E-Trade Financial Corp.'s new credit card balance-transfer program could create serious headaches for other issuers of loyalty cards.
The program, announced Tuesday, allows consumers to have their balances at other issuers automatically transferred to an E-Trade account on a recurring basis. The pitch is that consumers can pay E-Trade a lower rate on their balances while still earning rewards like air miles from the other issuers.
"As far as the customer is concerned, they're getting their miles and paying a lower rate," said Jarrett Lilien, president and chief operating officer.
Tim Sloane, a director for Mercator Advisory Group Inc. of Waltham, Mass., said that though E-Trade's new program sounds like a good deal for cardholders, "I'm sure it's going to create some problems with companies that offer the rewards programs."
If an issuer is counting on a high percentage of cardholders to revolve their balances to cover the cost of rewards points and generate profits, regular poaching by E-Trade would put current programs in jeopardy, Mr. Sloane said.
"If you follow the train into the station, it suggests a need to play with the segmentation some more, because it will be shrinking the pool of revolvers," he said.
However, if E-Trade's offer finds many takers, issuers "will find a way to create regulations to prevent this from happening - or they will boot the customers out of the program," Mr. Sloane said.
E-Trade's Mileage Maximizer Account has no annual or balance-transfer fee, and the annual percentage rate on transferred balances is 8.9%. Mr. Lilien said most airline or loyalty cards charge much higher APRs to fund their highly competitive rewards.
The account is one of the latest in a series of attempts by E-Trade to innovate. Two years ago it introduced a "portable" mortgage, a 50% mutual fund load rebate, and "instant" money transfers into its bank accounts from other institutions.
Mr. Lilien said another advantage of the Mileage Maximizer is the automatic nature of the transfers. Usually, consumers must initiate a transfer each time; here "you set it up and it takes that time factor off the table - it's done for you." Customers can easily change the transfer date and amount by calling E-Trade or through a Web site, he said.
