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The announcement that Wells Fargo will begin working with American Express to launch the Propel World and Propel 365 rewards credit cards are a positive sign for the bank, and a signal that it intends to pursue new revenue opportunities. The introduction of these card products will serve as the company's major foray into growing its consumer credit card marketshare.
A Small Presence In A Lucrative Space
Despite its large marketshare in consumer deposits, Wells Fargo has not historically had much of a presence when it comes to consumer credit cards. While other financial institutions widely market credit card products, most consumers would be hard pressed to recall a single competing Wells Fargo option. The financial statements in the banking industry reinforice this. In 2013, the bank had an average credit card loan portfolio balance of just under $25 billion, with interest income on these loans accounting for $3 billion in revenue. This pales in comparison to banks like Citi (NYSE: C) and JP Morgan Chase (NYSE: JPM), the company's largest competitors in consumer banking, and already market a large suite of popular credit card products. In 2013 average credit card loan balances were over $116 billion at Citi, and $123 billion for JP Morgan. Corresponding interest revenue for these companies was $14.4 billion and $11.5 billion respectively.
|Company||Average Balance (mm)||Card Revenue (mm)|
|JP Morgan Chase||123,613||11,466|
Source: 10-K Statements JP Morgan Chase, Citi, Wells Fargo | *includes Citi Retail Services
With credit card loans and fees generating around 10% of average loan balances, credit card loans are a lucrative market for financial institutions. More importantly credit cards are one of the few branded financial products that consumers use and interact with everyday, helping to promote brand recognition of the company. For these issuers credit cards serve as a vehicle for introducing a consumer to the larger array of financial services. From this standpoint, Wells Fargo has simply not capitalized on a large and valuable market.
Rewards Cards To Focus On Big Spenders
Instead of focusing on introducing a broad array of card offerings, it is a positive sign that the first cards are designed as rewards credit cards. A survey of rewards credit cards quickly illustrates the fierce competition in the space, with the most generous travel cards offering more than 2% on spending and hundreds in sign up offers. It shouldn't come as a surprise that issuers are doing everything in their power to attract new consumers in this area. Travel rewards cards attract high spenders with excellent credit including some that use these cards to expense work related travel. High spending on the cards can help generate transaction fee revenue as well as commissions in travel related services. With this demographic being more affluent and possessing larger bank accounts and higher average spending these consumers are also the prime targets for the marketing of other financial products including home mortgages, auto loans and other services.
Previously Wells Fargo simply didn't have a market share to speak about in this space, with nearly no products that would appeal to consumers. These new cards are designed to address that. The Propel World in particular is aimed at the travel spender with lucrative 2-3% rewards on airlines and hotels. With a $175 annual fee, it is priced to cater to only the highest spenders. The card's benefits also highlight the company's strategy in using these products to cross sell additional services. Consumers that have a checking account or a PMA package with the bank are eligible for annual bonus rewards when using the cards. Clients with an PMA package and annual balance of over $250,000 qualify for the highest bonus tier, earning an extra .5% in total rewards. The attractive rewards are clearly part of a strategy to upsell new consumers on the many services the bank has to offer.
Expecting Success And Increasing Revenue Opportunities
There is no reason that Wells Fargo can't succeed in building a market share among rewards credit cards. Ultimately when it comes to choosing a rewards credit card, consumers are motivated by the financial incentives built into using the card. Comparing of the Propel World with other alternatives the card has all the characteristics necessary to steal market share from competing cards, with a reward payout on airfare rivalling any of the alternatives. While it may take some time for consumers to become aware of the cards, we should expect that they many will find the offerings appealing and the bank should see a small increase in its account holders. Since the cards target consumers with better financial health, investors may not see a sizable bump in interest related revenue as these card holders are also among best at paying off monthly balances. Additional revenue may be reflected in the commissions related to transaction fees from using the cards.
The cards should serve as a bellwether for Wells Fargo's long term credit card plans. Hopefully as the bank experiences success with these initial products, it will push the company to make larger plays in the credit ard space opening up a significantly under monetized revenue opportunity. Once this happens we can should expect greater returns in this business segment overall.