Zero Worship: Credit-Card Firms Compete With No-Interest Transfers; Hunt for Customers Pushes Banks to Revive Terms That Were the Rage in the 1990s

Updated August 26, 2013, 6:35 p.m. ET

Zero Worship: Credit-Card Firms Compete With No-Interest Transfers

Hunt for Customers Pushes Banks to Revive Terms That Were the Rage in the 1990s

ROBIN SIDEL

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The goal of the 0% teasers is to reel in new customers with the lure of not paying interest on current balances, and then get them to rack up interest-bearing charges on new purchases.  

U.S. credit-card companies, hungry for new customers as many Americans continue to shun debt, are pumping up a popular promotion that can be risky for both lenders and consumers. Financial companies that issue plastic are flooding mailboxes and email accounts with offers that allow new customers to transfer their existing credit-card balances from other institutions without paying interest for as long as two years. The teasers, known as 0% balance transfers, have been used periodically since the late 1990s. The current offers, however, cover unusually lengthy periods and, in some cases, are being extended to a wider swath of potential customers than in the past, say industry executives and consultants. Those with spotty credit histories, however, still aren’t eligible for the promotions.The offers are coming from the country’s biggest credit-card issuers, including J.P. Morgan Chase JPM -0.99% & Co., Discover Financial Services Inc., DFS -0.71%and Citigroup Inc. C -0.46% Credit unions are also joining in: Navy Federal Credit Union is starting a promotion in September that offers all of its 4.5 million members, as well as new customers, an interest-free balance transfer for 12 months.

Lenders are pushing the offers as they attempt to bulk up their loan portfolios, which shrank dramatically during the financial crisis while they were writing off bad loans and restricting credit.

The goal of the 0% teasers is to reel in new customers with the lure of not paying interest on current balances, and then get them to rack up interest-bearing charges on new purchases. The lenders also make money by charging a one-time fee—usually 3% of the existing balance—for the balance transfer.

“We view competitive balance-transfer offers as one potential way for acquiring new customers, similar to the way we view bonus-point offers on reward cards….We believe customers who try our products will like them and will want to remain long-term customers,” said Paul Hartwick, a spokesman for J.P. Morgan’s card business. The bank, which is the country’s largest-card issuer based on outstanding balances, is offering 0% transfers for 15 months on its Slate and Freedom cards.

The strategy carries some risk for card issuers, which historically haven’t done a good job of getting the customers who transfer balances to use the cards for new purchases. That leaves the bank with revenue only from the balance-transfer fee, and stuck with the cost of maintaining an account.

Some customers also pay off the full balance as the offer expires or they jump to another lender that has a new offer. “Many organizations think they make money doing this, and they just don’t,” says Alan Schiffres, a managing director at Novantas Inc., a consulting firm that specializes in financial services.

Kenneth Chenault, chief executive of American Express Co., AXP -0.05% criticized the practice in a meeting with investors earlier this month. “I have been in the business a while and, to me, putting out a substantial number of 0% [balance-transfer] offers doesn’t appear to target the affluent prospects some competitors claim to be after, nor is it a net revenue driver over the short term,” he said.

Ray Pipkin took advantage of two zero-balance transfer offers from Chase and Barclaycard in May but hasn’t pulled out either new card since. The retired electrical engineer from Lisle, Ill., transferred a $10,000 balance from one credit card to the two new accounts, paying transfer fees of 1% and 2%.

“I’m smart enough to know not to do that,” he says, referring to running up balances on the new cards. Instead, he sticks with his old card from Discover.

The offers can also be a good choice for consumers as long as any fee associated with moving the account would be less than the amount of interest currently being paid on the balance. The potential downside is that consumers can get tripped up if the lack of interest charges prompts them to overspend on new purchases, which could leave them with more debt at a higher rate when the offer expires.

Consumers in general are having an easier time obtaining credit than during the financial crisis, because lenders have loosened underwriting standards, but credit-card debt remains well below prerecession levels. U.S. revolving consumer credit, which includes credit cards, stood at $853.6 billion in June, compared with more than $1 trillion in 2008, according to the latest data from the Federal Reserve.

As a result of the shrinking balances, credit-card debt accounted for 29.68% of total consumer debt at the end of 2012, according to the Nilson Report, a Carpinteria, Calif.-based payments newsletter. That is the lowest level since 1990, when it represented 29.42%.

“Banks think they have to do something to get customers excited after beating them up for the last couple of years,” says Robert Hammer, who owns a credit-card consulting firm in Thousand Oaks, Calif. He expects card issuers to direct more money to marketing programs for these kinds of promotions.

One-quarter of all interest-free balance-transfer promotions offered in the second quarter had a duration of 18 months or longer, according to Mintel Group Ltd., a market-research firm.

Citigroup has been offering interest-free balance transfers for 18 months on its Simplicity card for more than a year. The bank also targets a small number of 21-month offers to specific, prequalified customers.

“Citi uses a combination of offers to grow customer relationships, from rewards incentives to promotional pricing,” a spokeswoman said.

Discover is offering interest-free balance transfers for up to 18 months on its new “Discover it” card that launched earlier this year. The company has said growth on the card is being driven by rewards and other features rather than the balance-transfer offers.

“We are indeed seeing a growing prevalence of 0% teasers in recent months, especially during the past quarter,” says Scott Strumello of Auriemma Consulting Group Inc., a New York-based firm that specializes in the payments industry.

Randy Hopper, assistant vice president of credit-card lending at Navy Federal, says the teasers are good at attracting customers who already have mortgages or auto loans with the credit union.

“We want every one of our members to have a credit card with us, because it is a relationship product,” he said. The credit union doesn’t charge a fee for interest-free balance transfers.

Industry executives and consultants say the pumped-up offers will only stick around as long as short-term interest rates remain at current low levels.

After that, “the question for the banks will be, how many of the customers who ultimately avail themselves of these low-rate balance transfers will continue to use these as top-of-the-wallet cards,” says Mr. Schiffres, the consultant.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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