JPMorgan Chase & Co, Citigroup Inc 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. Banks cut back on advertising, mailings,
and rewards programs during the financial crisis, when losses jumped. But
the marketing is now increasing again.
BIG SPENDERS
So far, the big banks have shown no sign of seeking more
subprime borrowers 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.
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.
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.
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 which tracks card terms.
Some competitors have made new commitments to the
race. 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.
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