American Express Co. is offering a $300 incentive for customers to cancel their accounts as the card issuer and payments processor grapples with surging loan delinquencies and reduced card-member spending.
The move comes as credit rating firms have warned that rising credit-card delinquencies could push the charge-off rate into the double-digits by the end of the year from December's record level of 7.7% amid higher unemployment and a bleak economic outlook.
"It's a tool that has been used in the past to motivate borrowers to close off balances," says Scott Valentin, an analyst at FBR Capital Markets. Valentin cited an instance some years ago where National City offered $200 to borrowers who would close their home equity lines of credit.
"It's not necessarily cheap, but it is effective," says Valentin. "The key is to identify the high-risk borrowers."
The offer is also a stark contrast to previous incentives, like frequent-flyer miles and cash-back deals, offered by card issuers to encourage consumers to open an account or spend more.
American Express is offering a $300 prepaid card, which can be used anywhere American Express is accepted, to certain customers who pay off their entire balance between March 1 and the end of April. Enrolling in the deal automatically cancels the customer's account, regardless of whether the borrower successfully pays off the balance.
A potential problem for the company "is adverse selection," says Valentin. "The risk is that the ones that take $300 and close their balances do have the ability to pay, and the ones left behind that don't take the $300 anyway couldn't afford to pay off their balance."
American Express' offer is only valid for customers who receive a mailing with a registration code from the company, and was advertised as a way for people to "simplify your finances." It wasn't immediately clear what kind of balances the company is targeting with the deal or how many people will receive the offer. A company spokeswoman was unavailable for comment.
The company also warned consumers may lose rewards points by enrolling in the offer.
Shares of American Express were recently down 49 cents, or 3.8%, at $12.46. The stock is down about 70% since September.