67-The New Schwab Credit Card and What it Tells Us
Charles Schwab Corporation is introducing the Schwab Bank Invest First Visa Signature credit card. This no-annual-fee card offers an unusual set of benefits. First, it returns a 2% cash rebate on all purchases, one of the highest rebate promises around, and it has no pre-set spending limits to start the rebate. Most other cards impose minimum spending hurdles before the rebates kick in. Next, there are no category (e.g. type of retail) restrictions on the spending with the card in order to earn the 2%. This benefit contrasts with most rebate card programs that require spending at certain locations to get the highest rebate. Finally, Schwab charges no foreign exchange fees if the card is used overseas.
You see from the name of the credit card, the “Visa Signature” brand, that the card is targeted for big spenders. It is likely to succeed in attracting them. The benefits are very attractive in today’s market.
You may recall that the rewards credit card started back with the Citibank American Advantage card. This card offered one airline mile for every dollar spent on the credit card. And the card itself carried a fee. Until a few years ago, the value of the mileage rewards on credit cards was around 2%. Today, it is more likely to be 1%, if that, and the miles can be very difficult to redeem. It is no wonder that the largest growth in reward cards is in non-airline reward cards. This new Schwab card offers benefits worth at least twice what the airline cards offer and it charges no fees to boot.
Schwab is introducing this card in order to accomplish two goals with these very attractive large customers. First, they expect that new high net worth customers will open accounts with Schwab. Second, Schwab expects that many customers will consolidate their other credit card relationships with Schwab in order to take advantage of Schwab’s generous terms. Once the customer opens an account with Schwab, and begins using the new credit card, Schwab will credit the 2% of spending to the customer’s Schwab account. The customer, in turn, will use either a check or a debit card to withdraw the reward money.
This new Schwab product illustrates two patterns of market evolution. First, industry profits are high. You will read about the credit losses that the companies are incurring. They are, indeed, rising. Still, credit card issuing is a very profitable business. In fact, profits are so high that new entrants, like Schwab, are continuing to enter the market. The market is very attractive, no matter the anguished cries, as long as it has new entrants. (See the Symptom and Implication, “New competition is entering a settled market” on StrategyStreet.com.) Second, companies who sell several related products tend to dominate industries. Each new product may stand on its own base of profits, but it may also complement other products in the customer relationship. (See the Perspective, “Achieving the Low Cost Position” on StrategyStreet.com.) Industry leaders can afford to subsidize new products, if they have to, if they can gain new revenues and profits, either from selling a new customer other products or the new product to current customers. As long as the customer opens a new account, or consolidates balances with Schwab, Schwab will gain more than just the credit card profits from this new credit card.
This is not an uncommon pattern. You may recall the Netscape story. Netscape introduced a very profitable browser. Microsoft, as the industry leader, felt threatened by Netscape’s browser and introduced Internet Explorer in answer to it. However, rather than selling the Internet Explorer, Microsoft included it free in its Windows package and wiped out Netscape’s market. Microsoft figured that it made more sense to have the browser customer stay in the Windows family than to let that customer loose where someone else might offer him another operating system or office tools.
The Schwab move is consistent with the way the company has approached the market since Charles Schwab’s return as CEO. Before his return, the company was stumbling. It had raised its prices well above its peers. Customers were defecting. The company was losing market share and Schwab’s returns were dropping. Schwab returned as CEO, immediately reduced prices and the company became much more aggressive in the market place. The company’s returns grew apace. Nice job by Charles Schwab and the company.
This new Schwab credit card will threaten a lot of people, especially the legacy airlines. More on that in our next blog.
This Schwab credit card idea was so successful for Schwab that it expanded on the idea at the high end of the market. In 2016, Schwab introduced the American Express Platinum Card for Schwab. The card is a near identical twin to the American Express Platinum Card which has luxurious perks and a $695 annual price tag. This new Schwab card is a co-branded card offering most of the American Express benefits. The American Express card requires an excellent credit history and the willingness to pay the $695 annual fee. The Schwab standard card carries no fee (there is a $695 annual fee for the platinum version with more benefits) but does have an extra requirement, the need to have a minimum sized brokerage account or an IRA held with Schwab. In a benefit that American Express does not offer, this new card offers membership rewards points, which can be redeemed for cash expenses of travel, gift cards and shopping. It unlocks the ability to cash out membership rewards points directly for cash, a benefit not offered by American Express. The Schwab cards cash out rate is 1.1 cents per point compared to an effective rate on the far more limited American Express product of .6 cents per point. The Schwab product also offers other, priced based, benefits not offered by the American Express product.
Schwab is offering a Price Leader product version of a Performance Leader product with the standard version of the American Express card. Schwab’s platinum version of the American Express card is also a Price Leader version of a high-end Performance Leader product. In both cases, Schwab is offering the same product benefits as the branded American Express products, but at a lower net out-of-pocket cost. See HERE for definitions and examples of these Price Points.
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