Wells Fargo Ramps Up Secured Card Lending, Readies Affluent Push

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PHOENIX — Wells Fargo's (WFC) credit card business is slowly growing, especially among students and lower-income borrowers. But now the San Francisco bank is about to make a play for the biggest spenders.

Less than a year after starting to expand its insignificant credit card operations, Wells this month reported some signs that its efforts are starting to pay off. The bank's credit card loans in the first quarter rose 8% from a year earlier, to $26.1 billion. That's still paltry by the standards of most big banks, but it reflects several months of efforts by the fourth-largest bank to get more cards into the hands of its customers.

So far, much of that growth has come from customers who usually have a hard time qualifying for consumer loans: "40% of our acquisitions" are students and borrowers who only qualified for secured credit cards, according to Beverly Anderson, Wells Fargo's head of consumer credit solutions. Such customers, who pay an up-front deposit to "secure" the card and then borrow against it, tend to be either first-time bank customers without credit histories, or lower-income people recovering from foreclosures or other financial hardships that hurt their ability to qualify for traditional loans.

Wells, which is holding its annual shareholder meeting in Texas on Tuesday, has been one of the few big banks aggressively courting such potentially risky customers since the financial crisis. But now it's also about to start jockeying for the affluent, high-spending borrowers that most of its rivals want.

Wells Fargo is "days away" from introducing a new credit card for well-heeled travelers, in an effort to compete with the airline frequent-flier cards that are popular among wealthy borrowers. Anderson describes it as an "extremely competitive" American Express (AXP) card, which will offer rewards and travel benefits not tied to a particular airline or hotel chain.

The card will be "for affluent customers who like rich travel benefits," with rewards "in the areas where customers tend to spend their travel dollars," she said in an interview.

The bank is also about to officially unveil the more general-purpose "Propel 365" card that it has been testing for months. Both cards are part of a new suite of products that Wells Fargo has been developing with Amex since August. Anderson would not disclose many more details, but said that both cards will require customers to pay annual fees.

Wells Fargo's new travel card will likely compete most directly with the higher-end credit cards sold by U.S. Bancorp (USB) and Capital One (COF), which offer customers points that they can redeem against the cost of plane tickets or other travel expenses on several airlines. The downside is that such cards generally attract less loyalty — and thus less spending — than a credit card tied directly to a customer's favorite airline, which allows the customer to earn points more quickly by flying on that airline and spending money on that card.

That said, some airlines, including Delta, are changing the way that they award points to frequent fliers — essentially making it more difficult for customers to accumulate enough points for free flights. Wells Fargo is betting that such changes will create more demand for its more flexible, general travel-rewards card.

"For those customers who are tied into airline cobrands but are finding it more and more difficult to use their rewards points, particularly with the airline … this program will give them very rich rewards," Anderson says.

A longtime credit executive who spent eight years at American Express, Anderson joined Wells Fargo two years ago, and helped cement its credit card partnership with Amex last summer. On the sidelines of a bank event in Phoenix, she discussed the growth of her business, how banks struggle with and succeed at promoting diversity, and how the industry today could better recruit "young shiny folks wanting to do something fun and interesting." [See related article.]

Anderson, who leads a 1,700-person unit, is noticeably ambivalent about playing the airline-points-bonus game, which has driven up competition — and spending — among the biggest card lenders. For example, right now Citigroup (NYSE:C), JPMorgan Chase (JPM) and American Express are all offering sign-up bonuses of at least 30,000 points — enough for a free plane ticket — to people who qualify for their airline-rewards cards. That gets expensive for banks, which buy the points from airlines and then have to offer large chunks in order to encourage wealthy customers to switch their business from other card lenders.

"Today there is just a need to have a really rich value proposition at acquisition," Anderson says, comparing the airline-points bonus frenzy to the competition for credit card balance transfers in the late 1990s, when banks "had to get very aggressive."

Because Wells Fargo focuses mainly on selling more products to existing customers, "we don't always have to be that aggressive in terms of our acquisition bonus and therefore our acquisition costs," she says. "However, I do believe you've got to get people interested enough to get inside of the envelope, or to ask a question in the store."

"Stores" are what Wells Fargo calls its branches, and that's where its tellers are already trying to sell more credit cards to students and less affluent customers. Anderson says that 82% of the bank's new credit card accounts are opened in its branches, mainly by people who come in to open checking accounts or do other business.

"It's about the channel that we serve customers' needs in, which is the store," Anderson says. "You think about emerging credit, new to credit, students — they come to the store to open up a deposit account, and we get the opportunity to cross-sell a card."

Most banks have shied away from lending to these less creditworthy customers since the financial crisis, when losses surged after many people with subprime mortgages or card loans lost their jobs and their ability to repay their bills. New regulations now prevent banks from charging customers some of the fees that they once collected for lending to lower-income people, making such business less profitable. And many lenders are wary of the term "subprime," or the reputational risk of being associated with it.

Wells has been one of the outliers, even though how it does business with lower-income customers has frequently drawn regulatory scrutiny and criticism from consumer advocates. It was one of a handful of banks that sold short-term deposit advances, a bank version of payday loans. (Wells and its competitors discontinued that product this winter, after regulators tightened the restrictions on banks that offered such short-term credit products.)

"A lot of issuers have moved away from some of those businesses, but we're really in the business of serving customers' needs," Anderson says, arguing that Wells insulates itself from the risks of lending to lower-income or less creditworthy customers by bringing them in as deposit customers first.

"Because we have a relationship-based model, we feel pretty comfortable in the underwriting. … We don't have a massive risky profile today," she says. "We're just cranking the engine on acquisition. … The good news is that we're still doing it with very high degrees of credit quality."

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