September 27, 2018

Chase Shutting Down Cards

Many card issuers strive to capture more share of wallet by offering multiple credit cards often with different benefits. This made sense back in the day but as consumer card usage has matured there is less to be gained from shifting spending from cash and checks to cards and the battle to shift spending from competitor cards has become harder. More recently with the advent of significant, and costly, sign-on bonuses and higher reward rates the profitability and return on investment of these cards has shrunk. This will only worsen as interest rates go up.

JP Morgan Chase has aggressively pursued the high spender segment with cards like its Sapphire Reserve. Business Insider reports that Chase's 'card income has fallen by 25% in the past two years amid soaring rewards expenses.' In response, the bank has cut its sign-up bonuses and is trimming some card benefits.

They also report that Chase is shutting down some credit card 'super users.' Chances are the better description would be 'super abusers.'

Alarming stories started appearing online in forums and blogs frequented by the users. Customers with no obvious credit black marks or rules violations were suddenly having their card accounts shut down by Chase.

While Chase didn't what behavior it was trying to root out it did say that 'the company gears its products toward long-term customers.' In other words they don't want customers who sign up for new cards to get the sign-on bonus only to close or stop using the card later.

Card issuers have long suffered from customers who open one account to take advantage of the offer only to flip to the next card when a better offer comes along. This started with 'balance surfers' who moved balances from one low (intro) rate card to the next once their card's interest rate went up. Now that behavior has migrated to transaction/reward cards as the benefits there have increased. Issuers need to expect this behavior and account for it in their economic models.

Many issuers exclude customers who have opened too many new cards in recent months or years. In this way they avoid giving large sign-on bonuses to customers who will leave fairly quickly. But closing accounts after the bonus has been earned makes no sense. It's a sunk cost at that point. The bank needs to try to earn as much as they can in the future from annual and card usage fees. After excluding the sign-on bonus each card should be profitable annually, especially given the high annual fees some of these cards charge. Closing existing accounts says that they don't want the customer anymore period.

The smarter strategy would be to:

  • Exclude current customers from high bonus offers if it's likely to cannibalize usage.
  • Ensure that there is card activity elsewhere that can be captured. If a customer only has your cards it will be hard for them to shift spending to you. It's already there!
  • Remember that if a cardholder has burned you once, shame on them. If they burn you twice shame on you. Don't give them a second chance.

There are plenty of people out there who strive to get as many points as possible, often through bonuses. There's even a Reddit group dedicated to this 'churn' behavior. Some of the stories mentioned by Business Insider sound awfully egregious including:

It wasn't clear what precisely was triggering the shutdowns, nor the rationale behind who got reinstated. One user with 40 new credit cards opened in the past two years — 10 with Chase — said they got their shutdown reversed; another user with 10 credit cards total — none opened in the past year and a half — and a more than decade-long Chase credit-card relationship said Chase refused to reinstate the two cards it shut down.

The article also addresses the actions taken by issuers to combat churn or gamer behavior:

Most card issuers have instituted policies to curb gaming activity, but typically they're proactive, limiting how many cards you can sign up for or the bonuses you can earn over a given period rather than canceling accounts later. Gone are the days of opening and closing the same card repeatedly to snag its bonus.

Amex, for instance, restricts access to its welcome offers based on past offers you've earned or the number of cards you've opened and closed, debuting a new alert tool in June to warn customers if they're applying for a card but aren't eligible for the bonus.

Chase instituted its "5/24" rule a couple of years back, which prohibits customers from opening certain cards if they've opened up five credit cards across any issuer within two years. It's not used to retroactively shut down customer accounts.

These efforts echo the smarter strategy points above. All issuers should by using techniques to identify and flush out likely churners before the accounts are opened. More accurate data mining tools and models should help these efforts. Customers have gotten smarter about ways to earn points. Now the banks need to get as smart to cut out the abusers and only reward long-term, high-value customers.

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