Transfer Offers Slow as Issuers Tackle Rate-Hoppers

  After several years of consumer rate hopping-moving balances from one card account to another to take advantage of better annual interest rates-balance-transfer activity is slowing, according to industry research from Auriemma Consulting Group.
  In Auriemma's survey of 399 credit cardholders, 15% of respondents said they conducted a balance transfer in April, the lowest percentage since Auriemma began conducting the monthly survey in 1994. In April 2006, 17% of respondents conducted a balance transfer.
  The average amount last transferred among the respondents to this year's survey was $4,300, though 43% reported that their last balance transfer was for $2,000 or less. In February 2006, the average amount was $3,896, with 47% reporting that their last balance transfer was for less than $2,000.
  Consumers have gotten savvier about using balance transfers to lock in lower rates, industry observers say. So issuers today face the challenge of not only keeping cardholders but finding new ways to entice them to keep using their existing cards.
  "It had been assumed through the 1990s and early 2000s that you had to have low balance-transfer offers to keep up your response rate to card offers," says Brent Samuels, manager at First Annapolis Consulting. "But when the rate got to 0% and issuers couldn't take it any lower, it became almost impossible to differentiate offers from one another."
  Fees that issuers have started charging cardholders who transfer balances from other accounts played a part in this year's April drop in transfers, says Megan Bramlette, Auriemma associate. Fees have moved from 3% of the total transfer amount capped at $50 or $75 to even higher amounts or to rates without caps, according to industry research from Auriemma Consulting Group.
  "One of the big changes is that one or two years ago credit card-balance transfers had no fees," says Bramlette. "We've seen no-fee offers become very, very infrequent."
  "No bank can make money at 0%. The math doesn't add up. So the way issuers can make more money and discourage those who play the balance-transfer game is with the fees," says Curtis Arnold, founder of consumer Web site CardRatings.com. He contends issuers that have eliminated balance-transfer fee caps have gone too far in trying to stay competitive.
  Some major issuers, including Bank of America Corp. and Citibank, would not comment for this story, though analysts say they are among the big players who offer balance transfers and are experimenting with fees, including removing caps.
  Some issuers are doing specialized analyses to weed out rate hoppers. "The bigger issuers are getting smarter about how they offer balance transfers, and they're getting better at keeping rate hoppers from those types of offers," says Samuels.
  JPMorgan Chase & Co., for example, uses demographic data and credit checks to determine the right consumers to target for balance-transfer offers, such as finding out if a household has a child going away to college or another life event where they may be reworking their finances. In such circumstances, consumers may be looking for a better credit card deal or a way to pay off debt with a balance transfer option.
  Matt Kane, Chase senior vice president of marketing, says there still are some consumers who are working the system and hurting profitability. "Those holes do exist within the system," he says. "Our job as marketers is to use analysis to target away from them."
  MAIL OFFERS
  Though direct-mail promotions with balance-transfer offers have become more expensive as postage costs have increased, consumers still get constantly bombarded with mail offers. "The reality is the mailbox is open advertising real estate," says Kane. "Consumers receive lots of messages in that real estate, and it's our job as marketers to deliver offers that clearly show true value to the consumer and hopefully will arrive at a time that they want to make a balance transfer," he says.
  Kane says one of the keys in making balance-transfer offers, and where consumer advocates say is the biggest pitfall, is making the offer clear for consumers so they understand what fees and rates are involved, as well as the duration of those offers.
  "The reality is that any financial product has lots of terms and conditions associated with them, and the average consumer can be overwhelmed because of 'bank talk,'" says Kane. "My goal is to communicate as clearly and as simply as I can so consumers understand the introductory rate, the duration of that rate, the fees associated with the product and the conditions under which that rate might change."
  However, despite such efforts, Arnold contends that poor language in marketing materials is the reason many consumers do not realize they are being charged fees to transfer funds. "Sometimes it's hard to find the transfer fee listing in a mailing," says Arnold.
  Some consumers frequently take advantage of balance-transfer offers. They use that card solely to carry a balance and another card for purchases. "If an issuer can get consumers to do both on one card, that's pretty unbelievable," says Bramlette.
  Discover's Motiva card does both, she says.
  The card, which Discover introduced in March, rewards cardholders for carrying a balance. Motiva cardholders who pay the minimum payment on time for six months get the interest charged on the seventh month waived. The process continues for every six months. Cardholders also earn the 1% cash back built into all of Discover's card products.
  Despite the fact that the Motiva card fits into the latest analysis of what card issuers should do to encourage revolving balances and continued spend, Discover says the goal is to provide a variety of products that fit cardholders' needs. "[Making balance transfers] is one way in which a cardholder can use a Motiva card," says Matt Sloan, Discover vice president of portfolio marketing. "But if they do that, they have the added benefit [of] earning rewards while paying down debt."
  Other issuers, while still making balance-transfer offers, are turning to reward offers similar to Discover's to keep existing cardholders spending while maintaining balances. "Issuers today are trying to transfer some of that consumer incentive from balance transfers to rewards products," says Samuels. He cites Chase's Freedom Rewards, Citibank's Thank You points and Capital One's No Hassle Rewards as examples.
  Richard D. Fairbank, Capital One Financial Corp. chairman and CEO, said during an April conference call with analysts that the competition for cardholders using balance-transfer offers remains stiff. "The competitive environment remains intense across the credit spectrum, and we see many competitors marketing 0% balance-transfer teaser offers that last more than a year," he said.
  A Capital One spokesperson says the issuer still makes balance-transfer offers with various rates and durations such as 0% interest for six months. But it is focusing on offering rewards for prime and superprime customer segments.
  Cap One has been heavily marketing its "What's In Your Wallet" campaign that promotes its No Hassle cash-rewards product, another sign that issuers are moving more toward rewards for acquisitions instead of balance transfers.
  Issuers should make transfer offers attractive but make the penalties clearer to existing cardholders who might be allured by other issuers' transfer offers.
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