New Loan Sharks Enter The Credit Card Business

A while back, a writer (whose name and story details I unfortunately don’t remember) was researching the credit card business and tried to figure out how card issuers decide which customers to pursue. To this end he created a series of fake personas ranging from an affluent straight-arrow who always pays her bills on time to a white-trashy guy with impulse control issues and a history of multiple defaults and late payments.

The findings? Impulse-control-issues guy was deluged with card solicitations while straight arrow’s mailbox was relatively empty. Credit card companies, it turned out, make most of their money by extending credit to people who will be frequently late (thus generating massive late fees) and who are likely, when they do make a payment, to choose the minimum and let their balances accrue at double-digit interest rates. Customers who pay off their modest monthly balance are relatively unprofitable for the card companies and are therefore not as attractive.

Why bring this up, other than because it’s always fun to pick on such obvious villains? Because two uber-villains are now eyeing the business:

Goldman, Wells Fargo Look to Credit Cards for Bigger Returns

Two of the biggest U.S. banks, Goldman Sachs Group Inc.and Wells Fargo & Co., are on the brink of piling into credit-card lending, seeking a share of the $183 billion in fees and interest tied to the product.

Goldman Sachs is weighing the move as part of a push into consumer finance with its Marcus online lender, Chief Financial Officer Marty Chavez said during a conference call with analysts last month. Wells Fargo plans to resume targeting U.S. non-customers with mailed credit-card offers later this year and began accepting new applicants from outside affiliates in 2016.

The firms have pressing reasons to jump into card lending. Goldman is looking for a business that promises attractive returns even if the bank doesn’t win a large share, Chavez said. And for Wells Fargo, entering a market rich with fees is even more important after a Federal Reserve order crimped its business plans amid customer abuses in retail banking.

The lure is clear. The fees and interest U.S. banks collected from their card businesses jumped 12 percent in 2017 from a year earlier, according to estimates from payments consultancy R.K. Hammer. The average household that maintains a balance in credit-card debt pays $904 in interest a year, a study by Nerdwallet shows.

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