Credit Card Issuers Start to Loosen the Reins on Expenses

Large U.S. credit card companies are taking a cue from their most lucrative customers: they're starting to spend a bit more freely.

In the fourth quarter, American Express spent 13% more on marketing than it had a year earlier. Discover Financial Services boosted its marketing expenditures by 14%. Capital One Financial ratcheted up its marketing dollars by 19%. Synchrony Financial, the private-label card issuer that is being spun off from General Electric, boosted its marketing spending by 41%.

The looser marketing budgets follow a long period in which industrywide loan growth was flat, so the card issuers had to rely on their customers' pristine credit as a profit generator.

Those days are finally over. Now the credit card companies are spending more on advertising in order to attract new customers and to persuade existing cardholders to use plastic for more purchases.

"I think some of that is good spending, in the sense that it should drive account growth andbalance growth over time," said Christopher Donat, an analyst at Sandler O'Neill. "I think most companies are sensitive to putting their spending in places that generate a good return for them."

He added that loan growth in the credit card business gives companies like Capital One and Discover a certain amount of flexibility with respect to expenses. Many banks that have had a harder time generating more interest income remain in belt-tightening mode.

Discover executives said Wednesday that they are planning to launch a new credit card early this year, and that marketing of the card will contribute to rising operating expenses.

During a conference call with analysts, Chief Executive Officer David Nelms declined to provide details about the new card's features, but he hinted that the product will be a departure from the company's traditional reliance on cash rewards as a way to entice consumers.

Cash rewards have themselves been a growing expense at Discover. Amid strong competition from other card issuers, Discover recently made it easier for its customers to redeem their cash rewards, which cost the company $178 million. So Discover's upcoming card launch may turn out to be an example of spending in one area to save in another.

McLean, Va.-based Capital One did not announce any new products on Thursday, but it is pursuing a similar strategy of spending more in pursuit of growth. Officials at Capital One said that operating expenses are expected to be higher this year than they were in 2014.

"In our domestic card business, we see attractive marketing opportunities to drive future growth," CEO Richard Fairbank said Thursday during a conference call.

Mike Taiano, an analyst at Burke & Quick Partners, said that larger marketing budgets make sense as a way for the card issuers to build their loan portfolios. "I think it's partly a function of an increased competitive environment," he said.

But the rising spending in the credit card industry goes beyond just marketing dollars.

Discover, which is operating under a consent order that is related to its anti-money-laundering program, said Wednesday that its regulatory and compliance costs will also rise in 2015.

"Across the industry, there are much more significant compliance expenses, driven by all the regulators," Discover's Nelms said in an interview with American Banker.

He mentioned living wills and stress testing, in addition to investments in Discover's anti-money-laundering program, as areas that will require more spending. "It's across the board," Nelms said.

Capital One executives also referred Thursday to the rising cost of regulatory compliance. And they spoke at length about their substantial investments in digital technology, warning investors that the spending will not result in dazzling short-term returns.

"There's almost nothing that we're investing in digital where the primary objective is to save money," Fairbank said. "I think in the long run there is going to be [a] very significant cost benefit from all these digital investments. But the biggest benefit, and the reason we're doing it, is in almost all cases not for that reason."

Of the three large card issuers, American Express appears to be most focused on controlling costs. To that end, the New York-based company announced Wednesday that it is eliminating more than 4,000 jobs in the first quarter.

But Amex also noted that it is adding new jobs. And analysts said the job cuts appear to be part of the company's long-term strategy to eliminate back-office positions that fail to generate revenue.

Eliminating jobs may not sound like a growth strategy, but in Amex's case, it allows the firm to invest in other areas while restraining growth in operating expenses.

"This discipline around operating expenses allowed us to continue investing for growth," Amex Chief Financial Officer Jeff Campbell said Wednesday during a conference call with analysts.