Bank of America (NYSE:BAC) invented the credit card in the 1950s, and it is one financial product the bank is relying on to provide an important source of revenue.
Much has transpired since Bank of America launched its credit card program in the fall of 1958. Proper financial controls have been implemented, consumer protections have been legislated, and the financial crisis — which precipitated the Great Recession — changed how banks and consumers view credit card debt.
Before the late-2000s recession, an economic event that threw the household finances of an untold number of Americans into disarray, many “people took on too much debt,” IHS Global chief U.S. economist Nigel Gault told NPR. Of those people with too much debt, many were one of the 7.9 million Americans whose job was eliminated during the recession, and many ended up in bankruptcy court because they could not afford to pay down their debt, Gault said. “They defaulted and the debt just got wiped out.”
As the bankruptcy filings increased, lenders became more wary of issuing new credit cards, and now they are “being much more careful,” according to Gault. And consumers are, as well. “Everyone has become less willing to take on debt,” he said to NPR. In particular, credit card debt growth is nearly nonexistent, which is partially a function of more Americans paying off their full credit card balances.
But despite the fact that Americans remain reluctant to take on high-interest credit card debt, Bank of America’s credit card unit grew in the third quarter of 2013. The recession left many Americans delinquent credit-card holders, handing Bank of America huge losses. Those losses prompted the bank to reduce its credit card portfolio quarter after quarter.
Now that the financial institution has shed its worst accounts — cutting total loans by 62 percent — it is prepared to increase lending. However, there will be a difference from the bank’s pre-financial crisis lending practices: It will focus on selling credit cards to existing customers, Reuters reported Wednesday.
By selling credit cards to existing customers, lending will be more secure, as the bank knows something of its customers in advance. Plus, money is saved on marketing, and more importantly, the bank has found that customers with an existing checking account who sign up for a credit credit or other loan will bring in $1,000 in additional revenue.
“That was our biggest strategic choice,” Titi Cole, a BofA senior bank executive for retail products, told Reuters regarding customer selection. “The card business will be smaller, but less volatile and more profitable.”
When Bank of America released third-quarter results in the middle of October, for investors and analysts alike, the point of interest was where the company generated revenue during the previous three months, especially because home loans still remain a challenging business for U.S. banks.
What investors would like to see is Bank of America earning a more consistent profit from most of its business, including credit cards, Wall Street trading, and lending to corporations. And while analysts do believe Bank of America needs an improvement in the housing market, the institution has begun to reap the benefits of a strengthening retail banking business, evidenced by the more than 1 million credit cards issued in the third quarter, the most since 2008.
Further evidence is the fact that the unit that does traditional branch bank lending to consumers and smaller companies saw a 32 percent increase in net income. “That’s the core of Bank of America, and it did do nicely,” Edward Jones banking analyst Shannon Stemm told The New York Times. The bank does not disclose how much quarterly revenue or income is derived from credit cards.
CEO Brian Moynihan told investors at a December 10 conference that new card issuance should be strong in the fourth quarter, too. But the Federal Reserve consumer credit report did show that consumer debt grew at the slowest pace in six months; the weaker growth largely reflected lower credit-card borrowing. That borrowing, known as revolving credit, grew at a 0.6 percent rate in November, down from a 5.6 percent rate in October.
Still, all banks are now seeking to grow their credit card portfolios. In November, companies mailed out 45 percent more credit card offers than they did in November 2012, according to data from Credit Suisse and Mintel Comperemedia.
As Cole told Reuters in an interview, competition among banks for credit card customers is increasing, but Bank of America has a benefit in its current customer base. The institution has a financial relationship with one out of two American households, giving it far more opportunities to sell credit cards to current customers.
“The opportunity ahead of us is tens of millions of customers still. It is not a small little opportunity,” Moynihan said at a November investor conference.
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