Wells Fargo & Co, the fourth-largest U.S. bank, is trying to grow its relatively small credit-card business with an unusual strategy: appealing to its customers' distaste for debt.
In 2007, Wells Fargo debuted the Home Rebate Card, which offers a 1 percent rebate that automatically goes toward paying down principal on a Wells Fargo home loan. In the coming months, the bank has plans to roll out cards that provide similar benefits to customers who have taken out student loans, auto loans and other types of consumer debt from the bank.
"The real thing customers wanted was to pay down their mortgage," Tom Wolfe, Wells Fargo's executive vice president for consumer credit solutions, said in a recent interview. "That created a thought process where we asked, 'Why don't we offer that service for all our products?'"
Wells Fargo believes offering such rewards cards is one of its best bets for boosting the credit card business at a time when consumers remain wary of taking on debt. Outstanding balances on credit cards and other types of revolving debt in the United States have remained flat over the past three years, Fed data show.
Only about one-third of Wells Fargo's customers carry the bank's own credit cards - a relatively small number for a bank that controls roughly 10 percent of all U.S. deposits and prides itself on selling customers multiple products. It is ranked eighth among U.S. credit card issuers, with purchase volume of $66 billion in 2012, compared to $566 billion at top-ranked American Express Co and $416 billion at second-place JPMorgan Chase & Co, according to the Nilson Report.
The success of Wells Fargo's strategy remains to be seen. The bank is not the first to cater to customer frugality. Credit card companies like American Express and Discover Financial Services have long allowed customers to use reward points to pay down card balances, said Scott Valentin, an analyst at FBR Capital Markets.
Its reward program may also not be the best value for customers who prefer to get cash-back rewards to use as they wish, said Odysseas Papadimitrious, chief executive of Evolution Finance, the parent company of CardHub.com, and a former executive at Capital One Financial Corp.
Wells Fargo declined to say how many customers have a Home Rebate Card. But it said more customers pay their balances in full each month on the Home Rebate Card than on the bank's other cards, and fewer customers default on their loans compared to similar card products, according to Wells Fargo.
The bank estimates a customer with a $150,000 home loan who spends $1,500 a month using the card could shorten their payment schedule by over one year. In May, the bank said customers had paid down $50 million in mortgage balances since the card's 2007 launch.
In adopting the strategy, Wells Fargo is counting on its ability to deepen its relationship with consumers across many different types of products.
"Wells Fargo puts its claws in you," said Tom Jalics, a senior investment analyst with Key Private Bank in Cleveland, Ohio. "They give you a mortgage and cross-sell you on every other product they sell. They've really been able to differentiate themselves there."
(Additional reporting by Lauren Tara LaCapra; Editing by Jeffrey Benkoe and Andrew Hay)