By David Henry
NEW YORK (Reuters) - Morrie Low, a 28-year-old who works for a mobile technology start-up in Seattle, called from vacation in Taiwan to chat about what he has been doing the past year with his Chase Sapphire Reserve card.
Sapphire Reserve is the credit card that shocked the industry when JPMorgan Chase & Co debuted it in August 2016. Upwards of 1 million people signed up as users wrote in internet posts that its perks, credits and give-backs were so rich people could recoup the $450 annual fee and pick up another $1,000 or so of value.
"It is definitely working out for me," said Low, recounting trips he made using Sapphire Reserve and other card travel rewards to Miami, Berlin, London, the Philippines and Taiwan.
It has not worked out so well for JPMorgan's card competitors. And it is not clear when, or if, it will work out for JPMorgan, analysts and bank executives said.
Entering the premium card market with the Sapphire Reserve, JPMorgan dramatically undercut the pricing of the Platinum Card of American Express Co and the Prestige Card of Citigroup Inc. It also lured credit card spending from customers of Bank of America Corp .
An American Express executive earlier this year called the move a "full frontal assault" on the Platinum Card. On Thursday, a Citigroup executive said that after JPMorgan's move Citi changed course and turned its marketing toward no-fee cards that offer free borrowing for as long 21 months instead of travel rewards.
"We shifted our focus away from rewards because of the competitive heat," Citigroup Chief Financial Officer John Gerspach said in a conference call with reporters on Thursday after the bank posted quarterly results.
Bank of America introduced a new rewards card in September but was "very careful to balance the customer value with the shareholder value," Chief Financial Officer Paul Donofrio told analysts on Friday after the bank reported results.
Investors are concerned that card issuers are stretching too far as they compete for business, whether through extra givebacks to customers or by granting more credit to riskier borrowers. On Thursday, disclosures by JPMorgan and Citigroup that they had increased provisions for credit losses hurt their shares even though the two reported profits that beat expectations.
JPMorgan's invasion of the premium card business illustrates how Chief Executive Jamie Dimon is leveraging the scale and strength of his bank, the biggest in the United States, to undercut profit margins of competitors and take away business, analysts said.
"This is another example of Dimon's scorched earth strategy," said one analyst, who declined to be named talking so bluntly about the bank's tactics.
JPMorgan has also muscled in since the financial crisis on European debt, fixed income trading, securities custody for institutional investors and commercial lending.
Earlier this year Dimon quoted Jeff Bezos of Amazon.com as saying "your margin is my opportunity," noted analyst Jason Goldberg of Barclays. "JPMorgan is trying to bring some of that to the financial space," Goldberg said.
The company has not given an exact cost for the Sapphire Reserve foray. It has said it must account for the expense of signing customers in the first year and that those costs have run as much as $200 million each quarter.
That $800 million a year is a lot of money for most companies, but less so for JPMorgan, which this year is expected to earn about $25 billion, one analyst said.
BIGGER SHARE OF CUSTOMERS' WALLETS
The move on premium cards is also an example of how Dimon's lieutenants throughout the bank look for thin spots in their market penetration. When JPMorgan brought out Sapphire Reserve, its no-fee, low-fee and cash-back cards had already made it a strong second to American Express in card spending, according to the Nilson Report.
But it needed a premium travel card of its own for its customers, Jennifer Piespzak, chief executive for Chase Card Services, said in an interview.
"For us to be able to earn the greatest share of the customer wallet, we don’t want them to have American Express Platinum," she said. "We want them to have Sapphire Reserve."
JPMorgan earlier this year cut its sign-up bonus for Sapphire Reserve in half, saying the initial offer was to attract a base of users.
Now the bank is trying to hold and consolidate the territory it has taken. It has kept the spending credits and travel perks attractive enough that Low said he is paying the annual $450 fee again to renew and tossing other cards in his sock drawer.
And, the bank is promoting Sapphire Reserve in the first television ads it has launched in 18 months for a consumer credit card. The ads show late night talk show wit James Corden asking millennials to plan his next vacation as they travel the world with the card.
Winning over millennials has been the goal from the start, said Pam Codispoti, the executive in charge of the card, who was recently promoted to be in charge of the bank's 5,000-plus branches.
"We want to build lifelong relationships as they buy their first car, invest in their first home, and build their deposits and investments," Codispoti said in an interview.
JPMorgan declined to tell reporters or analysts on Thursday how many people have dropped the card or whether holders are borrowing as much the company has been counting on.
Codispoti said, "We feel good about what we are seeing, but it is really early" to say how the card's story will end.
(Reporting by David Henry in New York; Editing by Cynthia Osterman and Steve Orlofsky)