certainly hate it. But think about it: Without credit card regulation forcing banks to provide unrivaled consumer protection on purchases, using a credit card would be much less attractive. And without legislation outlawing "gotcha" clauses, customers would hate card companies even more.

Credit card companies' weaknesses

  1. Greed. You're going to find this hard to believe, but there are people working in the banking sector, including in credit card companies, who are greedy. This got them into trouble when the credit crunch hit, because some customers couldn't continue paying back what they owed. And the card issuers hemorrhaged money, something they could do again if they don't learn lessons.
  2. Little customer loyalty. Yes, it's a strength (from their point of view) that credit card companies don't have to invest in making customers love them. But one day they may regret their cavalier attitudes. All it would take is a new entrant in the market or one of the existing players breaking ranks for everyone to be playing catch-up over customer loyalty.

Credit card companies' opportunities

  1. Overseas markets. American card issuers have real opportunities in burgeoning overseas markets, especially as many in the third and second worlds see American brands as cool. Take China, for example. Synovate, a market research company, says: "The number of cards in circulation has skyrocketed from only 11 million in 2004 to over 200 million in 2010, and experts estimate the number of credit cards issued will continue to expand at double-digit rates over the next few years."
  2. Technological innovations. New technologies, such as near field communication (NFC) and virtual wallets could make payments simpler, and help maintain or raise levels of credit card use. And card issuers are already using social media websites and other online routes to build relationships with customers. Meanwhile, FICO and others are using new IT solutions to help card companies make smarter lending decisions.

Credit card companies' threats

  1. Credit card companies. Yes, they're their own worst enemies. And the biggest threat to them is their own capacity for greed and complacency. We need their products (many of them are really, really good), so let's hope they don't mess up.

Pedants' corner: In a normal SWOT analysis, strengths and weaknesses are factors that are internal to a company, while opportunities and threats are external. Given that this is an industry-wide analysis, some license has been taken.

Published 10/03/11


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