(Bloomberg Opinion) -- “In the United States, credit cards, debit cards, people love these cards,” Jamie Dimon, JPMorgan Chase & Co.’s chief executive officer, said during last year’s second-quarter earnings call. “They use their credit cards far more than they use their debit cards. I don’t remember the last time I used my debit card.”
It’s not just American consumers drawn to credit cards, of course. They’ve become a bigger part of JPMorgan’s kingdom, too. Gordon Smith, who leads the consumer division, said at the Feb. 25 investor day that in the past several years it has increased market share to an industry-leading 23% from about 13.5%. A presentation showed digital card sales grew 13% year-over-year, which was 3 percentage points higher than the sector a whole.
JPMorgan, the biggest U.S. bank, has been a pioneer in the space, with its Chase Sapphire Reserve reimagining what premium cardholders want and how much they’ll pay in annual fees to get it. The card exploded onto the scene in August 2016 with a sign-up bonus of 100,000 points, which was worth about $1,500 in rewards, easily making up for the steep $450 annual fee. JPMorgan featured late night host James Corden in a marketing campaign called “Reserve What’s Next.” In an interview with the New York Times about the series, Kristin Lemkau, JPMorgan’s chief marketing officer at the time, said this about the card, which also offered triple points for dining and travel anywhere in the world:
“Millennials do travel differently,” she added. “What's different is they're the first generation that can find anything on Google, including travel. They clearly like experiences more than stuff. They clearly want to make their own decisions about everything, including travel. It's more fun to post a picture of a fish taco or of a sunset over a beach than of a new couch.”
These days, though, Americans of all generations are spending a lot more time on their couches. The coronavirus pandemic has decimated the two industries most directly targeted by the Chase Sapphire card. With airplanes largely grounded and restaurants limited to delivery or takeout, is this card, which was once so popular that the manufacturer ran out of metal used to make it, now destined to be sent to the scrap heap?
Earlier this year, my Bloomberg Opinion colleague Barry Ritholtz interviewed Brian Kelly, also known as the Points Guy. His website served as a launch partner for the Chase Sapphire Reserve card, which as of January was its pick for best personal card. Wirecutter had a different view, posting an article titled “The Slow Sudden Death of the Chase Sapphire Reserve” on Jan. 13.
Regardless of the card’s rank among peers, Kelly’s life as described by Ritholtz probably seems positively alien to those starting their fourth consecutive week on lockdown:
Kelly travels professionally, amassing millions of miles and holding the highest status levels at his favorite airlines. We discussed his preferred travel gear: He always has a laptop or similar device filed with movies, podcasts and TV shows because you cannot rely on the in-flight entertainment system, and if you get stuck somewhere for hours you could keep yourself entertained. He has a Dual Sim iPhone 11, which allows him to use the phone just about anywhere in the world. Google Fi is his carrier abroad. Also important for stressful travel these days: an InsightTimer meditation app.
How long will it take for Sapphire Reserve-carrying millennials to return to their jet-setting ways? It’s really anyone’s guess, and it depends on how successfully governments around the world contain the coronavirus. But to think the travel industry will bounce back to what it once was in short order seems more dubious by the day. And I doubt people will immediately clamor to eat and drink in packed restaurants and bars after being hyperconscious about social distancing and wearing masks when interacting at grocery stores. The psychological toll can’t be dismissed so quickly.
That will change the credit card calculus. Anecdotally, I surveyed a handful of friends from across the country who I knew had Chase Sapphire Reserve cards (from splitting the bill while dining out, of course). They said they were thinking about canceling, or at best re-evaluating whether it was worth it — the card now includes a Doordash “DashPass” and $60 worth of credits per year. That’s a nice perk in the coronavirus era but hardly comes close to the travel benefits.
JPMorgan seems to understand cancellations are a risk: It had said it would boost the card’s annual fee to $550 as of April 1 but announced last week that it would give a $100 credit to those whose cards come up for renewal though July 1, effectively rolling back the increase. “We know Covid-19 has affected people in many different ways,” the bank said, calling the credit “a way to help.”
Of course, for those who still find that cost too steep while staying home, JPMorgan has any number of options to keep customers with them. And it’s not as if it’s the only card issuer feeling the sting from the lack of travel: American Express Co., which once called the Sapphire Reserve a “full frontal assault” on its offerings, had told shareholders its fastest-growing expense this year would be spending on membership services.
Bank CEOs had frequently marveled at the strength of the American consumer on earnings calls. When they report their first-quarter earnings starting next week, they’ll likely have a much different perspective. Bloomberg Intelligence’s David Ritter wrote last week that credit-card revenue could drop 5% to 10% in a recession similar to the last one, though banks with diverse revenue streams will be less exposed to the fallout than the likes of Synchrony Financial and Discover Financial Services. Capital One Financial Corp. could feel the pinch too, Ritter wrote, though the Points Guy considers it to have the best card for flat-rate rewards and the best one with no annual fee.
Dimon, who returned to JPMorgan last week after emergency heart surgery on March 5, noted on that second-quarter 2019 earnings call that the Sapphire brand was introduced in 2009, just months after the recession ended. “Marketing money is usually better spent in a downturn, the returns on it usually double,” Dimon said.
He published his annual letter to shareholders Monday, noting that the coronavirus pandemic will most likely send the U.S. economy into another rough stretch. “At a minimum, we assume that it will include a bad recession combined with some kind of financial stress similar to the global financial crisis of 2008,” Dimon wrote.
With the travel and hospitality industries facing a reckoning, it’ll be up to Dimon and his colleagues to innovate once more.
(Updates to add comments from Dimon’s letter to shareholders in the 13th paragraph.)
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.
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