Bankable Frontier Weblog

Last week, Bank of America announced that it would spend $35 billion to buy MBNA, the third largest issuer of credit cards in the USA. The Wall Street Journal commented: “For MBNA, the acquisition plan underscores the fading glory of stand-alone credit-card companies unaffiliated with banks. MBNA is one of a slew of such companies that took off in the 1980s when big banks were shedding card operations. But the stand-alones now are falling victim to slower growth and bitter competition.” Other monoline credit card companies, such as Providian, which made its name offering cards to higher risk customers, have also been taken over recently. The remaining large original monoline issuers are reported either to be considering their situation or broadening their own service offering through buying up banks.

The rapid growth of monoline card issuers was one of the most noticeable features of the consumer credit wave in the US in the 1990’s: more customers, of more diverse risk profiles than ever before, were offered more credit card accounts. Today, the average US user has 7 credit cards. Stand alone issuers such as MBNA benefited from aggressive marketing of cards; others such as Providian or CapitalOne from their risk underwriting processes and data mining capabilities.

The current wave of consolidation comes as no surprise as the industry pushes up against natural limits on consumer credit—after all, how many more cards can a wallet hold? Or more to the point, how much more short term, high cost debt can US consumers service?

How many more cards fit into your wallet?

Some commentators view monoline credit card companies as a vision for MFIs in the future: specialized in underwriting and servicing uncollateralized loans. Some bank MFIs already issue credit cards—see for example, MiBanco’s VISA offering to small enterprises in Peru.

In some ways, the comparison to monoline card issuers is unfair to MFIs. Many MFIs would consider the average bad debt experience of American credit card companies (5% per annum) as beyond the pale. However, credit card companies stress that it is the net interest margin, not the level of write-offs, that matters—as long as rates are high enough to absorb losses on riskier credit, who cares? Exactly because they care, some microfinance enthusiasts believe that this attitude illustrates the wide gulf between the two industries.

Such sensitivities notwithstanding, credit card companies in the US represent the apogee of widespread access to consumer credit. By contrast, most micro-lenders have a ways to go to provide easy, flexible credit at point of sale for their clients: many microcredit products are still cumbersome to access, slow to pay out and rule-bound. However, widespread use of credit cards requires at least a widespread acquiring network of point of sale devices (or ATMs) where they can be swiped. In the past, the telcoms infrastructure of many developing countries was too expensive or limited to allow this. However, as wireless networks proliferate, enabling real time connectivity, and as cell phones become themselves limited point of sale devices (see previous blog), this obstacle no longer exists.

They go together, like…

So, expect rapid growth in the credit (and debit) card industry in the lower middle income markets of the developing world. Hungry issuers from slow growth markets, such as MBNA, will drive some of this; MFIs and local banks becoming card issuers will drive the rest. However, as last week’s takeover announcement shows, having a predominance of monoline credit card issuers may only be a stage of growth through which the sector passes. The demand for an integrated consumer offering and access to lowest cost funding may then also drive the credit-only MFIs of the future into the pockets of larger banks. Credit-only strategies may have only medium-term shelf lives. But large untapped markets for cards in developing countries will ensure that the ‘sell by’ date for specialized credit providers is not for a while yet.