Summary
This customer pool is one that JPMorgan Chase wants to retain due to their decent credit history and payment performance. However, at their current promotional rates, the pool is not profitable. Chase is betting that their borrowers are payment-sensitive rather than rate-sensitive and the consumer will accept the higher interest rate in order to maintain the low minimum payment. Public sentiment against this change will stall changes to be proposed by other credit card companies.
Analysis
This article in mainstreet.com touches upon several debates currently circulating around the credit card industry. First, how do consumers behave when their cards’ fee structures have been changed? How does their reaction vary when they feel as though they have not been adequately notified of such changes? How does this impact JPMorgan Chase’s profitability on this pool of cardholders? And finally, what effects will a move like this have on the credit card industry that is currently going through its most drastic changes ever?
First, the consumer. The borrower holding a credit card with a low introductory rate typically (i) carries a credit card balance, (ii) shops among cards and balance transfer offers to take advantage of low rates, (iii) tends to pay his/her credit card bills on time to avoid a rate increase, and (iv) has a decent (although not stellar) credit history to be able to qualify for the promo rate. These are consumers that Chase probably does not want to lose.
Chase’s actions could result in two types of adverse consumer reaction. Most borrowers already feel cheated by their credit card company, and this change will just make them angrier. Some may just pay off the card with a balance transfer from another company, even if the other card has a higher rate. They feel duped and taken by their lender. Or worse, for a few who do not care about their credit rating, they may just stop paying the Chase credit card bill. And if the cardholder feels as though they have not been adequately notified of the change, then the cheated and angry sentiments just increase and spread.
Second, the impact on Chase. This pool of borrowers is not very profitable for Chase. They are not earning much in interest revenue and probably less in fee revenue (anything that would generate a fee – late payment, overlimit, etc. – would disqualify the cardholder from the promotional rate).
With the higher minimum payment change as described in the article, Chase is actually losing interest rate revenue since the balance used to calculate interest will be declining by a larger amount (i.e., you're paying 5% of your balance this month instead of 2%, so JPM is missing out on interest charged on the 3% additional balance that you have repaid).
Given its squeeze on revenues, Chase would like to get these people off of their teaser rates as soon as possible. Chase is probably betting that its borrowers are payment-sensitive these days given job loss and salary cuts. Borrowers do not care what interest rate they’re paying so long as they can keep making that minimum payment and keep the credit open. If Chase is correct, then most people in this pool will accept the higher interest rate, and the pool will then become profitable. If Chase is wrong, then payoffs will increase, interest fee revenue will decrease, and delinquencies will increase. All three events would negatively impact the profitability on this portfolio (payment rates would increase due to the increased payoffs, but this is just a measurement of activity and, in this case, is not an indicator of a healthy credit card portfolio). Chase tried to downplay the likelihood of this scenario by saying in a statement that the change affected a “small percentage of customers”. Other reports claim that the change was applied to 850,000 accounts. If the latter is true, then this is a big gamble on consumer behavior.
Third, current industry trends. One of the motivations driving current reform is the low minimum repayment requirement. In some cases, it can be as low as 2% of the monthly balance. It would take many years to repay a large credit card balance if the consumer only pays 2% per month.
So it would seem that Chase is doing its customers a favor by increasing the minimum payment requirement. However, current public opinion is against virtually all credit card companies changing their fee structure without clear and obvious disclosure. And there is much debate as to what clear and obvious disclosure is. With public sentiment against credit card companies and the fluid situation of evolving regulation, more than likely credit card companies will stay the course and not make any more changes to their fee/rate structures in the coming months.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
