Are Chase and Discover Offering Unprofitable Credit Cards?
With Chase and Discover recently introducing and experimenting with free balance transfer credit cards, they have breathed new life into a genre that industry experts previously believed to be extinct. However, the moves have left many scratching their heads and questioning the profitability of such cards, as the reason for their original demise – the CARD Act of 2009 – remains in place. So, it’s fair to wonder, what are these issuers up to?
If we are to answer this question, a quick history lesson is in order.
Prior to the Great Recession, credit cards with 0% introductory balance transfer interest rates and no balance transfer fees were common.
Issuers were able to offer such products, which to the casual observer had no discernible earning potential, simply because they were able to revoke these promotional terms at the drop of a hat (e.g. due to a consumer missing a payment by a day or going over limit by $1) and replace them with high penalty rates. They were also able to force customers into paying their entire transferred balance prior to paying off any purchases made with their cards, which usually accrued interest at a high rate in the meantime.
However, with the enactment of a new personal finance reform law (the CARD Act) in February 2010 came myriad new consumer protections, which prohibited such practices and completely wiped out the profitability of free balance transfer credit cards.
With that being said, why don’t we explore some possible motivations for Chase and Discover giving out credit cards that, in my opinion, will never make them money.
Option 1: It’s a public relations ploy – Though highly unlikely, one could argue that Chase and Discover decided to offer such attractive terms in order to gain some valuable social currency. After all, credit card companies have been much maligned as a result of the aforementioned bait-and-switch tactics.
Option 2: They actually believe they can make money – Chase and Discover genuinely believe this is a profitable strategy that will come to fruition via a combination of cross-selling and profiting off balances that remain at the end of the 0% period.
While zero percent rates and a conspicuous lack of fees do generally catch the public’s fancy, most consumers open balance transfer credit cards with the express purpose of either paying off their balances within the allotted 0% period and closing their accounts or transferring whatever balances remain to another 0% credit card.
Option 3: Chase and Discover are desperate for the appearance of growth – Like a runner with worn out shoes, Chase and Discover are desperate for new balances, or that’s at least what all signs point to. The reason they’d want to add consumer debt to their portfolios is to give the appearance to the Street that their credit card businesses are growing. Adding to outstanding balances not only indicates growth, but also artificially decreases charge off and delinquency rates, which are key metrics tracked and monitored by investors.
Conclusion: Regardless of what motivated Chase and Discover’s decisions and how long these cards will be available, having to give away your product for free in a market where your competitors do not is certainly a sign of trouble for those companies’ credit card businesses – one which investors should keep a close eye on moving forward.
This article was written by Odysseas Papadimitriou, a former senior director at Capital One and the current CEO of Card Hub, a leading online credit card marketplace.