JPMorgan x Credit Card King

JPMorgan Chase has quietly cornered the millennial market

When looking at the numbers, JPMorgan Chase (JPM) is undoubtedly firing on all cylinders. They have grown their tangible book value per share every year since 2004, in spite of the 2008–2009 economic recession.

(JPMorgan Chase 2016 Annual Report)

Their assets under management have continued to grow as well. Notice specifically the consistent and persistent growth in consumer deposits (the purple section).

(JPMorgan Chase 2016 Annual Report)

JPMorgan Chase had a strong year for credit cards in 2016:

  • New accounts opened was 10.4 million, 20% YOY
  • Sales Volume was $545 billion, 10% YOY

These numbers are good enough to make them the #1 U.S. credit card issuer and #1 U.S. credit and debit sales volume (JPMorgan Chase 2016 Annual Report).

(JPMorgan Chase 2017 Investor Day Presentation)

However, card income dropped considerably from $5.9 billion in 2015 to $4.8 billion in 2016 and will likely continue to drop in 2017. What is going on? Further, what indication is there that they can continue to grow their deposit base and their tangible book value?

These kind of questions cannot be answered by looking at their financials and we must look deeper into their specific consumer strategy for answers.

When a consumer looks to open a checking account, they really are doing much more than that. They are starting a long term relationship with a bank from which they will likely also later open a mortgage, take student loans, and entrust to look after their descendants wealth.

I do not want to minimize the great effort CEO Dimon and JPMorgan Chase have put in to take such great market share, but I have a hunch that I have found their Trojan horse.

Gordon Smith, CEO Consumer & Community Banking, had this to say about the blockbuster Chase Sapphire Reserve credit card released in 2016.

Since we are more than a credit card company and given our new customers’ strong satisfaction and engagement with their Sapphire Reserve cards, we are confident they will also choose Chase to do more of their banking, investments and loans.
(Chase 2016 Annual Report)

The reason for the card’s success were many:

  • It had a massive 100k point signup bonus. (Good for roughly $1.5k in travel.)
  • It was among the first premium cards to be made of heavy metal material. American Express (NYSE:AXP) only followed suit with their flagship Platinum card in March 2017.
  • It had easy to redeem travel credits to offset the annual fee.
  • It had very generous restaurant/travel spending categories.

The Chase Sapphire Reserve was only the tipping point — JPMorgan Chase has been perfecting a sticky ecosystem for quite some time already. JPMorgan Chase will continue to dominate because they are prioritizing gaining market share over maximum profitability (think Amazon). Look to see their stock price move away from the pack and gain a growth ratio. I expect JPMorgan Chase to trade up to a p/e ratio of 20 in the next five years. If they were to do so now then they would trade at 120.

One of the fictions here is that the marketing cost … gets booked over 12 months. The benefit of the card gets booked over 7 years. The card was so successful it cost us $200 million, but we expect that to have a good return on it. I wish it was a $400 million loss.
CEO Jamie Dimon interview with CNBC)

Credit Cards: The Trojan Horse

We are living in a digital payments world where we only need to carry cash for that one rare restaurant that doesn’t accept credit cards. I personally do not carry more than $10 in my wallet at any time. In this article I clear any misconceptions the reader may have about the credit card industry, especially that American Express is the leader in premium credit cards. You will understand what the current market looks like, as well as what a millennial looks for in a credit card. I will explain why JPMorgan Chase is investing so much in their credit card business, and show how they have successfully cornered the millennial market.

The following analysis I suspect is ignored by most analysts who spend all their time looking at the financials. In fact, I wonder if many still are not using credit cards themselves. By spending time understanding these industry specifics we will be able to understand beyond the numbers what exactly it means to be “best of breed” in the banking industry.

The credit card preferences of the current millenial market:

(Data and chart created by Author)

A look at their currency

The three most important points currencies are as follows:

  1. Ultimate Rewards from JPMorgan Chase
  2. Membership Rewards from American Express
  3. Thank You points from Citi (NYSE:C)

They may have several credit card offerings which all earn points toward the same currency. These points could be used to transfer to airline/hotel partners, purchase travel expenses in the travel portal, or redeem for statement credit.

According to, JPMorgan Chase points are worth 2.2 cents/point, American Express points are worth 1.9 cents/point, and Citi points are worth 1.5 cents/point. Let us now do an analysis to see why JPMorgan Chase has the most valuable currency.

Transfer Partners

(Data from Value Penguin, chart created by Author)

While JPMorgan Chase has the least partners in numbers, one should not take this to mean that they have the worst transfer partner offering. Rather, it is the opposite, we can see that they have focused on more of the higher quality offerings which appeal to millennials (especially Southwest Airlines (NYSE:LUV)).

American Express is not necessarily significantly worse as in theory their partners will allow you to travel anywhere that JPMorgan Chase can take you, but in practice the partner’s redemptions websites are much harder to navigate. For example, one using American Express points might use ANA Airlines as their transfer partner, but their award redemption website is extremely outdated. One using JPMorgan Chase would instead use United Airlines which has invested greatly into making their website a much more user friendly platform than peers.

Citi is in clear last as it does not really boast any unique transfer partners.

Travel Portal

(Chart by Author, data from Value Penguin)

JPMorgan Chase again is clearly on top. This is a good moment to also note that Citi used to offer 1.6 cents/point for American Airline redemptions, but this was ended July 2017. This may improve profitability, but in my opinion this is a step in the wrong direction.

Statement Credit

Often times there may not be travel planned and thus no travel related redemptions available. In this case, the last best option is directly receive statement credit/ pay off charges with the points.

(Chart by Author, data from Value Penguin)

JPMorgan Chase clearly is the most generous here — American Express and Citi users probably will never find themselves using the statement credit option.

As we can see, JPMorgan Chase has the strongest and most appealing rewards currency. This creates a strong “ecosystem” that will be made even more clear when we look at the individual card offerings below.

The Individual Offerings

The typical user will choose one premium credit card, along with at least one “everyday” card. We examine both below:

Premium cards

I consider the premium to be the “anchors” like a quarterback is to a football team or an anchor tenant is to a mall property. These cards help to attract high net worth individuals who are likely to also open checking and savings accounts (cross selling).

(Note: When I refer to “3x” or “3%”, I am referring to how much is earned per dollar. For example, “3x travel and dining out” means that one would earn 3 points for each dollar spent on dining out)

(Chart by Author, data from Value Penguin)

To give you an idea of how valuable the signup bonus is, 50k JPMorgan Chase points is worth $750 using the travel portal mentioned above. The most important column is the one titled *effective annual fee. I calculated this by subtracting from the annual fee all easily redeemable credits.

For American Express, airline incidental fees is defined as “checked bags, in-flight refreshments, flight-change fees, airport lounge day-passes” (American Express Airline Fee Credit). Most users will not find themselves using these thus I did not give credit to this.

We can see that the Chase Sapphire Reserve is the cheapest card, and the American Express Platinum is the most expensive, but does it offer enough value to compensate for this?

The Citi Prestige has an interesting 4th hotel night free benefit, but it still is not worth paying more for this card when the currency is much inferior.

Comparing JPMorgan Chase and American Express, the question becomes whether the gold status at Hilton, Marriott, and SPG is worth $200. From my experience this is a resounding no: the main benefit of the gold status is that you may get a room upgrade if available which are usually unavailable, and are only slight upgrades (an example upgrade is going from a connecting room to a non-connecting room).

If this is not enough, the Chase Sapphire Reserve also offers 3x points on dining out — this spending category is much more coveted than the 5x points on flights/hotels offered by the American Express Platinum. Millennials do not want a card with pseudo upgrades. They want a card that can be used everyday. The same cannot be said about the American Express Platinum.

Side note: Bank of America (NYSE:BAC) and U.S. Bancorp (NYSE:USB) have recently released new premium cards, but they do not have a competitive ecosystem. (Bank of America is admittedly almost there with their premium rewards program. I will look at this in a future article)

Now let’s examine the “everyday” cards. All these cards have annual fees and they also come with much lower signup bonuses.

(Chart by Author, data from NerdWallet)

The Chase Freedom is an interesting card in that it offers 5 points back on a category that is stated every quarter, as seen below:

(Chase Freedom Calendar)

One can surmise that a typical JPMorgan Chase customer may have the Chase Sapphire Reserve, Chase Freedom, and Chase Freedom Unlimited. This means that they have the following spending categories:

  • 3x restaurants/travel
  • 5x gas stations/ grocery stores/ restaurants/ department stores, rotated quarterly
  • 1.5x everything else

This is very hard to beat, and the strong JPMorgan Chase currency just makes it even more attractive.

Do you still not believe me? The 5/24 rule

JPMorgan Chase in late 2016 implemented a rule that they will reject any applicants with more than 5 credit cards opened within 24 months, known as the “5/24 rule.”

The consumer public has responded by creating credit card application strategies centered around the 5/24 rule. The idea is to make your first five credit cards from JPMorgan Chase and only then apply for cards of the other issuers. Even though other issuers have their own similar rules, the public has only really made strategies around JPMorgan Chase. When the public takes such strategic measures, you know you are the absolute leader.

Bottomline: JPMorgan Chase has successfully differentiated their product offering to create a real cult following. JPMorgan Chase is offering the cheapest and best cards out there. When you open a Chase credit card, you are not getting just any credit card, you are also joining the most rewarding and customer-focused ecosystem.

The main challenge to the credit card industry: Churning

Most analysts would be most concerned with credit loan quality. We can see in the chart below that JPMorgan Chase has not been sacrificing credit quality in the pursuit of market share:

(Chase 2017 Investor Day Presentation)

However, there is yet another challenge to consider:

Observant readers may be wondering, What is stopping a customer from simply applying for a premium card, gaining the signing bonus, cancelling, then signing up for the next premium card?

Nowadays this is known as “churning” and is a serious issue which all the banks have taken measures in addressing. The differences in the way they have approached this show a great deal in their strategy. Whereas Citi responded by removing many benefits, making their Citi Prestige significantly less valuable (The Points Guy), JPMorgan Chase has instead responded by continuing to improve the value of their currency and improve the appeal of their premium and everyday cards. Why are they doing this, are they just throwing away money?

Not quite. Citi and American Express have been focused more on immediate profits from their premium cards. JPMorgan Chase has taken a more long term view and it seems to me that they do not view their premium cards in the same way — they instead seek to take aggressively take market share (sound familiar?).

The longer JPMorgan Chase remains the market leader, the greater market share they will gain in consumer banking. Consumers will be more likely to open checking/savings accounts, finance mortgage loans, and establish long lasting relationships with JPMorgan Chase.

Not only this, but we must also think from the perspective of the rewards partners. If you are an airline like United Airlines, do you want to be partners with the laggards or leader in the industry? JPMorgan Chase will be able to gain market share even among airlines, hotels, retailers, and any company that can offer rewards.

This creates a constructive cycle: as JPMorgan Chase gains more consumer customers, they also gain more rewards partners. This creates a stickier and stickier ecosystem for both the consumer and rewards partners.

Credit card issuers with lesser currencies will continue to see their cards churned. Once “churners” run out of premium credit cards to “churn” they will continue using their JPMorgan Chase credit cards because the currency is the most valuable.

JPMorgan Chase has seen the big picture: the goal is not to gain immediate profits from their credit card business, instead the goal is to become forever remembered as the best credit card provider.

When you have a question about anything, you Google it.

When you want to do online shopping, you check on Amazon.

When you want a credit card, you go to JPMorgan Chase.


One final note

There is one more partner I want to point out:

(Amazon Website)

It is good to invest with the best.

Valuation compared to peers and Conclusion

(Chart by Author)

One thing to take away from this chart is that Wells Fargo (NYSE:WFC) is much too richly valued. I really do believe that having a strong credit card offering will be a main driver of ability to get new accounts in the future and Wells Fargo having absolutely no representation in premium credit card space puts them at a clear disadvantage.

(Chart by Author)

JPMorgan Chase has taken a unique strategy as compared with other credit card issuers in pursuing market share over immediate profits. I believe that this will enable them to continue to take market share for years to come. The Street will eventually recognize this and the stock price will pull away from peers towards a real “best of breed” multiple.

Buy and hold for the long future.

Disclosure: I am/we are long JPM, BAC.