Debit or Credit? Citi Places Its Bet

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By SUZANNE KAPNER

Making an aggressive push to rebuild a flagging business, Citigroup Inc. is stuffing America's mailboxes with credit-card solicitations.

Citi mailed an estimated 346 million card offers to North American customers in the third quarter, according to figures to be released later this month by Mail Monitor, a unit of research firm Synovate. That is more than one for every man, woman and child in the U.S. One in three credit-card offers that landed in consumers' mailboxes last month came from Citi, Mail Monitor estimates.

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The postal blitz is expected to make Citi the largest mailer of credit-card offers, ahead of longtime industry leader Chase, for the first time in eight years. It shows how Citi is trying to regain ground ceded to rivals after losing hundreds of millions of dollars on credit cards following the 2008 financial crisis.

In terms of dollars spent by U.S. consumers on Citi credit cards, the bank ranks a distant fourth, behind American Express Co., J.P. Morgan Chase & Co. and Bank of America Corp., according to the Nilson Report.

The push comes at a time when consumers, still smarting from bingeing on easy credit during the bubble years, are showing little appetite for new debt. In fact, Citi's peers have toned down their attempts to acquire new customers amid signs that the economy is slowing.

Citi said it is emboldened by a continuing reduction in uncollectible debts in its credit-card portfolio, a sign that the worst of the fallout from the financial crisis is behind the company. Citi's North American card business earned $584 million in the second quarter, compared with a $154 million loss a year ago.

Jud Linville, a former American Express executive hired last year by Citi to revamp its card operations, said he sees opportunity as rivals pull back. Mailings for American Express, Bank of America and Discover Financial Services all fell in the second quarter from the first quarter, according to Mail Monitor.

"This is a business where you look for vacuums," Mr. Linville said. "Are there players moving out of certain categories?"

One potential void was created last year by an addition to the Dodd-Frank Act, which overhauled financial regulation. Known as the Durbin Amendment, the new rules, which go into effect in October, will limit the fees that banks collect from merchants each time a debit card is swiped, making cards far less profitable for the issuers.

As a result, some issuers are making debit cards less attractive by charging monthly fees and eliminating rewards. Citi is hoping to capitalize on this change by convincing dissatisfied debit customers to use its credit cards instead.

Some new customers are being wooed with cards that aim to simplify the byzantine fee structure that card companies have adopted. Simplicity, which Citi rolled out this summer, offers no annual fee, no late charges and no penalty rates. Other cards offer 0% balance transfers at a time when interest rates are low.

Since these customers typically carry revolving balances, they could turn out to be profitable for Citi once the teaser rates expire in about two years, analysts said.

"Save when you switch. Save when you shop," proclaims one Citi mailing that offers 0% interest rates on purchases and balance transfers for 18 months, after which the rate would revert to 13.99%. "You're pre-approved to apply."

Citi said it is being more selective in its marketing, focusing on well-to-do consumers instead of the broader swath of customers targeted in the past.

But the solicitations won't come cheap for Citi. A piece of direct mail can cost upward of 70 cents, including postage, putting Citi's direct-mail expenditures at more than $240 million in the third quarter, analysts said. Acquiring customers through direct mail costs 10 times more than acquiring them through a branch network, which means Citi's costs probably outweigh those of Chase, which operates five times as many U.S. branches.

Overall card solicitations remain well off their highs of 2005. Response rates for direct mail have been falling, prompting issuers to turn to other avenues such as the Internet for acquiring new customers. Analysts said an issuer would be lucky to sign up 25 new customers for every 100 mailings. Because there is a lag time, Citi isn't expected to see a big bump in its portfolio for at least six months.

It is unclear how much success Citi will have convincing customers to switch from debit to credit. There were nearly 38 billion debit-card transactions in 2009, up from 25 billion in 2006, according to the latest figures from the Federal Reserve. Over the same period, the number of credit-card transactions fell to 21.6 billion from 21.7 billion.

Still, two-thirds of respondents in a survey conducted by the market research firm Mintel Group Ltd. said they would stop using their debit card or switch to another issuer if their bank charged a fee. Citi does not have a big debit-card business of its own, giving it more room to maneuver.

In its bid to get debit-card customers to sign up for its credit cards, Citi will face competition. In a recent bank statement insert, Chase posed the question "Debit or Credit?" and then made the case that credit cards are a "great choice for making all your purchases big and small." Chase said it isn't encouraging customers to switch from debit to credit.

Citi's Mr. Linville said he is unfazed by the rivalry. "This is about out-executing the competition," he said.