We are excited to have our next speaker. I'm Bryan Keane, of course, and it's about the 25th time I've said I'd cover fintech here for Citi Research. We're excited to have my Citi colleague, Pam Habner, who is the head of U.S. Cards. We have a great list of questions here for Pam to go through and talk a little bit about what we're doing in the cards business at Citi. First off, really excited to have you here, Pam. Thanks for coming.
Thank you so much. I'm delighted to be here.
Maybe you could just talk a little bit to this audience that might not know you as well. You can walk us through a little bit about your background and what led you to your current role of U.S. Consumer Cards business at Citi.
Sure. I started off my career as a consultant. I worked at Bain & Company, and I always say we're recovering consultants. We never quite give that up. Then I decided that I really wanted to pursue a career in general management, so I joined American Express, where I worked for about 20 years in almost every role you can imagine on the card issuing side, not the network side. A little bit in the commercial area, but mostly on the consumer side, managing products and acquisitions and all kinds of interesting things. I did do a dot-com detour, so I left Amex for three years, and I worked at two ad tech start-ups. One was called LinkShare, the first affiliate marketing company, and the other was DoubleClick, the first ad serving company. So I have a little bit of fintech in my background.
I went back to American Express, and then after many years, I moved over to JP Morgan. There, I worked in the credit card business for a couple of years, leading the proprietary products, launching Sapphire Reserve and a whole bunch of other things, and then also led the retail branch banking and wealth management team. So that was a very different job over in the retail bank and wealth side. That's when I got introduced to Citi and the amazing leadership team at Citi. I met Jane, Anand Selva, and a bunch of other folks. I never thought I was going to leave JP Morgan, but I got so inspired by being part of the next chapter of this great company that I joined Citi in the summer of 2020, right in the midst of the pandemic.
We've been on a journey ever since then to obviously transform the company and in the card business, to transform the business, and just excited this year to bring the two different card businesses at Citi, what was called, we call it legacy Branded Cards and Citi Retail Services, into one unified franchise that is now one of the five main businesses at Citi.
All right, that was awesome. I was thinking maybe we even start higher level up because we get, at Citi, such a good look at the health of the U.S. consumer. Maybe you could just talk about what you're seeing in activity levels and what the outlook might be for the holiday season, given your view on the consumer.
Yeah. So I would say despite a very uncertain macroeconomic and geopolitical environment, the U.S. consumer remains incredibly resilient. We're seeing very strong consumer spending. In third quarter, we saw spending up 11%. We see loans at a strong level as well, 6%. So the consumer is shopping, is borrowing, but in a very disciplined way. So we feel very positive about our base. Now, as a reminder, Citi operates in largely the prime segment. 86% of our customers are FICO 660 or greater, so we're not fully reflective of all elements of the U.S. consumer, but the place that we play in the prime space remains very strong. We do see higher spending in the higher FICO segments. That's always been the case, but we see pretty strong growth at every FICO level, every band.
People often ask me, "Do we see this K-shaped phenomenon persisting?" The answer is not as much so. We are kind of referring it to a soft K or a K kind of receding. We see definitely higher spend in the higher bands, but equal spending throughout. The broader picture, obviously, we spend a lot of time looking at macroeconomic variables. For the credit card business and for the U.S. consumer, we watch very closely unemployment. Unemployment has been pretty low. We just saw a pretty good jobs report, so we are at about 4.1%, and we expect that to largely persist. We watch very closely inflation in relation to wage growth. In recent periods, inflation has been in about 3.5%, 3.4%, but wage growth has been a bit higher.
If that were to shift, we might be a bit concerned, especially in an environment where consumer savings are not as strong as we would like them to be. But generally, the consumer is resilient. We expect that to continue. We talk to lots of experts, and there is a general feeling that the holiday season will be strong, kind of think mid-single digit growth in spending, around 5%. We will see how that plays out, but that is what we are generally seeing. The one thing that we do know, however, is that consumer sentiment is slightly different than consumer behavior. Consumer sentiment has been low. It stayed low. If you look at any of the surveys coming out of the midterms, you see the vast majority of U.S. consumers do not feel optimistic. They feel relatively pessimistic about the future and how their financials will look a year from now.
We watch that closely as well. There is a bit of the AI anxiety that is feeding into that phenomenon. But for quite some time, consumer sentiment has not matched actual consumer behavior.
I was going to ask about that because that seems unusual to me. Does it usually match, the sentiment usually matches the behavior? Because behavior, we have been waiting for this recession for five years. That has never happened. The consumer has been more melancholy about the economy, but continues to spend really well.
I would say, I've been in the credit card space for many years, and I would say for most of that time, consumer sentiment tracks consumer behavior. Over the past year or so, that has just not been true.
Yeah.
I don't know that I can fully explain it. I think there's just general anxiety about the uncertain geopolitical environment around us that's feeding into that, and then you add AI into the mix, and that creates more anxiety. I think it's that uncertainty. It started with uncertainty about tariffs and what would that mean, then uncertainty about wars and what that means. Obviously, there has been an impact to gas prices, fuel prices impacting airline prices, but people see that, they're concerned about it, but they continue to spend, they continue to borrow in a very disciplined way.
The U.S. card business that you outlined at the Investor Day earlier this year, can you just give us some of the key priorities, what you're focused on investing, and where's the opportunity to drive growth and gain market share?
We're really proud of our card business. We're a scale business. We serve 70 million consumers across the United States. We're operating largely at our target returns, which are through the cycle in the low 20s ROTCE. We're really proud of our business, but we do see tremendous growth potential, and we want to tap into that growth. At Investor Day, you may have seen, we presented what we called our virtuous cycle, our flywheel of growth. In the card business, you have to have guns blazing on a number of elements in order to unlock that growth. First and foremost is continuing to invest in class products. From 2022- 2025, we introduced 18 new products. We just introduced two new products this year, announced another set of products next year.
We will continue to invest and innovate on our products in a very highly competitive environment to stay cutting edge. The second thing is to increase our investments in acquiring new customers. This is a flow business, so you constantly have to bring in new vintages of customers, growing vintages of customers, and engage in the relationship with those customers so that they endure over time. In the card business, we talk about our J-curve. It is expensive to acquire a customer. It may take several years to pay back, but you need to keep that flow going. So we are investing more than ever in acquiring new customers. We just converted the Barclays American co-brand book to Citi that brought more than 2 million new customers to us, and we will continue to invest more in organic marketing and find some of those inorganic opportunities as well.
Once we have great products and we bring in more customers, the name of the game is to sustain a strong lifelong relationship with them, and we have to do that through a loyalty ecosystem. So we are investing in everything from strong rewards, strong travel, dining, entertainment, personal financial management tools to make sure our customers know that we have their back. We are giving them reasons to use their card that are rewards, and then beyond rewards, experiential benefits that create that loyalty and love for the product. The last piece of unlocking growth is being efficient. We enjoy a very strong efficiency ratio at around 37%. We are very proud of that, but we are constantly looking for ways to re-engineer our business to be more efficient so we can unlock more investment capacity to invest in products and customers and loyalty and growth.
AI has really taken center stage. We always are pushing on digitization, leveraging data and analytics, and now AI is helping us transform our processes to be more efficient to fuel more growth.
What is the future state of that business, and how does that fit into the objectives here?
Yeah, it's a great question. We're seeing shifts in the dynamic in the credit card space. It doesn't matter if you look at McKinsey study, a BCG study, et cetera. When you look at how the components of the credit card business is evolving, general purpose is the largest segment in a $1.2 trillion loan industry in the U.S., about 85%, and that has grown and is expected to continue to grow at a 5%-6% rate, a pretty healthy rate for a mature industry. If you look at the private label segment, it's much smaller and has been declining in the past couple of years, and is expected to continue to decline at about 3% into the future. Then you have point of sale loans that are growing and in some ways taking volume away from private label.
That's just a structural shift in the industry in which we operate. What we're doing is we're leaning into general purpose. You can see in our quarterly earnings, we're separating out our results for general purpose and for private label. We'll continue to invest more in general purpose, and as we grow that book, we'll see more growth. Again, if you look at some industry stats, you'll see that general purpose customers generally spend about 9x more and borrow 4x more than a private label. We see similar stats within our own portfolio. As we make that shift, the value of each customer is more, and that will also unlock growth for us.
No, that's great. Just thinking about the consumer and consumer preferences about, obviously, we've seen big adoption in the digital wallets.
Yeah.
As they adopt these wallets, how does Citi adapt with those general-purpose credit cards, and where do you see the greatest opportunities for growth and customer engagement?
Yeah, the name of the game for us is to always facilitate commerce with our card members in whatever form that they want to do it. Whether they go out and walk into a store, they want to use a digital site, they want to use a wallet, and now if they want to use an AI assistant. As technology's evolved, we evolved with it. First came, the 1990s, the online shopping and the credit card industry, and we made sure that consumers could use their credit cards online. Then came mobile and the arrival of digital wallets, the Apple Pays, the Google Pays of the world. Again, our job was to make sure that our cards were in the top of those digital wallets, and we're still on that journey. Really, it was COVID when wallets really took off.
It was longer than anybody in the industry expected, but boy, that hockey stick took off, and we keep innovating with partners like Apple Pay to allow Flex Pay on all Apple Pay transactions to create that stickiness. Now, we're reaching a new frontier, and that new frontier is agentic commerce. Agentic commerce is still relatively small, but we expect it will grow with the rise of the Meta Muses and the Instincts and the AI assistants of the world. Our job is to make sure that Citi cards are used by consumers either who use AI agents and assistants to help them shop or actually give them the authority to shop on their behalf.
We are working very closely with LLMs, we're working closely with networks and industry groups to make sure that card transactions are safe and secure, and then within Citi to make sure our customers know that we are a trusted provider and that they should use their Citi cards. The goal is to make sure that we maintain our primary relationship with our card members in any way that they want to use their cards, and I think that's going to be very important in this uncertain world of AI. We believe consumers will care very much about the safety and security of their transactions, and they can trust an institution like Citi.
Yeah, I was going to dig into that. We are at a fintech conference. On the AI side, when they do make purchase decisions and manage their finances, do you think it changes who owns the customer relationship when we get into AI and agentic commerce?
I think it is our job to make sure that we maintain the primary relationship with the customer, and that is what the work that we are doing with networks and LLMs and to create the guidelines so that a customer, when they are either shopping with the support of an AI assistant, because your agent becomes almost your super shopping assistant, or whether a consumer gives the AI assistant the authority to shop on their behalf, that they will know that it is a Citi card and they are backed by a Citi promise of safety and security. Because in this new world, if an AI assistant is shopping on behalf of the customer, they are still going to rely on Citi for the protections they enjoy now, protections against fraud, protections against disputes, insurances, and other protections. And we can only do that if they make sure that we maintain that relationship with the customer.
What are we doing at Citi that changes with AI, that changes personalization rewards? You touched on it a little bit, but just interested in thinking about new ways we are reaching the client as a result of AI.
Yeah. We think a lot about how AI will change the nature of our business and how customers interact with us. And there is a bit of offense and a bit of defense here. I will just start with the defense. We are leveraging AI tools to protect Citi at large. Obviously, with Mythos and other models out there, and bad actors having access to those types of tools as well, we are being very intentional about protecting our overall Citi cyber infrastructure. One level closer into the card business is fraud. We want to make sure that whether it is fraud or credit abuse, that we are using tools to detect those vulnerabilities and to protect our customers. It is protecting merchants, it is protecting customers, and we have a large agenda and a lot of investments around leveraging AI from a fraud perspective.
We are also being very careful about how AIs are gaining access to Citi accounts on digital or mobile and making sure that any of those access are authorized, and preventing that. But now you are saying that is just one aspect, that is the defense aspect. How do we take advantage of AI to support our customers and to gain share? There are two categories. This is more in the offensive play. One is to leverage AI to be better marketers of credit cards. Today, consumers shop for credit cards, to apply for a credit card through lots of different channels, but a very large one is through search. And working with companies like Credit Karma to go and search and compare for cards. We are now leveraging AI, something instead of search engine optimization known as SEO, we leverage generative search engine optimization known as GEO.
Leveraging AI models and working directly with LLMs so that when someone is searching for a credit card, the Citi card comes up. Then using new tools to have conversational applications, not a flat card application where you fill in blanks, but more of a conversational application that is much easier for customers to maneuver through. There is a whole body of work about marketing credit cards using AI. Then the very last bucket is, how can we use AI to power our products? I jokingly use the term "Museify." How can we Museify our customer experience?
If someone comes to a Citi site and they have a Strata card and they have 100,000 points and they want to book a trip, we want to have a conversational interaction with them to help them book that trip in the same way you might if you are using Muse, as opposed to a very static way of typing in a departure date and typing in and looking for a flight. It will be a conversational type of experience. We think all of those things are important to invest in, and they are on our roadmap now.
I was going to say, how long will some of those things take before you can get a full conversation going on?
I think it is imminent.
Yeah. Awesome. We have a lot of fintechs here, and I always try to think about financial institutions like Citi, thinking about friends and partners and frenemies and all the different ways. Citi obviously operates with all these competing with banks and lendings and payments. Just trying to think about across the fintech landscape, which companies do you consider more potential to help Citi grow, and which competitors like neobanks or buy now, pay later providers or others that you are a little more concerned on taking share?
Yeah. First of all, Citi as an institution banks many, many fintech companies and the like. So we have a very strong relationship with the fintech sector as an institutional banking entity and an investment bank. Now, on the consumer side, there is lots of different subcategories of fintechs, right? I think through the lens of credit card, starting a couple of years ago, there was a lot of questions about buy now, pay later fintechs, and were they going to encroach upon the credit card space, the Klarnas, the Afterpays of the world. The truth is, that has not really emerged as a major threat, and the reason is they serve a certain customer segment who is less likely to be eligible for a credit card.
If you have a credit card, you are more likely to use your card because you are going to get the rewards, the benefits, the safety, and security. If you are not eligible for a credit card, you are new to credit, that is a really great way for you to help finance a purchase over four equal installments. But we were inspired by the promise of installment lending, which is why we built installment capabilities into our credit card. We have something called Flex Pay and Flex Loan that allows a credit card customer within their credit line to take a transaction and break it down into installments, and to get a break on their APR for that. So in that way, there was an initial concern, would these companies encroach upon our business?
Answer, no, but we were inspired by the spirit of what they were solving, and we are now serving our clients with installments. Then there are other players that we partner with. I talked to you a little bit earlier about building out our loyalty ecosystem. So one area within that, we have travel and dining and offers and a whole bunch of things. For example, in the area of offers, it is really important for us to present to our card members the opportunity to use their card and get discounts at a range of merchants. All of the competitors in the space use that, and there we either partner with fintechs, we either build the capability ourselves, partner with fintechs, and in some case, acquire those capabilities.
In this case, we just announced a couple of months ago our intent to acquire a company called Kard with a K, and they have a really fantastic cutting-edge offers platform. In that particular instance, we said, "We think it would be best to do a strategic tuck-in of a fintech company, ad tech company, to accelerate our growth." There are other instances where we partner. In the dining space, we announced a partnership with inKind. I think there are some folks here. Our Citi Ventures team really helped broker that introduction. Instead of building a dining platform, we are going to partner with a start-up company that we think has a pretty slick solution and will add a lot of value. In general, I think we feel very confident in our position to play our own game.
We think fintechs inspire us because they are very good at typically a narrow customer experience and making that really terrific, and we can learn from that. In other cases, we might either partner or purchase their capabilities to accelerate our performance.
Yeah. The neobanks, is that much of a concern, their growth and that they capture more of the consumer mind share?
Yeah. We do think of neobanks more so in our retail banking space than in the credit card space. But again, I think we learn from the neobanks, and we take those learnings to bolster our position. But again, I do not know that we see that as a threat, but as a way for us to kind of play our own game and win with our customers.
Okay, got it. How do you balance these increasing investments in a business focused on maintaining the returns of low 20s target range?
Yeah, I mean, that's the age-old question for any general manager. It's a day-by-day battle to figure out how to prioritize investments. I talked to you about this flywheel, this virtuous cycle of investing in products, investing in acquiring customers, and investing in loyalty assets, and holding ourselves accountable to be efficient so we free up dollars to fuel and self-fund our own growth. But the way that we do that is a very disciplined way at Citi. We sharpen our pencils and we figure out what is the best optimal mix of investments to generate, on average and over time, those through-the-cycle returns in the low 20s. That means we invest in some things that have a very short horizon, a very close-in horizon. There are investments in automation that will pay back within a year. That's an easy decision to make.
Then there's kind of mid-horizon investments. Maybe it's launching a new product, a benefit, or service. That's going to take a little bit of time to pay back. Card acquisitions are probably the longer-term investment because they can take three, four, five years to pay back because of the acquisition J-curve that you have to grow through to get that payback. We're constantly looking at a balanced investment portfolio that together will drive that sustained and profitable growth. I mean, that's the essence of our job as general managers.
Then just to get to that mid-single-digit kind of CAGR over the near term, what are the revenue drivers in particular that will get us there?
You are referring, we have a through-the-cycle commitment to low 20s ROTCE. We also have near-term commitment to mid-single-digit revenue and loan growth.
Yeah.
I think that is what you are referring to.
Yeah, exactly.
The way that we generate revenues in the card business are through interest income, and for a bank like Citi, that is the vast majority of how we earn our money, on the loans that we generate, which is why, when we look at our position in the market, we look at our ranking as number 3 player in terms of loans. What do we do? The name of the game there is to acquire customers. We are playing the prime space, and really acquire customers and give them an incentive to use their card, to spend and rewards, but also give them strong lending features and benefits so that they revolve. The most profitable customers are blenders or transvolvers, people call them. They are customers who spend and occasionally revolve.
The reason we like them so much is because we get that borrowing interest income, but they are also good quality loans, and do not have high credit losses, right? You are always balancing more revolve comes with a little bit more risk, and we are always kind of balancing that risk-reward. That is the main way that we earn our revenue. Where we are growing and where we are going to lean into the future as part of this general purpose strategy is to get into more of the fee-based cards, which I would say has not been historically the focus of Citi, but over the past couple of years, we have been moving in that direction. That is with our fee-based co-brand card. Our AAdvantage portfolio has several fee-based products, as well as our new Strata family of products that come with annual fees.
Those annual fees cards are a nice complement to our interest income. Then we are looking at other new ways to earn fee revenue. We just announced last month that we are in the retail media space at Adweek here in New York, and that is a way for us to earn fee revenue with advertisers that want access to our audience of our customers, through our site and through other sites. We think that we have a competitive advantage in offering that solution, which would also create new fee revenue streams for us.
That is great. Just thinking about synergies, as Citi's global network client relationships and the broader ecosystem that creates advantages for the card business that may not be apparent from the outside, what are some of those synergies that you are looking for?
I would say we have a very strong set of partners, marquee brands that we work with, starting with American Airlines and Costco and Best Buy and Macy's and the like. Those relationships are Citi-wide relationships. American is a very strong relationship across our institutional businesses as well. There are some synergies in just how we manage our relationships. That also goes to not just our card partnerships, but other strategic partnerships like, for example, Mastercard and Visa. We have a large global network relationship with Mastercard that serves not just the U.S. consumer card business, but our commercial card business, which is part of services, and also other elements of our broad One Citi franchise, our debit cards that are part of our retail bank. There are broad relationships where we have synergies across.
We also have close relationship with our retail bank and our wealth businesses. About 60% of our banking customers carry a Citi card, so that's a great deepening relationship for us, and I think there's more opportunity for us to penetrate our wealth clients as well. Conversely, we're looking at opportunities to sell banking, checking, and savings, and accounts into our card customers. We have 70 million U.S. card customers. We share mobile and digital assets, and so we use those to make those banking relationships. There's a lot of really productive cross-sell that goes on in the consumer space, because the name of the game for us there is to create these multi-relationship customers. We call them MRCs, multi-relationship customers.
If a customer has a credit card and a banking relationship and a wealth relationship, that's a really deep relationship and one that we can grow.
Awesome. Maybe just to close, I was hoping you could talk a little bit about the change in culture. I see it every day in Citi, I've been here a little over a year. Just as you sum up the card business, maybe you could just give us a couple of the key takeaways.
Sure. I feel like the cultural change that Jane has orchestrated since taking on the role of CEO is really palpable. It's exciting to be at Citi. It's exciting to be at the card business now, one of the five businesses. I think the feeling that I get is, it's a winning culture. We want to deliver the best value for our customers. Customers are at the center of all we do, and we want to win in the market. Jane, I think, has come out with a phrase that we're all adopting because it really resonates is, "To be the best, we have to beat the best." So we're doubling down on investments in our products, our customer experience, to make sure that we deliver the best for our customers and we win in the market. There's just a lot of energy.
I think when I first joined six years ago, as I said, it was the heart of the pandemic. We had some regulatory things that we had to attend to, and that was kind of the focus. We're now kind of coming out, and it feels like a real growth-oriented culture right now. I think there's a culture, it's a winning culture, it's a culture of accountability, a culture of collaboration, this notion of One Citi. People actually talk about that in the hallways. It's a really exciting time right now at the firm.
Any just last final kind of summary thoughts on the U.S. card business for takeaways?
Just to kind of reiterate, we're really proud of the position that we have as the number three player, serving 70 million customers around the United States. But we do feel there's so much more that we can do, leveraging our proven business model, increasing investments in products and customers and loyalty, and really being a digital AI-led company. The amount of focus we have now to leverage AI to protect the firm, to power our products, to reimagine processes, and to make our people more efficient and more successful in their day-to-day jobs is really paramount, and a lot of energy and focus around that. We put that all together. We're excited about our position, but we feel like there's even more that we can do to unlock the full potential of this card business.
Well, Pam, we really appreciate you being here. It's part of the culture of Citi, so thanks for being at the FinTech Conference and thanks for doing this.
It's my pleasure. Thanks, everybody, for having me.