Citi Flips 12,000 Credit Cards to AmEx From Visa to Target Higher-Spending AmEx Cardholders

Implications: Key Implications: Citi, the third-largest credit card issuer is flipping 12,000 of its Visa branded credit cards to AmEx AAdvantage cards, to target AmEx's higher-spending cardholders.  Credit card issuers are looking at new ways to grow their credit card portfolios and cobranded and affinity card programs have grown substantially over the last few years.  In 2006, approximately 38-60 million U.S. consumers carried over 320 million cobranded and affinity cards in their wallet, which is up from 212 million in 2003.  In 2006, bankcard issuers posted a combined after-tax profit on assets of $18.37 billion of average receivables outstanding, which represents a 45% increase from 2005 of $12.67 billion of average receivables.  Purchase volume on consumer and commercial cards reached $1.29 trillion in 2006, compared to $1.18 trillion in 2005 and despite this growth, issuers are concerned that penalty-fee income is down, interest income is down and the fraud rate is up.

Analysis: Comments/Perspective:
AmEx and Discover networks sued Visa and MasterCard arguing that Visa and MasterCard prohibited its bank issuers from issuing other network's branded cards.  The courts ruled in favor of AmEx and Discover and lifted the ban imposed by the two giants and forced Visa and MasterCard to pay multimillions in fines and fees.  As a result of bank issuers' declining penalty-fee income, interest income, an increase in the fraud rate and costs of funds, bank issuers are looking for new ways to grow their profits, and bank issuer Citi is expanding its relationship with AmEx and "flipping" 12,000 of its Visa branded AAdvantage cards to the AmEx brand in an effort to reach AmEx's higher-spending cardholders, who may help Citi grow its charge volume, purchase volume on consumer and commercial cards and receivables revenue.

1.  Bank issuers are facing a "backlash" from certain fees they charge their cardholders, such as universal default fees, over the limit fees, late fees and annual fees. As a result, Congress has introduced legislation to restrict card issuers from charging certain fees and to place caps on other fees, which if passed, may contribute to issuers' declining penalty-fee income and interest income

2.  As a result of cardholders becoming move savvy and paying more than they contractually have to, it has caused a slowdown in card issuers' receivables growth, which has led to a shift in strategy to grow credit card revenue and as long as consumers continue to demand more from their rewards/loyalty programs, affinity and cobranded cards volume may continue to grow

3.  Issuers are shifting from traditional marketing and advertising strategies to grow their credit card revenues and utilizing their branches to cross-sell and up-sell their cobranded and affinity credit cards, which may provide a buffer for declining penalty and interest income and may reduce their costs of funds