The Best Credit Card Business No One Talks About

There are a number of great credit card businesses. There's one, however, that never seems to get the attention it deserves.

Apr 12, 2014 at 9:00AM

Citi Credit Card

When it comes to great credit card businesses, American Express (NYSE:AXP) and Discover Financial (NYSE:DFS) seem to always assert themselves toward the top of the list – and for good reason. There's one company, however, that never seems to get enough love. 

Citigroup (NYSE:C), believe it or not, is the world's largest issuer of credit cards. This business struggled with the rest of the company during the financial crisis. However, the leadership of CEO of Citi cards, Jud Linville, has righted the ship and turned Citigroup in to a credit card company to be reckoned with. 

American Express and Discover use a closed-loop model. This means that it both issues cards and acquiring merchants. This allows Discover and American Express to analyze trends and create more targeted rewards programs. Since information never leaves its network, it also stays more secure. 

While a closed-loop strategy is often considered the gold standard, it does come with one big limitation: distribution. To combat this issue, Discover and American Express will enter into relationships with bigger or international banks. 

Citigroup uses an open-loop model, issuing cards onto Visa's and MasterCard's networks. Citigroup's unique global footprint, mixed with the ease of issuing cards onto a readily accepted network, has allowed the company to become the world's leader in card distribution with 142 million accounts. 

Customer appeal
When it comes to traditional customer service, there are few if any that can top Discover and America Express. As mentioned, the model that the companies use gives them a huge advantage in this department.

Even just a few years ago, Citi cards sported a net promoter score of zero. This means there were just as many customers that would recommend Citi cards as there were who wouldn't. Over the past three years, the business has improved its net promoter score to positive 50%. This is still a far cry from American Express and Discover, but it's a big step in the right direction. 

Customer appeal also means having products people enjoy using. Again, just three years ago, Citigroup's credit cards and fraud detection were in shambles. Since then, the company has simplified its product offerings and made rewards cards more rewarding. The company also gave its fraud detection a much needed facelift. This included implementing a new cutting-edge infrastructure. According to Linville, the net promoter score on fraud detection had improved "tenfold." 

Show me the money
OK, so Citigroup has great distribution, and has made a valiant effort to improve its customer appeal. Do the cards make any money? Oh yes. In fact, Citi cards stacks up well next to American Express and Discover.

The first thing that pops out is Citi's jump in income from 2010 to 2011. That was primarily due to a $5 billion decline in net credit losses, meaning more loans were getting paid off. 

Looking forward, Citi card's loans could be at greater risk of default as it serves a larger portion of the population, at least compared the affluent focused American Express. However, in the past few years, its been even more efficient at turning revenue into income when compared to American Express. Overall, investors shouldn't be surprised to see Citi cards more than keep pace. 

Bottom line
Citigroup can be broken into two businesses: Citi Holdings, which the company is actively attempting to wind down, and its core banking business Citicorp. In 2013, Citi cards accounted for $1 out of every $3 earned by Citicorp.

This is a fantastic business that more than holds its own compared to the industry titans, and it will be a huge driver for Citigroup. So the next time you talk about the best credit card companies, don't forget about the hidden gem at Citigroup.

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Dave Koppenheffer owns shares of Citigroup. The Motley Fool recommends American Express. The Motley Fool owns shares of Citigroup and Discover Financial Services. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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