Card companies, surprised by low write-offs, seek new customers

Lenders have spent months puzzled by the persistently low delinquencies on their credit cards. Now, they’re seizing the moment.

The card companies Capital One Financial and American Express said this week they’ve jump-started marketing efforts in recent weeks to bolster their brands and acquire new customers. And they plan to keep up the push through the holiday season.

“This is the biggest disconnect that I certainly have experienced in my three decades of building Capital One between what we see in the economy itself and the actual performance of the consumer,” Capital One Chief Executive Richard Fairbank said on a conference call Thursday. Still, he cautioned, “this is not a declaration that we see the light at the end of the tunnel.”

The fourth quarter is generally the busiest for card issuers’ marketing and customer-acquisition efforts, with many consumers applying for new credit lines or using up existing card rewards for their holiday shopping.

But investors had been wondering what this year would look like, given the surge in unemployment caused by the COVID-19 crisis and resulting recession, and lenders’ stockpiling of reserves since the pandemic started. The last three months of 2020 will be particularly fraught for credit quality, with U.S. and worldwide COVID-19 cases spiking again and raising the prospect of additional pressure on consumers and the economy.

Capital One expects “a significant sequential increase” in marketing costs in the last three months of the year after spending $283 million in the third quarter. At American Expresss, executives said such costs should be similar to the $1.8 billion spent last quarter. That would be more than the $1.6 billion in marketing and business-development costs analysts were expecting.

“During times like this, probably the go-to move is to reduce marketing, but we don’t believe that’s true,” Amex CEO Stephen Squeri said on a conference call Friday. “The most important thing we can do is solidify our foundation.”

Discover Financial Services, for its part, sought to maintain new-account marketing throughout the pandemic even as competitors pulled back, CEO Roger Hochschild said Thursday.

“If the economic environment continues to improve, it’s natural that we’re going to spend more money on customer acquisition,” Hochschild said. “But the other expense lines — professional fees, information processing, other miscellaneous expense — we’re going to keep a foot on those.”

Adding customers comes with risks. Card companies don’t want to be a borrower’s lender of last resort should the economy continue to suffer, and it can take years for new customers to become profitable.

In recent years, many lenders have focused on adding cardholders who tend not to carry a balance, known in the industry as “transactors.” For these customers, companies reap billions of dollars in swipe fees when credit cards are used at checkout. But even that model is now being strained, given that the biggest swipe fees are paid by airlines, hotels and other retailers in travel and entertainment — industries hurt most by the pandemic.

As for “top-line growth for new cards acquired,” Squeri warned, “I think it’s going to be hard to see the top-line growth, because you’ve got this compression that’s happened due to travel.”