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Fitch: New Strategies Emerge as US Card Competition Intensifies
August 29, 2017 / 4:14 PM / 23 days ago

Fitch: New Strategies Emerge as US Card Competition Intensifies

(The following statement was released by the rating agency) NEW YORK/CHICAGO, August 29 (Fitch) Competitive pressures will likely remain high for U.S. bank credit card issuers, given the still historically high risk-adjusted margins in the credit card business relative to other consumer lending businesses, says Fitch Ratings. Competition has been especially acute in the premium card space, where Bank of America (BAC) will be the latest major bank to enter this segment when it launches its Premium Rewards credit card in September. BAC follows JPMorgan Chase & Co. (JPM), which launched its Sapphire Reserve in August 2016, and Citi, which recently boosted its signup bonus for its Prestige card in July. American Express (AmEx), which has been historically dominant in the premium segment with its Platinum card dating back to 1984, has also recently enhanced its rewards offering partly in response to competition. <iframe allowfullscreen src="//e.infogram.com/9e2fd186-98bc-4b13-b50a-42473b5b8d23?src=e mbed" title="Credit Card vs Auto APR" width="550" height="707" scrolling="no" frameborder="0"> Rewards competition has had an impact on premium card profitability, particularly on transactors - those customers that produce high levels of spend but do not revolve a balance. Notably, JPM said in December 2016 that its profit would be cut by $200 million-$300 million in 4Q16, largely due to the launch of its rewards-rich Sapphire Reserve card. At the time, JPM said that it would, on average, take seven years for a Sapphire Reserve customer to become profitable under its current rewards promotion. Increased focus on deepening customer relationships across multiple products and more sophisticated customer targeting will likely result in adjustments to reward offerings as the profitability of the credit card business moderates alongside interest rate and asset quality normalization. Specifically, selling credit card customers other banking and wealth management products and services are likely to become a more important driver of growth and returns, particularly for larger diversified banks. Larger diversified banks appear to be increasingly using credit card account acquisitions as an entry point toward broadening relationships with demographically attractive customers, as opposed to just seeking to gain transactional market share in the credit card business. Notably, the reward rate offered with the new BAC card is linked to the level of a customer's deposits and/or investments with the bank. This could be a potentially quicker path to profitability than other large, diversified banks' premium cards given its ability to offset higher reward costs with revenue from other customer relationship products. Conversely, card issuers lacking a full suite of consumer loan, deposit and/or wealth management products could be at a competitive disadvantage to the large diversified banks. In fact, card-focused issuers such as American Express and Discover have lost card loan market share to diversified banks over the past few years. Nonetheless, they may have to compete by other means. For example, AmEx's premium merchant discount rate and closed loop network infrastructure helps to maintain its structural competitive advantage. <iframe allowfullscreen src="//e.infogram.com/a5cb4ecd-f6ba-4279-a200-31f96082a4c2?src=e mbed" title="Market Share (Credit Card Receivables)" width="550" height="790" scrolling="no" frameborder="0"> As profitability declines, Fitch also expects card issuers to become more sophisticated in targeting customers with a higher probability of revolving credit while avoiding consumers who primarily open new accounts to take advantage of bonus sign-up rewards. Structuring rewards driven by continued engagement as opposed to upfront bonuses or making upfront bonuses contingent on larger initial spends may become more common. This should better match the costs of acquiring an account with the commensurate revenue stream and also reduce customer disengagement and/or attrition. Discover's Cashback Match program, which pays out the cash back reward only after the customer's one year anniversary of using the card, serves as a case in point. Contact: Michael Taiano, CPA Director Financial Institutions +1 646 582-4956 Fitch Ratings 33 Whitehall Street New York, NY Justin Fuller, CFA Senior Director Financial Institutions +1 312 368-2057 70 West Madison Street Chicago, IL Jared Kirsch, CFA Associate Director Financial Institutions +1 212 908-0332 Justin Patrie, CFA Senior Analyst Fitch Wire +1 646 582-4964 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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