Are Premium cards becoming harder to distinguish from Standard Classic cards? Is there still a place for them in the market?
Traditionally, Premium* cards (gold and platinum) were perceived as reserved for the lowest-risk, best-quality accounts, and so had higher limits. Spend was thought to be greater, though a larger proportion of full-balance payers made them less profitable than Classic cards.
However, over time the FICO Benchmark Reporting Service data for the UK reveals that the Premium customer is changing and so is the performance, particularly of the more mature accounts. In July 2017 25% of the accounts in the FICO Benchmark Reporting Service were Premium accounts, along with 25% of balances. With the exception of New accounts (<12 months on book), which were 20% of accounts and 20.4% of balances, Established (1-5 years on book) and Veteran (5+ years on book) accounts were about 25% of the relevant vintage population in the service.
Common Beliefs About Premium Cards vs. Today's Reality
- Limits are noticeably higher on Premium versus Classic – Whilst this has been historically accurate, the gap has narrowed over the last two years. In July 2015, Premium lines were 16% above the Classic average, compared to 11% in July 2017. Premium lines grew <1% over this period, so it is the rise in Classic lines that has generated the difference, increasing 5%. The vintage view is interesting - although Premium New and Established lines have fallen 0.7% and 2.1% compared to July 2015, Classic lines have risen 4.25% and 7.3% respectively, indicating Issuers are concentrating their limit increase campaigns on this subpopulation and initial limits are higher potentially to account for the promotional offers available.
- Average balances are higher as limits are greater – The majority of balances within our four different limit ranges are lower on Premium cards, e.g., balances on all vintages are lower than Classic for limits >£10,000.
- Spend is greater as limits are larger – Average totals sales (combination of merchandise and cash) are lower across all vintages for Premium cards.
- Premium accounts generate more interest – This remains true. New and Established Premium accounts generated less interest than Classic cards despite the many 0% balance transfer and low % purchase led offers available to this segment. In line with this, a lower percentage of active accounts generated interest.
- Delinquency rates are lower on Premium - Although average lines were 12% above Classic lines, 2-cycle average balances were more than twice as high. This was seen across all cycles and vintages. Whilst the percentage of 1-3 cycle accounts was lower for Premium, 1-3 cycle balances were higher. All Premium average delinquent balances are growing at a faster rate than current balances; the same is true for Classic, but with Premium the difference is bigger.
- The payments to balance ratio is higher – This remains the case.
- There are fewer overlimit accounts due to higher limits – The percentage of Premium accounts that are overlimit does remain noticeably below the Classic average. The Veteran amount overlimit, though, is 50% higher than Classic, despite average lines being just 12% above.
- Inactive accounts and inactive exposure are higher – This still holds true. The unused exposure on inactive accounts is higher for Premium across all vintages, most noticeably Veteran (35% compared to 29% for Classic). It will be interesting to see the direction issuers take on limit decreases due to the introduction of IFRS 9 on their Premium cardholders. Historically there were fewer decreases as customers were considered lower risk and due to the potential impact on the customer experience and attrition. With higher provisioning, this approach may well have to change to a similar approach across all types of cards.
Issuers could explore whether customer perception of Premium cards warrants maintaining their presence in the market. If they are no longer an attractive draw to new customers or are no longer a successful retention tool, issuers could consolidate products and concentrate efforts on their Classic offerings.
For information on the FICO Benchmark Reporting Service, contact me at firstname.lastname@example.org.
*Please note by Premium we are not referring to products that have ancillary concierge service offerings, but Premium does include reward accounts.