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 JPMorgan Chase & Co, <JPM.N> Citigroup Inc <C.N> and other big banks
are making more credit card loans, after years of focusing mainly on
customers who paid off their balances each month. Lenders hope that
in an era when consumers are conducting more of their banking online
and less in branches, an increased emphasis on credit cards will
help them sell more products to their customers.
The shift underscores how seemingly staid businesses have become
increasingly attractive on Wall Street as tougher capital rules and
lower trading volume have cut into profits at trading units. Bank of
America and Citigroup now make about 25 percent or more of their
income from credit cards, after excluding businesses they are
shedding. That is up from about 15 percent before the financial
crisis.
Analysts will be closely watching credit card results as banks post
earnings this week. They are primed after seeing Citigroup, for
example, take in more revenue from cards last year than from stock
and bond trading, and after seeing card loan balances increase this
year in national banking data.
Bank executives have noticed a change in how rivals are pushing for
more card business.
“A lot of companies are getting back to marketing their products
aggressively,” said Eileen Serra, chief executive for cards at
JPMorgan, which was earlier than others with a bigger push into the
cards business.
Banks cut back on advertising, mailings, and rewards programs during
the financial crisis, when losses jumped. But the marketing is now
increasing again. According to Mintel, a market research firm, banks
are on track to mail out about 17 percent more offers for credit
cards this year compared with 2010.
BIG SPENDERS
So far, the big banks have shown no sign of seeking more subprime
borrowers, industry experts say, but some expect banks will
gradually ease credit standards as increased competition and the
drive for higher profits pushes them to look harder for new
borrowers.
In the years after the financial crisis, banks focused on credit
card customers who were big spenders, charging upwards of $15,000 a
year on their cards, but who also generally pay down their balances
in full every month. They make little money directly from these
customers, but they earn high fees from merchants: every time a
consumer spends using a credit card, the merchant pays fees of
roughly 2 percent to the banks and the processors of the
transactions. That fee income is stable and low risk.
“The lending business generates significant, sustainable, quality
revenue,” said Jud Linville, the chief executive for Citigroup’s
branded cards.
However, the potential profit growth from those fees is tailing off
because of intense competition. Spending on JPMorgan Chase cards
increased 12 percent in the second quarter from a year earlier,
while fee revenue after rewards program costs fell 1 percent.
Banks are all looking for the holy grail: consumers who spend a lot,
and will carry a balance from time to time, including all the
interest rate charges that often run to a rate of 15 percent or
more.
About 25 to 30 percent of card customers fit into this category and
generate as much as 90 percent of card profit, according to a
September report from the Boston Consulting Group.
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Finding these customers is not always easy, but "teaser rates", such
as offering low or no interest charges for the first year the
consumer uses the card, is one way to win them. Good customer
service can also help.
There is some evidence that consumers overall are more willing to
borrow on their credit cards. Banks' outstanding credit card loans
rose at a seasonally adjusted, annualized rate of 5.5 percent in
September, Federal Reserve data show, far exceeding 2013's increase
of 0.8 percent. While the pace of card loan growth has varied in
recent months, bankers - such as JPMorgan Chief Financial Officer
Marianne Lake - have said they are increasingly optimistic about
rising balances.
“ARMS RACE”
Since the financial crisis, banks have competed intensely for big
spenders by offering rewards or cash back on credit cards. But by
now almost all of the most creditworthy customers already hold cards
that pay rewards, said Marianne Berry, a managing director and
payments expert at Auriemma Consulting Group.
At this point banks are in what Berry called an "arms race" to make
their rewards programs attractive enough to lure customers from
other banks and to keep the ones who have already signed on.
Cash-back offers have increased from 1 percent of spending under
certain conditions to 1.5 percent with no conditions. Citigroup has
introduced a card that offers 2 percent cash back, 1 percent when
the charge is made and 1 percent when the customer pays his or her
credit card bill.
That 2 percent is "kind of the limit" of what banks can practically
afford to pay in cash back or other rewards because of the costs of
preparing statements, issuing cards, and providing account security,
said Odysseas Papadimitriou, founder of CardHub.com, which tracks
card terms.
Citigroup’s Linville said the card drives enough revenue for the
bank that it makes sense.
Some competitors have made new commitments to the race. Wells Fargo
& Co, the fourth-biggest U.S. bank by assets, earlier this year
teamed up with American Express Co to offer two new cards designed
to appeal to big everyday spenders or frequent fliers as it tries to
bulk up its card portfolio. The bank made another deal with retailer
Dillard's Inc in April to offer and service credit cards to
store customers.
Portales Partners analyst Charles Peabody said the increased
competition is going to yield profits that are less than many people
anticipated, which will likely spur lenders to take more risk. “They
are going to get more aggressive,” he said.
(Reporting by David Henry; Editing by Dan Wilchins and Martin
Howell)
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