To say we are a nation that runs on credit might be a severe understatement.
According to statistics aggregated at CreditCards.com, the total value of general-purpose and private-label credit card purchases in 2012 was $2.48 trillion. Furthermore, there were 26.2 billion credit card transactions in the U.S. in 2012, up 38% from the 19 billion recorded in 2003.
Why are Americans so fixated with credit cards? It probably has a lot to do with the convenience factor of being able to purchase items on impulse, as well as having the leisure of paying something off over time. While these impulse buys do help spur the consumer-driven U.S. economy, it's also led to an average credit card debt per U.S. adult of nearly $4,900, excluding people with zero balances and department-store credit cards.
In other words, the credit card servicing business can be extremely lucrative for most companies considering the reliance of consumers on credit. But, choosing which credit card, or credit cards, to rely on isn't an easy task. Out of roughly 200 million credit card holders in the U.S., there are approximately 1.9 billion issued credit cards, meaning consumers can be overwhelmed by choice. This is why forging an emotional connection with consumers and building brand loyalty to create lifelong cardholders is especially crucial.
Why brand loyalty is critical for credit card companies
Yet measuring brand loyalty among credit card holders isn't cut and dried. That's why we'll turn to Brand Keys and its 19th annual Customer Loyalty Engagement Index to decipher which credit card brand Americans are most loyal to.
In order to measure brand loyalty, Brand Keys surveyed more than 36,000 people across 64 categories (with credit cards being one) to get a feel for how consumers perceive a brand and compare that brand to its peers. By examining how a brand interacts with consumers, and in turn how that brand is viewed by consumers, Brand Keys is able to formulate its ranking on brand loyalty.
The reason brand loyalty is so critical among credit card companies largely boils down to free word-of-mouth advertising. Credit card companies can advertise to their hearts' content, but the tried-and-true best method for attracting quality customers over the long term is for current users to talk up the benefits and satisfaction with their credit card company with family and friends. Loyal customers are far less likely to be fazed by variable rate hikes or late-payment penalty increases, making them either very profitable from a fee-based aspect for the credit card company, or a great customer in terms of low default or delinquency risk.
Now that you have a good idea of why brand loyalty matters, let's have a look at a few surprising companies that missed the mark.
You can't "bank" on these credit card providers
In total, 10 credit cards qualified for ranking in Brand Keys' 2015 CLEI, but one pattern became readily apparent in the rankings: Bank-issued credit cards performed poorly in terms of brand loyalty.
With the exception of JPMorgan Chase, whose Chase card ranked fifth, credit cards issued by Citigroup, Bank of America (NYSE:BAC), Wells Fargo, and Barclays ranked Nos. 7 through 10. Put plainly, banks still aren't well liked among investors or consumers, which likely stems from the housing bubble and mortgage crisis that's followed. A steady stream of legal settlements for the nation's largest banks -- including Bank of America, which has paid out $61.2 billion in settlements to the Justice Department -- have reduced faith and trust in large banks, all the way down to the credit cards they issue. It's certainly made generating extra income difficult for the United States' largest money center banks.
Payment processing facilitators Visa and MasterCard logos may adorn countless credit cards, but they only found themselves in the middle of the pack when it came to customer brand loyalty, finishing No. 4 and No. 6, respectively. While these stocks are a dream for investors because they boast no lender liability and thus can't be held liable for credit delinquencies, they also lack a corporate identity that consumers look to associate with. Since Visa and MasterCard aren't direct lenders, and their merchant networks are both enormous, consumers have a difficult time staying loyal to either brand.
Americans are most loyal to this credit card
Here's the plot twist you probably didn't see coming: a tie for first place!
One factor both Discover and AmEx take care of is that they act as both a payment processor and the lender. Handling both aspects of a transaction allows for more impressions with consumers and an easier ability to forge connections that Visa and MasterCard have clearly struggled to create.
It's also particularly profitable for both businesses to handle both aspects of a credit transaction when the economy is booming, as it allows them to double-dip by generating income from the merchant vis-a-vis processing fees, and the consumer through interest on credit card debt. Of course, the flip side to this is that AmEx and Discover can be exposed to delinquent loans when the economy weakens, so this is always something for investors to consider.
But, each company also offers its own unique factors that boost their brand loyalty. American Express, for instance, had (key word there, "had") two factors working in its favor that built brand loyalty. First, it's been allied with Costco, one of American's favorite shopping destinations, for more than a decade, but it's set to lose this partnership, as was recently announced. Secondly (and this is still well intact), AmEx targets affluent customers that tend to be loyal to what's perceived to be an exclusive club of cardholders and perks. Consumers wants to feel unique, and AmEx certainly does a pretty good job of it.
Discover, which isn't as targeted with its credit card offers as AmEx, instead relies on being well-rounded with special offers and rewards. The "Discover it" card was dubbed to be one of the best rewards cards by NerdWallet earlier this year because of features like a 0% APR on balance transfers for 18 months, a 0% APR on new purchases for six months, 5% cash back bonuses, free FICO scores, and a competitive interest rate relative to its peers. Consumers more and more are looking at rewards as a deciding factor in signing up for a new card, and Discover has found a nice formula for bringing in new customers and keeping existing cardholders loyal.
Although AmEx has some kinks to work through with the loss of Costco as a partner, both Discover and American Express have strong enough brand loyalty that investors would be wise to consider adding these stocks to their long-term portfolios if they're looking for some "supercharged" growth potential.
Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool recommends American Express, Bank of America, Costco Wholesale, MasterCard, Visa, and Wells Fargo. The Motley Fool owns shares of Bank of America, Capital One Financial, Citigroup Inc, Costco Wholesale, Discover Financial Services, JPMorgan Chase, MasterCard, Visa, and Wells Fargo and has the following options: short April 2015 $57 calls on Wells Fargo and short April 2015 $52 puts on Wells Fargo.
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