October 17, 2014
Banks in the U.S. are realizing that they are not generating enough revenues from traditional monetary products like stock and bond trading. Big banks like JPMorgan Chase and Citigroup are now focusing more on products like credit card loans. Banks wish to leverage the fact that consumers are conducting more and more transactions online and rely heavily on credit card usage. This gives banks wide opportunities to push their credit card based products.
Why the new focus on credit cards?
Wall Street banks have not been able to generate much profit in the trading business. Tough capital rules and lower trading volume are cutting into the profits. Banks are generating more revenues from credit cards. Bank of America and Citigroup now make 25% of their income via credit cards. Analysts are keeping track of credit card earning results which will be released soon. The results will show whether it is more feasible for banks than stock and bond trading.
Rival banks are trying to push their card businesses more. They are marketing credit card products aggressively. According to one market research firm, banks are likely to increase their offers for credit cards by about 17%.
The search for ideal customers
Banks have two major concerns if they wish to gain more share through the credit card business: the increased competition and the need for higher profits. This would eventually push banks to attract more new borrowers and will force banks to gradually ease the credit standards.
Earlier, banks used to focus only on credit card customers who were big time spenders but perhaps also paid their balances in full every time. Banks do not gain much income directly from this customer segment but do so indirectly via merchants. Banks earn higher fees from merchants as they drive more consumers spending.
The growth from merchant fees is fading off because of competition. Banks still find those customers as ideal who spend on a higher scale. 25% to 30% of the card customers fall into this ideal category but they are not always easy to find. Banks try promotional schemes, like waving off interest charges for the first year, in order to attract more customers from this segment. Good customer service is also something which helps.
Lure customers from competitors
Banks have been competing intensely for the ‘big spenders’ offering rewards and cash backs. A saturation stage has been reached since worthy customers already hold cards that offer rewards. So, how do the banks sign up more customers?
In the current scenario, banks are fighting hard to offer rewards programs attractive enough to lure customers from other banks. Cash back offers now reach up to 5%, sometimes in rewards, with no conditions, a noticeable change from before. Banks like Citigroup are going ahead by offering more than 1.5% in cash backs.
Other visible trends include collaborations with different stakeholders. Earlier this year, Wells Fargo teamed up with American Express to design new cards more appealing to big spenders. Wells Fargo also made a deal with the retailer Dillard to promote credit cards