US banks ramp up credit card lending but margins may suffer

As traditional Wall Street moneymakers like stock and bond trading suffer, banks are growing increasingly willing to invest in less glamorous operations: their credit card businesses.

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.

More attractive

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 per cent or more of their income from credit cards, after excluding businesses they are shedding. That is up from about 15 per cent 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 per cent more offers for credit cards this year compared with 2010.

Big spenders

So far, the big banks have shown no sign of seeking more sub-prime 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 per cent to the banks and the processors of the transactions. That fee income is stable and low risk.

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 per cent or more. About 25 to 30 per cent of card customers fit into this category and generate as much as 90 per cent of card profit, according to a September report from the Boston Consulting Group.

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