Sapphire Reserve Cards Aren't Very Rewarding For J.P. Morgan

By Emily Glazer Features Dow Jones Newswires

J.P. Morgan Chase & Co.'s Sapphire Reserve credit card has been popular with consumers -- maybe too popular.

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Some at J.P. Morgan are raising concerns that Sapphire Reserve won't make money for the bank, due in part to high demand and the card's generous rewards. Meanwhile, the lender is pushing for about $200 million in fresh cost cuts in the unit that oversees the card, people familiar with the matter say.

The scrutiny inside the bank reflects changing economics of the competitive premium card market. Rewards for consumers -- paid for by the bank -- have gotten sweeter. Spenders, meanwhile, are growing savvier about maximizing benefits and avoiding balances that pad banks' profits.

J.P. Morgan says it is making a long-term bet on the millennial customers who favor the card. Prospects will become clearer in August, one year after its launch, when the first Sapphire Reserve customers will decide whether they want to spend $450 on the card's annual renewal fee. If many flee, it would add to the anxiety.

Gordon Smith, head of J.P. Morgan's retail-banking business, this month ordered up cost trims at the unit overseeing cards, the people familiar with the matter said. A bank spokeswoman, Trish Wexler, said any midyear cuts would take into account overall expense targets regardless of specific products.

"As part of any planning process you're always looking for ways to eliminate waste," she said. "That's just good fiscal hygiene."

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Still, internal concerns about the card are growing -- surprising for what has been seen as a blockbuster at the nation's largest bank by assets. At recent meetings, senior J.P. Morgan employees reviewed models questioning whether the card would make money and when, the people familiar with the process said.

Banks including J.P. Morgan generate credit-card revenue from the annual fees customers pay, the interest charged on their balances and the fees merchants pay when the card is used at their businesses. The bank pays out when it offers rewards, such as the 100,000-point sign-up bonus that J.P. Morgan initially offered on Sapphire Reserve.

The bank offered the bonus for about five months after the card's launch. It estimated the reward was worth about $1,500 per customer if used on travel, along with an additional $300 annual travel credit.

J.P. Morgan doesn't disclose how many Chase Sapphire Reserve cards it has issued. The bank said it exceeded its 12-month sales target in two weeks and temporarily ran out of the metal used to make the cards.

J.P. Morgan's second-quarter card income, as reported, fell 15% from the year-earlier period to $1.06 billion. Credit-card account openings, excluding commercial cards, totaled 2.1 million, down 22% from the year-earlier quarter.

Bank executives acknowledge that it doesn't immediately make money on each new card and customer. "You expense the acquisition costs over 12 months. The benefit comes over seven years," J.P. Morgan Chairman and Chief Executive James Dimon said on a conference call this month.

"These are the customers that everybody wants to acquire," Marianne Lake, the bank's chief financial officer, said on the call. "We now have them, and we intend to deepen relationships with them."

The big question is whether the consumers want to stay in this relationship. Customer renewal rates for premium credit cards can range from 60% to 90%, said Robert Hammer, founder and CEO of credit-card industry consultant R.K. Hammer. Some 5% to 10% of card holders tend to "shop around," looking for new rewards, he adds.

American Express Co.'s Platinum card and Citigroup Inc.'s Prestige card have been pushing to win over Sapphire Reserve customers. J.P. Morgan has tried to avoid signing up potential defectors by rejecting applicants who have opened up five new credit cards in the previous 24 months, known internally as the "5-24 rule."

"They may need to recalibrate those benefits" that come with the Sapphire Reserve card, said RBC Capital Markets banking analyst Gerard Cassidy "There's always that risk of having benefits to the card customer that are greater than needed."

One problem for Sapphire Reserve: Fewer customers than the bank initially imagined are holding balances, according to the people familiar with the matter. That lowers interest income generated by the card and forces the bank to focus on merchant-driven "interchange" revenue -- which at about 2.5% of dollars spent is generally less lucrative than interest income.

Cardholders have proven adept at squeezing the most rewards out of Sapphire Reserve, often using it for travel and dining, categories where J.P. Morgan generally pays more to cover rewards. Consumers also are likely to book travel through Chase's rewards website for an additional 50% bonus that the bank covers.

Sapphire Reserve customers have been helping the bank in other ways, though. About 4,300 cardholders have applied for new mortgages with J.P. Morgan under a program offering 100,000 reward points. That's about twice the number of mortgage applications from other Sapphire card customers last year, Ms. Wexler said.

"More than 95% of our customers are spending actively, are digitally engaged, and are retaining their relationship with us," she added. "It's still early, but we've never seen numbers like this."

--AnnaMaria Andriotis contributed to this story.

Write to Emily Glazer at emily.glazer@wsj.com

(END) Dow Jones Newswires

July 28, 2017 07:14 ET (11:14 GMT)