When Chase and American Express unveiled plans to enhance rewards for their luxury credit cards—and raise their fees—it seemed that these lenders were focusing on the most rock-solid customer base amid economic upheaval.
Though macroeconomic factors have played a part in the renewed focus on affluent customers, these moves involve much more than is apparent at first glance.
As Brian Riley, Director of Credit Payments at Javelin Strategy & Research, detailed in the report Amex and Chase Face Off on Credit Cards, but the Backstory Is More Interesting, smaller credit card issuers can take critical cues from the top issuers’ strategies.
The Timing Is Perfect
In addition to the economic backdrop, the credit card industry is approaching one of the most important shifts in dynamics in decades.
“You have the biggest merger in the history of credit cards going on right now with Capital One and Discover,” Riley said. “The timing of doing this is good because they’ve got to integrate this portfolio, and all of a sudden Chase is going to lose its position as top issuer—it’s now going to be the new Capital One. With all the chaos, the timing is right for Chase and Amex to readjust this piece.”
The issuers are recalibrating by addressing the three best segments in the credit card market.
First are the big spenders, who can afford to make the substantial investment in a product that others receive for free. Next are the strategic buyers, who are willing to pay a high fee for the potential to reap high rewards. The final segment is responsible cardholders, those who have FICO credit scores above 720.
Another attractive trait about the premium segment is that Discover doesn’t have an offering in this space. Capital One does—with its Venture X card—but the$395 annual fee card doesn’t deliver the same caliber of rewards as the Chase and Amex products do.
“Capital One and Discover are middle-market players, but they do have some great accounts,” Riley said. “So here the two biggest players on the premium side aim directly at the top-end segment, so that’s a big deal.
“There are subsegments within that, because you also have the smaller banks in the mix. Here, you are taking on little community banks; you’re marching into their area. You’re presumably going to be taking the top of all their customers and leaving the middle-market stuff there, so the portfolios become less sound outside of Chase and Amex.”
Safeguarding the Segments
Smaller banks won’t be the only institutions affected as Amex and Chase duke it out over premium cards. Other top issuers, such as Bank of America, Citi, and Wells Fargo, will have to shift to defend their top customers.
However, the affluent cardholder base isn’t the only segment that these institutions must safeguard.
“Another big thing here is that—for the first time—Chase is adding their small-business card into the mix,” Riley said. “Now, Amex has always done that in the Platinum card, but it shows you how Chase is addressing the market. That is a real big focus, and it’s a great time to be in the market because with small businesses—yes, some will fail—but many will succeed, and it’s a good choice.”
Investing in the small to medium-sized enterprise market is a strong strategy because typical card spending ranges from $20,000 to $50,000 per month. The arrival of Chase means other issuers must reevaluate their offerings to this sought-after segment.
Betting Against Regulation
Additionally, the moves by Chase and Amex are revealing about the regulatory environment. The credit card industry has come under the microscope in the past few years because of the fees charged to merchants and consumers.
While the Dodd-Frank Act reduced interchange fees on debit cards many years ago, it did not affect credit cards, because credit cards are an independent product not governed by the FDIC.
Some regulators have attempted to remedy this with the Credit Card Competition Act (CCCA), which sought to force price controls on credit card interchange.
“The CCCA has been looming out there, but it is far from being the law of the land,” Riley said. “Here, we’ve got the two of the largest credit card organizations who are really mature—Amex and Chase have been strong players in the U.S. credit card market literally from Day 1. Their bet is the CCCA is not going to happen when you see these premium cards enter the market, or else the revenue dynamics could not support the reward offers.”
Because two of the strongest credit card issuers are enhancing their premier reward programs, other issuers should consider following suit. However, this should be done only if the issuer’s business allows for it. Adding 100 basis points to a card might make it more competitive but also makes it less profitable.
Another area where smaller institutions can follow in the footsteps of top issuers is by benchmarking their card data. Companies like Chase and Amex are constantly adjusting their products based on market conditions, as evidenced by data from Javelin’s Card Bench, a competitive intelligence card acquisitions tool.
“Offers get honed through the year,” Riley said. “We tracked that there were more than 1,200 different offer changes on just the 200 cards provided by the top 10 issuers. It shows you that when Chase does something, Citi reacts. Or when Amex amps up an offer, Bank of America antes up. You take the United Airlines Card from Chase and they compete against the Delta card from American Express—when one adds 10,000 points, the other adds 12,000 points.”
Protecting Against an Unbalanced Market
In addition to fine-tuning their offerings, issuers should also constantly reevaluate their relationships with their customers, across all segments. Many of the top banks, such as Wells Fargo, have long been focused on cross-selling other financial products to their existing customers.
“You just don’t have one Wells Fargo product, you have a few others,” Riley said. “Chase is very strong with in cross-selling their financial products. They’ll solicit you for a credit card, and once you get in there, they’ll see how you are, and they’ll go for your deposits. That’s a really healthy way to do this.
“There are some banks that do that better than others. Bank of America has a great program for that, and it’s a good time for issuers to be doing that. So does U.S. Bank. Nobody knows what unemployment is going to be, and new tariffs are still funky. The timing is interesting, but you have to keep in mind the whole risk of credit cards is still unbalanced right now.”
Disclaimer: This story is auto-aggregated by a computer program and has not been created or edited by finopulse.
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