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Shining Citi on a hill...of credit card junk mail?

by Peter Andrew

Does it feel to you as if we're teetering on the brink, with the potential for economic disaster and renaissance pretty evenly balanced? On the one hand, the Swiss Alps are dwarfed by the mountains of debt in Europe, while stateside unemployment won't budge and the recovery feels like a surreal dance devised by a particularly sadistic choreographer: two steps forward, one step back, one step sideways, two steps back, one step forward, and dip.

On the other, there are some signs that things are improving: interest rates are low, which is good news for those able to refinance their mortgages; auto sales are up; larger enterprises are generally profitable…it's not a short list of positives.

Credit card companies confused?

If you're unsure what the future holds, you're not alone. The handsomely remunerated people who run credit card companies appear to be similarly undecided. Except, that is, for the good folks at Citi. They seem to be confident that their business is going to make mega-bucks over the coming months and years.

Synovate Mail Monitor recently gave The Wall Street Journal a sneak preview of the latest findings of its continuing analysis of direct mail activity by credit card companies. And it estimates that 346 million Citi credit card offers are going to arrive in American mailboxes in the third quarter, up from 131 million in the first three months of this year. For a long time now, Chase has been the leader in such mail shots, but its postal activity during the third quarter is expected to be a mere 322 million units, so Citi has now taken the lead.

The Journal quotes analysts on the cost of producing and mailing each item, and they calculate that it's roughly 70 cents. That puts Citi's estimated spend in the third quarter alone at over $240 million. Given that the company's earnings from its card business in North America during the second quarter were $584 million, that's a substantial bet on the recovery strengthening.

Rewards credit cards another factor

Actually, Citi may not be gambling just on the recovery. Recent debit card regulation means that banks earn much less in interchange fees (the cut that merchants must pass on to card issuers whenever they swipe a card) on debit card transactions than on credit card ones. So many banks are having to scale back their debit card rewards, which is pretty much bound to boost the appeal of rewards credit cards. As recently observed in IndexCreditCard.com's news blog (see As debit cards lose their shine, credit cards bounce back), this has recently led to many new product launches, especially for cash back credit cards and travel rewards cards.

So it's likely that Citi's strategy is to build market share in order to take advantage of the anticipated increase in credit card use. Certainly, in the last few months, it's launched its own new products in the travel rewards cards and cash back credit cards and the no frill credit card markets.

Credit card offers to pay off?

So will those new products and all the credit card offers that Citi has been mailing pay off? Clearly the company's executives think so, and they may well be proved right.

But, if they wake in the wee hours, there are likely to be a few nagging doubts that may stop them getting back to sleep quickly. The most obvious is the robustness of the economic recovery, but there could be others.

For example, iStockAnalyst reported in September that, with credit card rates at a 10-year high, consumers are tending to manage their debt more conservatively. It quoted a report from Mintel Comperemedia, a market research company, that found that a surprising two out of three cardholders pay down their balances in full every month. It also suggested that "more people than ever before are avoiding large balances on their credit cards by clearing debts as soon as possible."

Those findings on credit card debt may be reassuring to card issuers when it comes to their charge offs (when debt is written off as uncollectible, and passed to collection agencies), but they're not so welcome in terms of revenue. Card executives very much like raking in all those interest payments every month.

Better news

One thought that might allow Citi bosses to get back to sleep more easily concerns credit card use. Back in June, an IndexCreditCards.com news blog included the following quote from First Data, yet another research company:

Since the beginning of 2011, consumers have begun to spend using their credit cards again. First Data industry figures show that, in February 2011, credit card dollar volume year-over-year growth surpassed that of signature or PIN debit for the first time in over two years. This reverses a fundamental trend away from credit cards and towards signature and PIN debit…

So even if sky-high credit card rates mean a lower income from debt interest payments, those yet-to-be-regulated interchange fees from burgeoning card use could still generate a very healthy return on Citi's current investment in marketing. The fly in the ointment would be a double-dip recession, which might well bring a sharp decline in consumer spending and hence card use. If that happens, we really could see a Citi on a shining hill of glossy junk mail.

Published 09/22/11 (Modified 08/22/14)


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