By Robin Sidel
Credit-card companies are clamoring for customers like Heather
Fowkes Rusert.
The lawyer and mother of two small children carries a bunch of
plastic in her wallet but favors credit cards branded by Amazon.com
Inc. and Banana Republic because they offer perks that she can
later apply to other purchases. She said she tries to time her
shopping to periods when her branded cards are offering special
rewards, such as triple points.
"I take the rewards and use them when I am buying shoes or
clothes for the kids," said Ms. Rusert, who lives in Pittsburgh
with her husband, a college guidance counselor at a private high
school.
Stuck with slow growth prospects in a saturated market, banks
that issue credit cards are increasingly churning out cards that
are aimed at creditworthy customers loyal to a store, airline or
hotel. Known as co-branded credit cards, these cards fell out of
favor after the financial crisis, as issuers pulled back credit
generally in the recession. Now, issuers are battling for these
blocks of customers, which are prized for their loyalty even though
they aren't always as lucrative for the banks.
Merchants, meanwhile, are capitalizing on the competition for
their customers by extracting better terms, often including a
percentage of the profits.
Banks are eager to expand their credit-card loan portfolios,
which remain one of their most profitable businesses as other
profit centers have been dented by low interest rates, uneven loan
demand and rising compliance costs, industry executives say.
Personal spending and household debt also are edging higher now,
reflecting cautious consumer optimism on the economy.
But with more than one billion U.S. credit, debit and prepaid
cards already in circulation--the average credit-card owner carries
3.7 cards--issuers are finding it harder to attract new customers.
Consumers often don't respond to card pitches that come in the
mailbox, and many younger shoppers prefer to use debit cards over
credit cards.
"Card companies aren't going to mail their way to growth in the
current market," said John Grund, a partner at First Annapolis
Consulting Inc., which specializes in the card industry.
Partnering with an established brand is considered a more
efficient way to grab customers, he said.
Nearly 53% of all U.S. credit-card users had a card in 2014 that
was associated with a hotel, airline or other type of merchant or
group, up from 46.4% in 2010, according to a survey conducted by
Simmons National Consumer Survey data and compiled by Packaged
Facts, a marketing firm. The companies don't break out the size of
their co-branding businesses.
The battle for control of co-branded credit-card portfolios has
intensified in recent months, leading to a scramble among issuers.
In one of the biggest upsets so far, Costco Wholesale Corp. dropped
a 16-year-relationship with American Express Co. and struck a new
deal to issue a co-branded card with Citigroup Inc. on the Visa
Inc. processing network.
Other co-brand cards also are changing hands. Energy company BP
PLC's co-brand card is switching issuers this week, moving to
former General Electric Co. unit Synchrony Inc. from J.P. Morgan
Chase & Co.
Elsewhere, Bed Bath & Beyond Inc. is looking for a new
lender to issue its co-branded card after its current arrangement
with U.S. Bancorp expires, according to people familiar with the
matter. Representatives for both companies declined to comment, but
a recording on the card's customer-service line said the bank isn't
accepting new applications.
Co-brand deals are appealing to merchants like clothing retailer
Forever 21 Inc., which for the first time is seeking bank partners
for a potential co-brand card, according to people familiar with
the matter.
"At this stage we are still in very early stages of exploring a
co-branded card with a view to a larger loyalty program," said
Kevin Fegans, Forever 21's director of global communications.
Telecommunications firm Verizon Inc. has considered a co-brand
card in recent months, but it isn't clear if it still is pursuing
it, said people familiar with the matter.
A spokesman for Verizon declined to comment.
Merchants typically negotiate lower card fees in a co-brand
relationship and sometimes share in revenue that is generated from
the card, said industry executives.
Charles Schwab Corp., which stopped offering a co-brand card in
2010, recently announced it will launch a new card with AmEx next
year. "We continually look for ways to better meet the needs of our
clients," said a spokesman for the online brokerage.
Still, not all lenders want to go after merchant partnerships in
the increasingly competitive co-brand business. Discover Financial
Services has backed away from co-brands after former partner
Wal-Mart Stores Inc. in 2014 ended its nine-year card-processing
relationship and struck a deal with MasterCard Inc.
"The co-brand market seems to have really heated up and it has
become very competitive in terms of [financial] terms. And that
makes me glad that we're not in the co-brand business," Discover
Chief Executive Officer David Nelms said in a conference call last
month.
Commerce Bank, a regional lender in Kansas City, Mo., is taking
a slightly different approach by striking "affinity" card deals
with colleges, universities and specialty organizations. Affinity
cards typically don't offer big perks like co-brand cards but are
aimed at consumers who have a particular relationship with an
institution.
The Commerce Bancshares Inc. unit has roughly 40 affinity-card
relationships, up from five in 2010. The bank, which recently
announced deals with alumni associations from Southern Illinois
University and North Dakota State University, expects this year to
outpace the dozen affinity deals it signed in 2014, said Carl
Bradbury, its director of consumer-card products.
The deals allow the bank to "market directly to a decent-sized
group of people that we don't do business with right now" even if
they don't live in places where the bank has branches, Mr. Bradbury
said.
Affinity cards were particularly popular in the 1990s but fell
out of fashion after MBNA Corp., which had thousands of affinity
relationships, was acquired by Bank of America Corp. in 2005. The
Charlotte, N.C., bank eventually dropped many of those card deals
after the financial crisis when it overhauled its consumer-lending
businesses.
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