Sometimes the best move is the one you didn't make.
BBVA Compass had several opportunities in recent years to exit the credit card business, just as many other regional banking companies did. But the bank stuck with it, and that decision could give it a leg up, now that legal reforms and new attitudes about the nature of the business may bring many regionals back in the game.
"A lot of banks may look at the cards business as an income stream, but we view this more as a key financial tool for our customers," said Shelaghmichael Brown, executive vice president of retail banking. "It is a fundamental product. That's really why we are in it, and why we will stay in it."
BBVA Compass, a unit of Banco Bilbao Vizcaya Argentaria SA of Madrid, will begin launching a new suite of cards products in October. Acknowledging the risks of doing so while the economy is still suffering, executives said the effort is expected to boost profit over time. However, they say the primary goal is to deepen relationships with customers.
That view of cards reflects what many observers believe is the prevailing future of issuance, where the product is seen mostly as an add-on to an existing package of services rather than an isolated business. Restrictions on rate changes and other consumer-friendly terms embedded in the Credit Card Accountability Responsibility and Disclosure Act of 2009 are likely to play an influential role in that metamorphosis, some say.
Rick Spitler, a managing director at consulting firm Novantas LLC, said the changing landscape could motivate some regional banking companies to reenter the business years after getting out. "There are banks below the top five who are looking seriously at returning," he said, declining to identify any contenders. "If the game has truly changed back to being about a relationship credit, then there is a reason for some banks to get back into it."
Spitler said the biggest banking companies in terms of outstanding balances — including Bank of America Corp., Capital One Financial Corp., Citigroup Inc., JPMorgan Chase & Co., Wells Fargo & Co. and U.S. Bancorp — control about 80% of the credit card market. Consolidation, along with aggressive marketing and teaser rates, drove many smaller banks to sell their portfolios.
A handful of regional banks still have sizable cards portfolios, according to data from the Federal Reserve Board. The biggest of these issuers at June 30 were Fifth Third Bancorp in Cincinnati, with $1.9 billion in outstanding balances, PNC Financial Services Group Inc. in Pittsburgh, with $1.8 billion and BB&T Corp. in Winston-Salem, N.C., with $1.44 billion.
BBVA Compass, in comparison, had $461 million in outstanding balances and $1.6 billion in unused commitments, according to its filing with the Fed.
Brown noted that BBVA Compass' cards portfolio has remained profitable by limiting cards to existing customers, but she would not discuss specific results. "We have seen deterioration like the rest of the industry," she said. "We don't have subprime credit, but ordinary people are losing their jobs and are struggling. We think that pressure will let up over the next six to nine months."
BBVA Compass has three cards products it plans to introduce, the first being its ClearPoints card on Oct. 15. The main features are a fixed margin over the life of the card, terms the company describes as clear, and free credit bureau monitoring and identity theft coverage. A month later the unit will offer a secured card where the credit limit will be linked to 90% of the balance in a customer's savings account. A signature card for more affluent clients will debut in early 2010.
"We're focused on transparency," Brown said of the programs. "It reinforces that we're focusing on what will help the customer."
Timothy Kolk, a consultant with experience brokering portfolio sales, said he believes there will be increased competition for BBVA Compass with the simplified card product as other issuers respond to new regulation. "Everyone is redesigning into simplified card products," he said. "Coming up with such a card is not a game-changer, but it is a solid blocking-and-tackling way of doing business."
Kolk was more intrigued with the secured product. "That could be a growth business, particularly among those who cannot get a card," he said. "You do run the risk of adverse selection. I wonder where it will lead over the next 12 to 18 months."
Jonathan Mulkin, director of consumer asset products at BBVA Compass, said the unit is taking steps to minimize risk for the secured card. Clients must open, and commit a set amount of funds to, a BBVA Compass savings account. Over time the established customers may migrate to a more traditional credit card product, he said.
"We will make money," Brown said.
Not everyone believes that regionals will be in a rush to get back into cards. There are significant barriers to reentry, with sizeable startup costs perhaps the most prevalent. Others are diminished returns and a need for improved risk management. "If you are an issuer of a card, it is a tough time," Kolk said. "No one is forecasting that things will be getting better until 2011. So if you want to get back into it, I would suggest going about it slow and steady."
