Credit card companies are pulling out all the stops to lure new customers, and it turns out consumers are getting more savvy, taking advantage of the generous rewards credit card companies are willing to offer. That, according to a report by Reuters, is starting to worry some of the analysts that cover the U.S. credit card sector.
Chris Kotowski, an analyst at Oppenheimer & Co., said in the Reuters report that there are five or six national players, and “they are going around killing one another.” The problem with offering generous rewards points, perks and other benefits is it’s not clear if these consumers will become profitable customers for them once the upfront rewards are gone. After all, consumers can simply drop the card and move on to another one that is offering more generous perks. What’s more, they may make a move ahead of getting hit with any annual fees. Take JPMorgan’s Reserve Card. Reuters highlighted the example of a consumer who is using the rewards but may not necessarily stay with the company and the card over the long run.
John Grund, a partner at card industry consulting firm First Annapolis, told Reuters that, in order for JPMorgan to make money on the card, it will need the right mix of customer spending, annual renewals and borrowing with repayments. Grund noted that airline travel rewards cards have traditionally been successful with around 50 percent of customers borrowing. High-fee cards geared toward wealthy people have also worked with less borrowing, but they were equipped with “less valuable incentives than the Reserve card.”
JPMorgan would not say how much credit card debt the customers would need to take on. “I am not going to give you the details of our business case, but I will tell you that we obviously have a lot of experience in a number of different [card] products,” Marianne Lake, JPMorgan CFO, told reporters on Friday (Oct. 14) after reporting quarterly results.