It's official: Chase Manhattan Corp. is in the market for credit card portfolios.
A year ago, the fourth-largest bank card issuer declared an interest in becoming No. 1 among Visa and MasterCard lenders-a move that would require it to more than double its managed loans.
But in the months that followed, it made no visible move to achieve that goal. Instead, its executives say, Chase worked on getting ready to bulk up by hiring risk managers, improving customer service, and adding predictive models and other technological pizzazz.
"The aspiration remains" to be No. 1, said Michael Urkowitz, executive vice president and head of card member services. "Expectations are, there will be an even smaller number of remaining issuers in five years and we intend to be one of the dominant ones."
"We are back in the hunt for the next portfolio acquisitions," he added.
Some longtime card issuers have left the field, daunted by the enormous scale that the largest issuers are accumulating. Chase's $34 billion of receivables is about half that of Citigroup Inc. or of the First USA division of Bank One Corp.
MBNA Corp., at $67 billion, stands between Chase and the two leaders.
Mr. Urkowitz's group faced the same handicap last year when it boldly stated its growth ambition. The difference today is "we have a more precise sense of how to get there," Mr. Urkowitz said.
Portfolio acquisitions will be part of the mix, he said, and there seem to be plenty of receivables on the market. Many smaller banks are selling their card holdings to larger competitors; others are signing agent deals, ceding control of receivables while keeping their names on the cards.
Delving deeper into ethnic markets is another part of Chase's strategy, Mr. Urkowitz said. For six months, Chase has had the ability to offer soup- to-nuts credit card services in Spanish-solicitation letters, statements, and customer-service and fraud-center representatives. Next on the agenda is the same capability in Chinese.
"We've always solicited and attracted people who were Spanish-speaking, or ethnic Chinese, or African-American, so this is not the first time," Mr. Urkowitz said. "It's just that we're now thinking about them in that way and trying to understand if there are unique things that we should do in communication or other forms of service. And we're discovering that, yes, there are, and doing those things is proving successful."
Some industry observers are skeptical of Chase's ability to raise its stature dramatically. James Shanahan, a partner in Business Dynamics Consulting Inc., said Chase and its predecessor companies-Chemical Banking Corp. and Manufacturers Hanover Corp.-"have demonstrated through the years a lack of aggressiveness in the card business."
Chase is "almost a poster child for the commercial bank that is too large to focus on this business," said Mr. Shanahan, who is based in Newark, Del.
Though Chase's current card team has "done a good job on risk management and customer service," Mr. Shanahan said, its bold growth predictions seem unrealistic, given the price competition among large issuers for decent portfolios.
"Fleet, MBNA, and Citi are going to be at their elbows," he said. "These organizations are able to bid more because they are able to wrench out more profitability once they get these businesses."
One industry expert who follows card portfolio sales said Chase has been far from dormant in the acquisitions market but the deals it has done "are not headline-capturing so far." The company has "continued to be very active" even as it shored up card operations, he said. "Some deals were public, and some were not."
Mr. Urkowitz cited Chase's record of successful integration efforts as evidence of its ability to absorb growth quickly. The Chase-Chemical merger brought together two companies with $12 billion card portfolios, which were blended on one operating platform by the end of 1996.
In 1996, Chase introduced a cobranded card with Wal-Mart Stores. It was one of several such programs the bank maintains with high-profile partners but a "very challenging event" nonetheless, Mr. Urkowitz said.
In 1997, Chase bought Bank of New York's $4 billion of credit card loans. Then it "became clear that in 1998, a critical task for us was to make sure we had taken all the pieces that we'd gathered up and assembled them in an effective, efficient way," Mr. Urkowitz said. The Bank of New York portfolio, he said, was integrated "elegantly."
He characterized 1998 as a "year of relatively slow growth but a very solid year in terms of creating a platform for the next phase of growth."
G. Patrick Dunkerley, an analyst at Securities Corp. of Cedar Rapids, Iowa, called Mr. Urkowitz and his lieutenants "a disciplined management team" that "take(s) great care to make sure their operations are profitable." He said caution "pervades their entire operation."
Chase has a creeping delinquency problem, Mr. Dunkerley said. Nonperforming card assets rose to $1.6 billion in the first quarter of 1999 from $1.34 billion a year earlier. But "the rate of growth of nonperforming assets has slowed."
Card revenues rose 8%, to $1 billion, in the first quarter, and the division's earnings were up 3%, Mr. Dunkerley said. Fee revenue was up 26%, to $379 million.
The credit cards group contributed 13% of the $2.9 billion of fees Chase collected in the first quarter.
"Cards are not going to make or break them, but it is a nice stream for them," Mr. Dunkerley said.
Mr. Urkowitz said Chase is "delighted with the trends we see in the credit quality of our portfolio" and with the preparations to accommodate more customers and accounts.
"For the rest of the year, you'll start to see us growing again," Mr. Urkowitz said. Along with the pursuit of others' portfolios, "we have increased" the marketing budget. "As we build our plans for the next year," he said, "we will be increasing marketing" spending again.
Harry F. DiSimone, Mr. Urkowitz's second-in-command, said Chase has benefited by controlling customer attrition rates. The cards group loses about 10% of its customers a year, versus a figure "in the low teens" for the industry.
Chase has added sophisticated risk models; hired hundreds of people to work in analytics, marketing, and technology; and stoked up customer service. Among managers in the 7,000-person cards group, 83% have spent some time listening to calls from customers; Mr. Urkowitz can hook in and eavesdrop on call centers at any time from his desk in lower Manhattan.
A "renewed focus on the customer experience" is one way Chase aims to transcend the card industry's "arms race," wherein issuers compete for customers by reducing interest rates, Mr. DiSimone said. Service quality can lift Chase's products "beyond commodity status."
These efforts are showing some results. In last year's J.D. Power and Associates' annual cardholder satisfaction survey-which asked 12,082 consumers what they value most in credit cards-Chase's Wal-Mart MasterCard earned the highest satisfaction rankings for both basic and gold cards.
Chase is "mining new segments of the (customer) acquisition universe," from commercial cards to subprime, said Mr. DiSimone, executive vice president and chief operating officer of the cards business.
Through Chase Merchant Services, the banking company is extending its reach among small and midsize companies that use corporate cards. The merchant-acquiring company is a joint venture with First Data Corp.
Chase also is courting subprime customers and has cut a deal with Merrick Bank of Salt Lake City, which specializes in that end of the market.
In a further example of niche marketing, Chase recently introduced the LensCard, which comes with a built-in magnifier for such uses as reading bills in dimly lighted restaurants. It has proven popular among people who need help with their vision, the bank says.
Mr. Urkowitz said mail solicitations will "continue to be extremely important for Chase" but will be less of a mainstay as time goes on. "Being entirely dependent on the mail is no longer strategically sound," he said, so the division will be "diversifying" into other channels, like the branch network.
The Internet is another "extremely important" channel but one that Chase has not yet plumbed. Mr. Urkowitz said September will see "big things coming out of Chase as well as (the) credit card (division) with respect to the Internet."
International expansion is also in the game plan. Though many card issuers have recently moved into Canada and Great Britain, Hong Kong has remained Chase's sole foreign card operation.
Despite competition from Citigroup, HSBC Holdings, Standard Chartered, and others, Chase's Hong Kong operation is "doing very well," Mr. DiSimone said. "This year we will probably grow purchase volume 16% in a market where consumer spending will be down 3%."
A year ago, Chase had grander overseas plans. But "within weeks" of launching time, "there was the eruption of the emerging market crisis, and that caused us to take a time out," said Mr. Urkowitz, whose office decor includes a Japanese swordsman mask, Korean wedding scrolls, and other pieces from Chase's vast art collection.
Maintaining a domestic focus has helped the company concentrate on product offerings that appeal to all demographic groups, from people who are "underserved" by card companies to those who are "overserved," Mr. Urkowitz said.
For some consumers, Chase's cobranded programs-with Bell Atlantic, Continental Airlines, Shell Oil, Toys "R" Us, and others-are the "important elements of value," he said.
One further plan is to test card designs, including ones that give more prominence to the Chase name. MasterCard International is letting member banks move the association logo to the back of the card. Chase, which holds a seat on MasterCard's board of directors, welcomed the flexibility.
Mr. Urkowitz called the decision "an important and positive step for Chase. Our strategy is to be a branded global financial services company, and this will enable us to much more effectively pursue that goal."