Have JPMorgan Chase’s Underwriters Lost Their Minds?
The past few years have made one thing abundantly clear: Banks are businesses first and foremost, and turning a profit is therefore their top priority. That’s why it’s so odd that JPMorgan Chase (NYSE:JPM), the largest bank in the United States in terms of outstanding balances, has invested heavily in a money pit of a product.
The Slate Card from Chase is what’s known as a free balance transfer credit card, which means it offers a 0% introductory interest rate on debt that you transfer from another card without even charging you a fee for making the switch. Back in the day, banks could score big with such products because their seemingly marvelous terms brought customers in droves, and the inadequate regulatory environment enabled issuers to simply pull a switcheroo, raising rates and doling out fees once customers were signed up. Now that the CARD Act both limits the fees issuers can assess and prohibits them from increasing interest rates during the first year an account is open (and only if a consumer is 60 days delinquent after that), free balance transfer credit cards merely represent a way for the savviest indebted folks who have excellent credit to use Chase to save a ton on interest, close their accounts once the intro rate expires, move on to another card, and leave Chase in the lurch.
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These new dynamics explain why free balance transfer credit cards disappeared altogether for a few years. Until recently, that is. To be fair, Discover (NYSE:DFS) has also taken a turn at reinventing this genre, but unlike the Slate Card, its product offered exceptionally modest terms and disappeared very quickly.
So, should you avoid investing in JPM as a result?
These practices should certainly raise a red flag for any potential investor, but before you write off Jamie Dimon and the Co., let’s first delve a bit deeper into what exactly Chase might be up to.
Two possibilities that I consider longshots are: 1) Chase is gambling on its ability to retain the new customers borne from the Slate Card and profit down the road off of their interaction with other products and services; or 2) Chase is looking for a bit of positive press after the consumer blowback against banks following the Great Recession.
Such theories have more holes than a Louis Sachar novel, however. First of all, Chase isn’t drawing any special attention to their unique free balance transfer offer, and you can bet that they’d be yelling from the rooftops if good will is truly what they’re after, especially considering the fact that it’s likely costing them around $250 per customer. When you further consider that consumers have displayed a greater willingness to switch banks in recent years, the odds that Chase will be able to recoup these initial losses down the road aren’t as great as you might think either.
Unless there’s absolutely no explanation for Chase’s actions, which would be very concerning in its own right, we’re therefore left to assume that the bank is welcoming unprofitable credit card balances with open arms in order to artificially decrease delinquency and charge-off rates and inflate outstanding balance figures. Investors track such metrics closely, and seeing positive growth in these areas could help allay concerns over recently volatile stock prices and big investment losses. That, of course, assumes that everyone would be too distracted by the rare free balance transfer offer to figure out Chase’s scheme.
At the end of the day, we have no way of knowing for sure what Chase’s true motivations are, but something fishy is certainly going on. While indebted consumers should strike while the iron is hot, investors should proceed with caution.
Odysseas Papadimitriou is a former Capital One senior director who now serves as CEO of the credit card comparison website Card Hub and the personal finance social network Wallet Hub.