How should I approach the following question: estimate the market size of credit cards in the U.S.?

Banking Cases Market sizing Practice cases
New answer on May 27, 2020
6 Answers
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Peter
Skilled
asked on Apr 29, 2020

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Anton
Expert
replied on Apr 29, 2020
FREE 1st session in November | From Lawyer to MBB | Top in FIT | 10x your structuring skills | Message to get Free Prep Checklist

Hi, Peter!

In this case you should follow demand-driven approach to market sizing. By market size I would assume value of credit card debt in the U.S. (not the number of Credit Cards issued).

First of all you can start by outlying an algorithm which would consist of 3 big steps:

1. Total addressable market

X

2. Product penetration

X

3. Average ticket size

Now let’s see how to calculate each of these blocks:

1) Total addressable market = US population X % bankable population

2) Product penetration = number of credit cards per capita in US X % of active cards

3) Average ticket size = average credit card limit X %limit usage

  • average credit card limit is usually estimated though debt-to-income ratio. In case of credit cards it is 5 monthly salaries on average
  • limit usage could be derived from your personal experience but on average it is 20%

Let’s plug-in the data:

1. Total addressable market = 330 mln x 80% bankable population = 264 mln

X

2. Product penetration = 2 X 50%

X

3. Average ticket size = 4k USD X 5 X 20% = 4k USD

Thus credit card market size is 264 mln X 1 X 4k USD ~ 1tn USD

Let’s double check with official statistics. STATISTA.COM provides the following data: Value of credit card debt in the U.S is 0,93 tr USD. Thus our answer is super close

You can also make your calculations a bit more sophisticated if you add segments (e.g. by income or credit score). In this case you would have to provide detailed assumptions on product penetration and average ticket size for each segment.

As for the sources for your assumptions you can use:

  • Input from interviewer, well known facts
  • Statistical data
  • Personal experience, e.g. from casual everyday situations
  • Workplace experience, e.g. from working on projects in the industry
  • An educated guess
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Peter on Apr 29, 2020

Thank you for your help! Now it seems quite clear to me!

(edited)

Anonymous updated the answer on May 01, 2020

Hi,

I would address personal & professional credit cards in two different buckets

Personal credit cards

  • number of citizens : ~300M
  • people having at least 1 credit card : assume that people above 15 yo have a credit card (life expectancy ~80yo and assume equal ages distribution) so ~250M people
  • averaged number of credit card for each person : let's assume ~2 (in Europe for example should be around 1, in the US it's definitelly higher)
  • number of personal credit cards = 500 millions

Professional credit cards

  • number of citizens : ~300M
  • number of active workers (assume >20 years old) : 225M people
  • % of people working in private companies (assume that people working in public companies do not have professional credit card) : let's say 80% so 180M
  • % of people working in private companies having at least 1 credit card : assume only executive persons, probably around ~10% of the workforce so ~20M people
  • number of credit card : assume only 1

All in all, I would say ~520M of credit cards in the US !

Finally average fees / month for each credit card should be around 10 USD / month so 62,4 Bn USD / year overall

Hope it helps

David

(edited)

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Anonymous on May 01, 2020

But first of all, I would ask interviewer to clarify what credit card markets means (monthly fees ? transaction fees ? revenues implied by drawdowns on authorizations). My understanding is fees directly generated by credit cards issuance)

(edited)

Antonello
Expert
Content Creator
replied on May 01, 2020
McKinsey | MBA professor for consulting interviews

Hi Peter, in addition to the solutions proposed by the other coaches in the discussion, I would like to suggest similar cases in the platform to practice with:

  • https://www.preplounge.com/en/consulting-forum/how-much-would-you-charge-to-clean-all-the-windows-in-seattle-4965
  • https://www.preplounge.com/en/consulting-forum/market-sizing-milk-consumption-5087
  • https://www.preplounge.com/en/consulting-forum/how-would-you-calculate-the-value-of-a-cow-4982
  • https://www.preplounge.com/en/consulting-forum/estimate-number-of-traffic-lights-in-a-london-5692

Hope it helps,
Antonello

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Emily
Expert
Content Creator
replied on Apr 30, 2020
BCG Project Leader | 3+ years interview experience for BCG SEA recruiting | Kellogg MBA, NTU, Peking University
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Clara
Expert
Content Creator
replied on Apr 30, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

To add on top on what has been said: this is a very standard type of case.

The important thing here is not how accurate your estimations, but your line of tought (e.g., how do you pass from total market > total adressable market > penetration > exceptions, etc.)

Hope it helps!

Best,

Clara

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Udayan
Expert
Content Creator
replied on May 27, 2020
Top rated MBB coach with many offers /Ex McKinsey EM in New York /6 years McKinsey recruiting experience/Real cases

Hi Peter,

All of the answers have touched on the typical approach you can take here from a demand perspective. That works well and you will answer the question if you use it. Here's an alternative approach for you to consider

Take the average income in the US - $65k per household

Avg Household size - 2.5 - So we have roughly 128M HHs in the US

Now you can ask yourself what would be the amount of leverage I would be willing to give individuals from a credit card perspective. For example, if you say that you want to give up to 20% of annual HH income - that is roughly $13k per household. This is approximately $1.6Trillion annually. (you can get to this number in many ways - for example you can say rent is 30% - 50% of income, auto loan and student loans is 10-20% and you would not want to reach more than 80% debt to income/expense ratio.

Just a different way to get to the same answer

Best,

Udayan

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Anton gave the best answer

Anton

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