Bank of America (BAC 2.73%) and Wells Fargo (WFC 3.90%) both know it's cheaper to sell more products to existing customers than it is to go out and recruit new ones. And, one of the most profitable products to sell to their customers is a new credit card.
According to the recent earnings releases, both companies are having tremendous success. Bank of America's targeting of "mass-affluent" customers and Wells Fargo's partnership with American Express (AXP 0.90%) to create new and enticing credit card products seems to be paying off very nicely.
Wells Fargo's American Express "Propel" card
While this is great for both of these companies, there could still be more room to grow. How will this affect the bottom lines of these two banking giants, and how could this take business from institutions that rely heavily on credit cards, like Capital One and Discover Financial?
Excellent data shows the effort is paying off
I had mentioned in a recent article that Bank of America has stepped up its cross-selling efforts considerably, and the number of new cards issued had increased accordingly.
Well, not only did Bank of America issue over 1.1 million new credit cards during the second quarter, 10% more than it did during the first quarter, it improved where it really counts. The number of cards issued to existing customers made up 65% of the total, up from 63% last time.
So, not only is Bank of America getting better at selling credit cards, but they are getting better at selling to their existing customer base, which is much more financially efficient.
Wells Fargo also did well in this area. The percentage of its banking households with a credit card product issued by the bank grew to 39% from under 35% last year. And, while it's too early to know the full effect of the partnership with American Express, CEO John Stumpf said during the recent earnings call that it's off to a "very good start."
And, the customers will use the cards
Both companies also recognize that it's not enough to simply get customers to sign up for the cards, they have to use them in order for the banks to make a profit. That's where the Amex partnership and Bank of America's customer targeting comes in.
Wells Fargo's Amex partnership could have a huge impact on the company's credit card loan portfolio simply because American Express' cardholders have money to spend and like to use their cards to do it.
The average Amex cardholder's annual income is 60% higher than Visa and MasterCard customers, and they charge 53% of all personal purchases on their Amex card. Consumers without Amex cards charge just 34%.
Bank of America has begun to aggressively target the "mass-affluent" customers by being the first of its peers to offer its VIP perks to customers with over $20,000 in B of A accounts. The perks used to be reserved for those customers with more than $50,000 with the bank.
Similarly to Wells Fargo's partnership with American Express, customers who make more money tend to charge more of their personal expenses. Mass affluent describes those customers with incomes above $75,000 per year or $100,000 to $1 million in investable assets, so it's easy to see why Bank of America wants this group.
Bad news for the others
The big banks have a distinct competitive advantage over companies like Capital One and Discover because they have more power to incentivize their credit card products. They also offer the added convenience of being able to manage banking and credit accounts in one place, enabling customers to pay bills instantly by transferring money from one account to the other.
For example, Bank of America's Preferred Rewards program offers those cardholders with over $20,000 in combined Bank of America accounts the opportunity to receive up to 25-75% more rewards when using their cards. Wells Fargo offers a similar "relationship bonus" to its cardholders, on top of the American Express cards' already generous rewards.
It's too early to tell if customers will begin to jump ship and use their primary banking institutions as their main credit card provider, but Bank of America and Wells Fargo are certainly giving them a reason to with products that rival any of their competitors' cards and offer the added bonuses and convenience of doing all of one's banking in one place.
