As Fidelity divorces American Express, Schwab steps in to launch AmEx cards -- with help from RIAs -- as part of broader effort
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Fidelity says the average user got $1,500 in cash back last year, suggesting the average annual card-holder spend is around $75,000
May 2, 2016 — 6:37 PM UTC by Sanders Wommack
Brooke’s Note: Everybody, it seems, wants you to use their credit card — and credit card peddlers are relentless. I get thick packages in the mail from American Express at least once a month. I can’t go to my teller at Wells Fargo without getting pitched for the thousandth time on a Visa card — never mind my discount broker, Capital One, and the World Wildlife Fund. Now, add Schwab back to the list, even after it famously faltered on an earlier effort after being too generous. But is it repeating a mistake in picking up AmEx, which has been driving hard bargains and losing? AmEx still has a little more cachet than Visa but like everything else in finance these margin-compressed days, its brand is negotiable.
Six years after axing its credit card portfolio after it failed to turn a profit, The Charles Schwab Corp.'s custody division, Schwab Advisor Services, has launched two new co-branded credit cards in association with American Express Co.
The timing is interesting.
Fidelity Investments is in the process of divorcing American Express — a deal that underpinned one of the country’s most remunerative cash-back credit cards for more than a decade.
Only Schwab clients are eligible to apply for its new cards: the American Express Platinum Card for Schwab and the Schwab Investor Credit Card. But this category includes those who have accounts with Schwab through a registered investment advisor, according a statement released on March 31. RIAs will not be compensated or otherwise encouraged to sign clients up for its newest service, according to Schwab spokesman Rob Farmer.
“Margins on traditional brokerage services are being compressed because of greater pricing transparency and more client questions, so a lot of institutions are facing the same issue.”
Halloran says brokerages see “very attractive” opportunities in credit lending on both a large scale (securities-based lending) and on a small scale (via credit cards). Brokerages are also keen to add cash to their balance sheets, which they can then quietly leverage into huge profits.
And then there are some more self-serving reasons.
“Viewed extremely cynically, this is just a blatant grab to get your money and lend it to Schwab for free,” Halloran says. “[Schwab] likes the cash, its good for their profitability, and so they’re happy to take it, thank you very much.”
Michael Halloran: Viewed extremely cynically, this is just a blatant grab to get your money and lend it
to Schwab for free.
No custodian has gained more from this kind of strategy than Fidelity Investments. Since 2003, the Boston-based firm has set the industry standard for credit cards with its Fidelity Investment Rewards card, a 2% cash-back, no-annual-fee credit card for brokerage account clients. The card’s popularity has accelerated recently, and currently 550,000 of Fidelity’s 24 million clients have one. Its user base represents 1% of all 55 million American Express cards in the United States. See: How RIAs can compete with super-RIAs, robo-RIAs and the 'phono’- and faux-RIA market of 2015 and beyond.
The massive transfer of money back to Fidelity’s accounts is helped by the deep pockets of the card’s average user.
Fidelity says the average user received $1,500 in cash back last year, suggesting an average annual spend of around $75,000.
(As a caveat, a Fidelity spokesman says its credit card portfolio consists of many legacy cards with different benefits and reward rates so it’s difficult to try to clearly analyze the numbers. “We can’t go any deeper into the detail of the portfolio, but suffice it to say that the vast majority of customers who can redeem rewards, redeem them into an eligible Fidelity account,” Rob Beauregard wrote in an email.)
One of those firms that tried — and failed — was Schwab. Starting in 2008, Schwab Advisor Services sponsored a 2% cash-back “Invest First” card with Visa Inc., momentarily matching the rate of Fidelity’s card. But in September 2010, when the program proved unworkable, Schwab paid $20 million to Bank of America’s FIA Card Services unit to wind it down.
“Unfortunately, economic conditions challenged our ability to continue sponsoring the cards in a manner we originally intended,” Schwab spokesman Greg Gable told the New York Times in 2010. “Different options we explored would have required us to make significant changes to the features and benefits, which was something we didn’t want to do — so we made the difficult decision to exit the credit card sponsorship business.”
Schwab isn’t making the same mistake twice. The Schwab Investor Credit Card offers 1.5% cash back while the Platinum Card gives 1.25% back.
As for Fidelity, cracks began to appear last year in its rebate program with American Express. Bloomberg reported it was mulling a partner switch in August 2015, and the firm announced this January that it would drop American Express for Visa, a more widely accepted partner, by mid-2016. Fidelity says it is also ending its relationship with Bank of America’s FIA Card Services (which issued the card) in favor of U.S. Bank’s card issuer, Elan Financial Services. In the coming months, U.S. Bank will acquire a book of outstanding balances consisting of $1.7 billion.
This shuffle, Fidelity hopes, will keep the card in play and preserve its rewards rate. “We’ve offered a 2% reward since 2003 and see it continuing for a long time,” says Beauregard.
Fidelity hasn’t seen higher turnover rates or client churn in the wake of the announcement, says Beauregard.
Fidelity is the latest firm to drop American Express. It lost its cobranded partnership deal with Costco and JetBlue in early 2015. The Costco deal, in particular, hurt the card company deeply as 10% of all American Express cards in the United States were Costco cards, and its loans represented 20% of American Expresses’ book.
The friction point in that case was interchange fees: Costco paid American Express .06% of each transaction. American Express’ replacement, Visa, agreed to charge an interchange fee of only .04%.
The Schwab co-branding deal was announced exactly a year before the cards were unveiled but Fidelity and Schwab have both denied the suggestion their credit card shake-ups were motivated in any way by their rival’s movements.
“After a long and successful partnership with FIA Card Services, both companies decided it made the most sense for Fidelity to partner with a new issuer, Elan Financial Services,” says Fidelity spokesman Rob Beauregard, “We feel it’s important for potential customer to understand the overall value of the Fidelity Rewards Visa Signature Card — not the underlying business machinations.”
Fidelity needs to hope its customers don’t miss the outlying brand of American Express.
Fidelity|American Express|Schwab Advisor Services|Visa Inc.
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