JPMorgan Chase & Co. is discontinuing a secured credit card it inherited from Washington Mutual Inc. just as observers are predicting that the recession and new regulations will boost consumer demand for this niche product.
Secured credit cards, which require a consumer to put up cash collateral equal to the amount of their credit limit, were introduced in the 1980s as a way for issuers to groom people with limited or tarnished credit histories into better prospects for acquisition. Cardholders who demonstrate their creditworthiness by making timely payments over a year or more can graduate to a traditional, unsecured card.
Though secured cards are said to generate paltry profits, they are seen as a way to cultivate long-term relationships with little downside. Wells Fargo & Co., which has offered a secured card since 1992, says the product makes customers more loyal and less likely to switch to another issuer. Several other large issuers, including Bank of America Corp., Citigroup Inc., U.S. Bancorp, and HSBC Holdings PLC's U.S. cards business, offer secured cards.
JPMorgan Chase did not offer a secured card when it acquired Wamu's banking operations last year. The New York company confirmed last week that it is winding down Wamu's secured card portfolio.
The decision was part of JPMorgan Chase's "conversion of Washington Mutual's credit card portfolio to Chase systems, policies and practices," Elaine Franck, a company spokeswoman, wrote in an e-mail. CreditMattersBlog.com reported the decision last week.
JPMorgan Chase opted against selling the accounts to another issuer. Instead it "will be issuing refunds for funds in the secured card savings accounts in excess of balances owed," Ms. Franck wrote. "We will also credit any portion of the annual fee unused for the account year." She would not say how profitable the portfolio was or whether JPMorgan Chase eventually plans to reintroduce a secured card.
Bankers and observers said they were surprised by the decision.
"This would seem to be the exact wrong time to be getting rid of secured cards," said Jennifer Tescher, the director of the Center for Financial Services Innovation, a nonprofit affiliate of ShoreBank Corp. "I think they're going to become an incredibly important tool given the regulatory changes around credit cards that we've just seen from the Fed, and the state of the economy, and the state of the average consumer's credit score."
Ms. Tescher, who said she was unfamiliar with Wamu's secured card, acknowledged that for a large issuer like JPMorgan Chase, the overhead and work involved in starting such a program might be unappealing in an economic downturn.
"If secured cards weren't a business you were already in, given the current environment and the new regulations, it wouldn't be unusual to have an institution say, 'I can't be bothered.' But I do think it's shortsighted."
Dinna Martinez, the product manager for Wells Fargo's secured card, said the San Francisco company has no intention of discontinuing it.
Demand for Wells' secured card has been "pretty consistent" in recent months, she said, but there may be an opportunity for growth. "Certainly being aware of the economy, we are thinking of ways to better serve our customer, how that would apply to the product."
Ms. Martinez would not say whether Wells' secured card was profitable or disclose its chargeoff rate. She said "a significant percentage" of customers move to an unsecured card after 12 months of on-time payments, but she would not elaborate. "We do see a longer-term relationship with them after graduation," she said.
Secured cards are marketed mostly to consumers without credit histories, like students or recent immigrants, or to consumers who cannot qualify for unsecured credit after bankruptcy, foreclosure, or other defaults. If a consumer defaults on a secured card, the up-front deposit — usually a few hundred dollars — covers the issuer's losses.
In the past decade secured cards were eclipsed by prepaid debit cards, which are widely marketed to underbanked consumers, and by subprime credit cards, which usually carry higher fees but require less up-front collateral.
"When subprime credit became mass-marketable … the secured card got relegated to the back bench and really wasn't a big item," said Irving J. Levin, who ran secured and other card programs in the 1980s and 1990s.
Subprime cards — which some critics call "fee harvesters" — are facing new federal regulations that observers said are likely to reduce their availability. Under rules adopted last month, no more than 25% of the credit limit can be charged in start-up fees on the first statement of a new account, and if the fees exceed 25% of the total limit, their cost must be spread over a period of at least six months.
The regulations are "really causing shrinkage in the subprime nonsecured card market. Big guys have really stepped away from that," said Mr. Levin, who is now the chief executive of Genesis Financial Solutions Inc. "And now the secured card is really going to have a place."
Secured cards are profitable "in and of themselves" because of their low funding costs and loss rates, he said. Chargeoff rates "typically mirror those for prime unsecured card accounts." But secured card accounts are expensive to acquire and service, and they "require different processes and controls," Mr. Levin said. For large issuers, such differences can be "distractions because the secured card account bases are almost always a small fraction of total issuance."
Observers said the economic downturn has renewed interest in secured cards among consumers who want to use a debit-like product to control their spending while building a credit history. Prepaid cards offer fewer credit-reporting features.
At the online lead generator Credit.com Inc., consumer "click-throughs" to secured card offers jumped about 27% from a year earlier in the fourth quarter, according to John R. Ulzheimer, the company's president of educational services.
"With job losses and foreclosures, they are a viable option for people to start rebuilding their credit scores now," he said. "I'm not entirely sure why you would discontinue a product that really has no risk to it."
