Which Credit Card Companies are Desperate for the Appearance of Growth?
Odysseas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The short answer to that question is whoever is offering credit cards that stand no chance of making them a dime. Free balance transfer credit cards would certainly seem to fit that profile, as their basis of profitability was seemingly wiped out by the passage of the Credit CARD Act of 2009. Their recent return therefore raises a number of important questions that potential investors should be aware of.
You see, these cards were cash cows when issuers were allowed to apply penalty rates and fees after the slightest mistake, engage in double cycle billing and universal default practices, and ensure that their customers’ most expensive debt was the last to be paid off. Now, constrained by rules preventing all of these practices, it’s tough to foresee a revenue stream emanating from a card that does not charge interest or fees for the entire time most consumers will have them.
That explains both the discontinuance of the No Balance Transfer Fee Discover More Card (NYSE: DFS) just about two months after it was introduced and why the No Balance Transfer Fee Slate Card from Chase (NYSE: JPM) – the only no balance transfer fee credit card currently offering 0% intro terms for longer than a year – is such a hot commodity. It also begs the question of why issuers decided to resuscitate this perceived-to-be-extinct credit card genre to begin with.
There are actually a couple of potential explanations:
- Profitability hubris: Who knows, maybe issuers like Chase actually believe they can make money off free balance transfer cards. They do offer the potential to cross-sell other, more profitable products to an expanded customer base lured by flashy 0% terms, but most people get 0% balance transfer credit cards with the intent of paying down what they owe and closing down their accounts.
- Outstanding balance sleight of hand: Outstanding balances are one of the most common metrics used to evaluate the size of credit card issuers and their growth. By adding a bunch of new balances via a sweet balance transfer credit card offer, a bank can therefore give the appearance that its credit card division is growing as well as manufacture lower delinquency and charge-off rates. These things would obviously make said bank more attractive to investors.
Ultimately, if you’re planning on investing in Chase, Discover or any other major bank that decides to come out with its own free balance transfer offer, you should be exceedingly concerned about its underlying motives in doing so. In other words, what does the need to offer a decidedly unprofitable product say about a company when the competition – Bank of America (NYSE: BAC), Capital One (NYSE: COF), Citi (NYSE: C), etc. – is under no such constraints? Nothing good, most likely.
Odysseas Papadimitriou is a former Capital One senior director and the current CEO of Card Hub, a credit card comparison website.
The Motley Fool has no positions in the stocks mentioned above. Odysseas Papadimitriou has positions in COF but has no positions in the other stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
