According to the latest news from Bloomberg, two of the biggest banks in the United States, Goldman Sachs Group Inc. and Wells Fargo & Co. are on the verge of entering the $183 billion credit card market segment, but both companies have their own reasons for doing so.
Marty Chavez, Goldman Sachs’ Chief Financial Officer, announced on a conference call last month that the bank was looking at pushing into consumer finance via its Marcus online lending platform.
Well Fargo, on the other hand, is planning to re-start targeting non-US consumers with mailed-credit-card offers later in the year. The bank already had been accepting outside affiliate applications since 2016.
The one thing that is common for both banks is that their reasons are pressing. For Goldman Sachs, the bank needs a business that will offer attractive returns; it doesn’t matter that the company has a small market share, stated Chavez.
For Wells Fargo, it is imperative to enter a lucrative fees market, especially after the recent Federal Reserve orders clipped the company’s business plans and ability to expand beyond a certain level.
The credit card market is at record highs, exceeding even pre-recession levels. However, according to RBC Capital Markets’ analyst Gerard Cassidy, Goldman Sachs and Wells Fargo will not find it easy to enter this market. Cassidy stated that this market is extremely competitive and filled with veterans who are strong players with great offerings for their customers.
Despite that, the call of this market is strong for both banks. According to data garnered from payments consultancy RK Hammer, the credit card fees and interest that banks in the US collected from card users shot up by 12% from 2016 to 2017.
Nerdwallet’s data shows that the average American household has a credit balance and tends to pay about $904 just in interest every year. More data shows that banks in America earned about $182.7 billion through credit card fees and interest in 2017.
With the market being so competitive, costs to attract new customers are low too. Consumers can now simply apply for new credit cards online and get approved within minutes. And issuers of these cards can collect from merchants every time a customer makes a credit card purchase. And the best part of the banks is that credit card loans have some of the highest interest rates in the lending industry.
Just to give an idea of the competition in this segment, JP Morgan Chase & Co., in 2016, launched its Sapphire Reserve credit card, which had a $450 annual fee and a huge initial sign-up bonus award of 100,000 reward points. The forced other banks such as American Express, Citigroup and US Bancorp to step up their game.
Currently, Wells Fargo has a rather weak presence in the credit card segment. It is just the 7th largest issuer of credits cards in the US and has a market share of just about 4.3%, according to data from the Nilson Report.
Goldman Sachs, on the other hand, is just entering the market and has placed Hari Talwar, previously the head of the card services business for Discover Financial Services. The company has also brought in Scott Young as well as Anand Sivadasan from Citigroup, and Shailesh Mendonca from Capital One Financial Corp. Other team members were pulled in from credit card startup Final.
There are, however, cracks in the credit card market, warning signs of over-heating. Charge-offs have been increasing steadily in the last few years, which means that lenders are having to set aside more funds to provide for bad loans.