As refinancing slows, banks turn to credit cards for growth

wells fargo, u.s. bank are investing in new products, technology

Star Tribune (Minneapolis)September 22, 2013 

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Hispanic man choosing credit cards

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Wells Fargo & Co. and U.S. Bancorp are betting on credit cards and payments to help fuel revenue growth as the mortgage refi boom fades in the rearview mirror.

Wells Fargo is making a big credit card push and will be testing products this fall as part of its new partnership with American Express Co. The bank is tight-lipped about just what it will be testing, but promises compelling rewards and benefits. Its target: existing Wells Fargo customers, only a third of whom currently pack a Wells Fargo credit card.

Rival U.S. Bank, meanwhile, has been investing heavily in mobile payments technology and quietly marching its behind-the-scenes card processing operation for merchants across Europe and into Mexico and Brazil. Now it's eyeing Asia. Payments, including its credit card issuing operation, is the Minneapolis-based bank's fastest growing business, and U.S. Bank aims to grow it from 26 percent of revenue to 30 to 35 percent in the next three to five years.

"It's game on for these two," said card industry consultant Robert Hammer. "Banks are looking to spend their war chest."

Hammer, head of California-based Card Knowledge Factory and a former Norwest executive, said he expects to see the two banks forming new credit card partnerships and affinity groups, and snapping up card portfolios.

The emphasis makes sense. When bank CEOs rank their multitude of business lines for profitability, Hammer said, "credit cards come out at the top of the list every time."

The moves come amid stiff competition for consumers who, clobbered during the recession, are more prudent with their money now. They may be taking on car loans and student loans, but credit card borrowing has declined. Borrowing hasn't returned to previous levels, even though credit card spending on existing accounts continues growing.

"It's been a bit of a paradox," said Ken Paterson, vice president of research operations at Mercator Advisory Group in Maynard, Mass. "It might be a waiting game until consumers start borrowing again."

Then there are the nation's restive retailers, who despise fat credit card fees. There are legislative ideas brewing to reform credit card fees, said Doug Kantor, a lawyer for the National Association of Convenience Stores. But for various reasons, there's unlikely to be a push to cap them the way debit card swipe fees have been capped, he said.

"There are more ways to skin a cat than just put a cap in place," Kantor said.

Such talk strikes fear into the hearts of bankers.

U.S. Bank is the fifth-largest issuer of credit cards in the United States by total volume, with Wells Fargo No. 6, according to the latest Nilson Report ranking.

Both banks are also big merchant acquirers, the term for companies that process credit card transactions for the merchant when someone pays with plastic. U.S. Bank is the fifth-largest merchant acquirer in the country, with Wells Fargo No. 7.

U.S. Bank is also one of Europe's largest merchant acquirers, and the international business helped U.S. Bank perform through the recession.

Most recently U.S. Bank, whose strategy is to partner with other banks already in the market, has entered Mexico and Brazil. CEO Richard Davis has said he sees Brazil, where the bank has partnered with Citibank, as a "beachhead" for moving across South America.

Pam Joseph, vice chairman of U.S. Bancorp Payment Service, said in an interview that the bank plans to expand merchant processing into Asia in about two or three years, and has been looking at China, Japan, South Korea, Malaysia or Singapore.

"We've had discussions off and on with India," Joseph said.

Then there's the lender's white-label business of issuing credit cards for other banks. It currently issues cards for 1,700 other banks. "We sign banks every month," Joseph said.

Wells Fargo, meanwhile, is gunning its retail credit card engine.

"We've got 70 million customers at Wells Fargo. Only one in three have a card with us. We know they're using credit. We'd like for them to deepen their relationships with us, and use our credit card," Beverly Anderson, head of consumer financial services for Wells Fargo, told CNBC in August.

The bank is going beyond its Visa cards to dangle new Wells Fargo cards in front of its customers on the American Express network. Pilots in undisclosed markets start this fall, with a full launch set for 2014.

Wells Fargo is also working with American Express' Loyalty Edge group on a program that will let Wells Fargo card holders redeem points for merchandise and gift cards.

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