Tough times lead to differing approaches to credit card marketing

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Related Companies American Express Co. (AXP) Barclays Bank Delaware Barclays PLC (BARC) Capital One Financial Corp. (COF) JPMorgan Chase & Co. (JPM)

Related Documents Transcript (ET) Capital One Financial Corp. 10/22/2009 Transcript (ET) American Express Co. 10/22/2009 Transcript (ET) JPMorgan Chase & Co. 10/14/2009 Financial Supplement (FIN SUPP) American Express Co. 9/30/2009 Financial Supplement (FIN SUPP) Capital One Financial Corp. 9/30/2009

A continued decline in credit card direct mail volume might come as something of a relief to weary recipients of the previously omnipresent offers. If nothing else, it represents another indication that the card industry finds itself in a state of flux.

Credit card issuers find themselves preparing for the implementation of the CARD Act — a new federal law formally known as the Credit Card Accountability Responsibility and Disclosure Act of 2009 that may forever change the way they operate their businesses — all the while wrestling with evolving capital markets, sharply deteriorating credit quality and an uncertain macroeconomic outlook. With the Christmas shopping season soon to get under way, it would seem that consumers are not the only ones dialing back their holiday plans.

Mintel Comperemedia, a company that provides direct marketing competitive intelligence, reported in September that the volume of credit card direct marketing offers fell 8% between the first and second quarters of 2009. Credit card direct mail volume plunged more than 27% in 2008, the company reported. But despite that downward trend, two leading issuers went in diverging directions with their marketing spend between the second and third quarters.

American Express Co. reported a 22% decline in marketing and promotion costs on a year-over-year basis for the third quarter to $504 million, part of a 17% retreat in overall expenses. At the same time, the company's marketing expenses increased more than 43% from second-quarter levels, which, themselves, had plunged 47% from the same period in 2008. The trends are similar when examining combined expenses relating to marketing, promotion, rewards and cardmember services: up 7.1% sequentially and down 16.1% year over year.

The company reported a 13% year-over-year decrease in its provisions for losses, down to $1.18 billion, which executives said during an Oct. 22 conference call enabled American Express to increase its investment spending during the quarter.

Capital One Financial Corp., meanwhile, reported marketing expenses of just $103.7 million for the period, down 22.6% on a linked-quarter basis and off 61.2% from the third quarter of 2008. Prior to the first three months of 2009, according to SNL data, Capital One had spent at least $200 million on marketing and promotion for 33 consecutive quarters with a peak of $511.1 million in the fourth quarter of 2004. It last spent a lesser amount on marketing relative to third-quarter levels in the second quarter of 1998.

Prior to 2008, Capital One had ramped up its level of marketing spend between the third and fourth quarters on 10 occasions out of the previous 11 years. That might happen once again this year, as Capital One CEO Richard Fairbank explained in response to an analyst's question on an Oct. 22 conference call regarding prospects for a future "surge" in marketing volume.

"You might see a little bit of an uptick," Fairbank said, but he added: "I would never use the S-word 'surge' to describe this low level of marketing that's going on here. So, more I think what you'll see out of Capital One on the credit card side is … a combination of our caution and, in many ways, the lack of demand that's out there [by] high-quality borrowers as they continue to ramp up their savings rate."

Fairbank later elaborated on his reticence to engage in a "big … breathtaking increase in marketing," preferring instead to go about ramping up promotional efforts in a measured, gradual manner.

"It is my deep belief that there is still a lot of pretty darn bad stuff waiting to happen in the economy," he explained. "I don't think that we have to rush to go anywhere, and I want to see demonstration of what the pricing and competitive dynamics are in the business post-CARD Act. I think that's going to say a lot about the growth prospects for all of us."

JPMorgan Chase & Co. does not appear nearly as reticent. CEO Jamie Dimon said Oct. 14 on his company's third-quarter earnings call that the company could become "very aggressive on the marketing side" should it successfully adjust to the ramifications of the CARD Act.

"We're willing to make real investments in our business once we're convinced that we're building the right kind of business," Dimon said. "So, our marketing budget so far for 2010 in card is up by several hundred million dollars. It's not down. But we'll spend that money when we actually feel we're going to get a good return on it."

The company introduced the Chase Sapphire rewards card in August, a product it built from the ground up to address the needs of the top 15% of U.S. households by income. The card includes "premier" travel benefits such as trip cancellation, lost luggage and rental car insurance; direct access to specially trained customer service representatives; and an "ultimate" rewards program.

The affluent marketplace has been one area that has not seen a downturn in mail volume. Mintel Comperemedia reported a 28% uptick in direct mail offers for premium cards in the second quarter relative to the first. Offers for premium cards accounted for 19% of the mail campaigns tracked by the firm in the first half of 2009 versus 9% for the same period of 2008. The Chase Sapphire card joins a market already populated by the likes of Barclays PLC unit Barclays Bank Delaware's Visa Black Card and American Express' Centurion Card.

Mintel Comperemedia reported that the affluent market is particularly attractive to issuers as a way to restore profitability as a result of their annual fees and the high credit scores of targeted consumers.

Among the broader population, it appears that a combination of tighter credit and a substantial reduction in new card offers has led some consumers to pay more attention to the direct mail that they do receive as measured by response rates.

American Express executives said the company has been generating good returns on its marketing investments, but they declined to discuss specifics. Said Capital One's Fairbank: "We are seeing some increase [in response rates], pretty much across the board, everywhere we're marketing."