The End Of The Schwab Card?

A couple of years ago, Schwab Bank stirred up the waters a bit when it launched a card that offered 2% cash back on all purchases.   This set the standard for cash back reward cards that few could meet.   Many people wondered how they could offer such a great rate.   In April of this year, they announced that they would no longer be accepting applications for new cards.    Existing cardholders still received the deal, but newcomers were out of luck.   Now, speculation is rampant that the 2% deal will be dropped when their cardholders are sold to FIA.

How Were They Offering 2%?

There are many cards out there that offer reward points or miles that can be worth more than 2%.   The key is that the bank purchases the miles/points in bulk by the billions from the airline/hotel/or travel company.    They these points for a small fraction of what most consumers value the points at, typically well less than 1 cent per point or mile.   It is up to the savvy cardholder to find the value in an award redemption that exceeds 2%.

When it comes to cash back, the story is different.   Schwab was clearly hoping to break even off of merchant fees while attracting new customers to its brokerage.    They also hoped to make money off of interest.  Back in April, Schwab’s spokesperson was quoted as saying:

“The card was designed and modeled based on a very different economic environment than what we’re experiencing now after the financial crisis, in particular a change in people’s approach to using credit,” he wrote. “The economics of the program are being reviewed based on the current environment and usage patterns. For example, the majority of cardholders are not revolving credit.”

Statement such as that lead The Consumerist to believe that “Without a balance, there’s no interest charges, and Schwab wasn’t making any money.”    I have to disagree with their rather simplistic view of the credit card industry.    If that were the case, no company would ever issue me a credit card, as I never have and never will carry a balance.    I have to believe that Schwab was at least breaking even on merchant fees, but it wasn’t generating enough new customers for it’s brokerage services in order to justify the program.    The idea that credit cards cannot survive without interest is unfounded, but that is what you would believe is your knowledge only extended as far as the Consumerist’s.

Is This The Failure Of A Business Model?

I am not so sure you can extrapolate the results of the Schwab card out to the rest of the industry.  Schwab was clearly trying to push the limits of cash back reward cards, although Fidelity continues to offer a 2% cash back card.    The idea that was intriguing to me was that a credit card would be offered not as a profit center, but merely as a loss leader for other services.   It is easy to imagine reward cards tied to other, more profitable financial services such as insurance and mortgages.    A good example is the automotive co-branded cars that offer up to 3% cash back towards a new car.    The idea is that once you get the car, you are committing to purchase a car from that manufacturer.

Either way, I have to applaud Schwab for giving this a try.   This is an example of pro-consumer competitive innovation in the credit card market.