| NEW YORK
NEW YORK Oct 17 Morrie Low, a 27-year-old
Seattle cocktail server, has found an unlikely new source of
pleasure: credit card companies.
After working off card balances he built up during college,
Low started collecting new cards in May specifically to reap the
increasingly lucrative travel awards banks are offering to
encourage spending on their cards.
In August, Low snagged a new Sapphire Reserve card, from
JPMorgan Chase & Co, which has become a magnet for
millennials willing to pay the $450 annual fee for a sign-up
bonus worth as much as $1,500 in travel, plus $300 in annual
spending credits and more freebies.
Now Low is planning a trip to Germany with his girlfriend on
JPMorgan's dime. "I have never been to Europe, so that is
something pretty cool about this hobby," he said.
The Reserve card opens up a new front in the war among banks
to build up their lucrative credit card businesses. While it may
be fun for customers, investors and analysts worry that battle
will eat away the fat profit margins that made the sector so
attractive to banks in the first place.
"You have five or six big national players and they are
going around killing one another," said Chris Kotowski, an
analyst at Oppenheimer & Co.
METAL CARDS RUN OUT
Low illustrates the problem. JPMorgan won't know if he will
become a profitable customer for another year because the
up-front rewards are so great. He may drop the Reserve card
before the next annual fee. He has already acquired two more
cards and now is spending on those to meet their requirements
for more sign-up bonuses.
And he doesn't intend to borrow on his cards. That could be
bad for JPMorgan because credit card companies historically have
made about three-fourths of their revenue from interest. The
rest has come from fees, which are being whittled away by the
rising costs of the givebacks.
Still, JPMorgan executives say they are thrilled that many
more young people applied for the Reserve card than they ever
expected. That's especially true with millennials - people who
reached adulthood around 2000 - who are the next generation of
depositors and borrowers.
"It has been a huge success," said Kevin Watters, the bank's
chief executive for cards. The bank so underestimated the demand
that it quickly ran out of its initial stock of metal cards and
had to resort to plastic for a while.
To make money from the card, JPMorgan has to have the right
mix of customer spending, annual renewals and borrowing with
repayments, said John Grund, a partner at card industry
consulting firm First Annapolis.
Marianne Lake, JPMorgan's chief financial officer, declined
to say how much card debt the bank needs customers to take on.
"I am not going to give you the details of our business
case, but I will tell you that we obviously have a lot of
experience in a number of different (card) products," Lake told
reporters on Friday after the bank posted results.
Historically, airline travel award cards have been
successful, with about 50 percent of customers borrowing, said
Grund. High-fee cards used by the wealthy have worked with less
borrowing, but with less valuable incentives than the Reserve
Like JPMorgan, Citigroup Inc also has been spending
hundreds of millions of dollars to encourage additional spending
and borrowing on its cards.
The other two banks among the four biggest in the United
States, Bank of America Corp and Wells Fargo & Co
, have also been looking for more card business, but less
Citigroup intensified the card war last year by giving
retailer Costco Wholesale Corp such a sweet deal for
running its Costco card that it took the business from American
Express Co, which said the winning terms were
Citigroup said on Friday that its Costco deal drove spending
on its cards to $73 billion in the latest quarter, 57 percent
higher than a year earlier. JPMorgan said spending on its cards
rose 10 percent to $139 billion.
The banks do not report clear and mutually comparable
figures for actual profits from cards. But executives say cards
are among the most profitable of any business, with returns on
equity of as much as 25 percent, about twice banks' recent
Citigroup's Costco deal fueled a round of concessions by
banks to renew contracts with other retailers, hotel and airline
companies for co-branded cards. JPMorgan's new deals with
Southwest Airlines, United Airlines, online retailer Amazon.com
and others, for example, will cut revenue by about $900 million
annually, the bank said earlier this year.
Now, with the Reserve card, JPMorgan has "fundamentally
changed the calculus for what makes a premium credit card," said
Sean McQuay, who tracks card offers at online personal finance
website NerdWallet.com. Citigroup, he said, needs to respond
with more givebacks on its Prestige premium card.
Citigroup Chief Financial Officer John Gerspach disagrees.
The Prestige card is already a "strong offering," he told
reporters on Friday. JPMorgan, he said, has "a very attractive
offer on the table right now. We will see whether or not that is
Earlier this month, American Express increased rewards on
its Platinum card, the traditional leader among high-fee cards.
American Express spokeswoman Charlotte Fuller said the move was
not a competitive response, but a coincidental improvement for
The intense competition over card rewards has its roots in
the financial crisis of 2008. Post-crisis reforms reduced the
profitability of other businesses such as mortgages and capital
markets trading, encouraging banks to turn to cards for profits.
And, within that business, the reforms pushed banks from people
with lower credit ratings toward creditworthy customers who
respond to incentives.
And lately, the banks have had the means to bid more for
customers because loan losses have declined to record lows.
At the same time, cardholders have become more savvy about
working the incentives.
Ivan Drucker, a New York City-based consultant to Apple
computer users, recently used awards from a strategically
managed mix of credit cards to travel in luxury to Finland.
Drucker, 46, said he borrowed on cards at high rates in
years past, but he's determined not to do it again.
"For me, there's personal redemption in this," Drucker said.
"They got the better of me. Now I hope to turn those tables."
(Reporting by David Henry in New York; Editing by Bill Rigby)