Card deals: Amazon wants buyers to borrow

Amazon's giveaway deal with JPMorgan Chase & Co.'s giant credit card operation, which is centered in Delaware, sounds so generous, you wonder how the two giant companies are making any money.

"We’ve expanded benefits on the existing Amazon Rewards Card, and launched a new Amazon Prime Rewards Card that provides 5% back on purchases" for Amazon Prime members, Chase spokeswoman Maria Martinez told me.  Chase has also cut foreign exchange fees, encouraging foreign buyers.

Amazon invited banks to bid for the new program in mid-November, according to people at teh bank. Chase already offered an Amazon card and was able to launch the new program fast.

Amazon's reported profits from credit cards are still small, but growing quickly. In its most recent quarterly report, Amazon said it earned $372 million in North American profits from "other income," including credit cards and certain unnamed advertising services, during the fall quarter, up from $249 million during the same three months a year earlier.

That 53% one-year increase is double Amazon's overall sales growth rate (27%).  The company's growing earnings totalled $1 billion a month in 2016. So "other income" including cards is already more than $1 in every $10 Amazon makes in profits. 

How long will Amazon grow richer from consumers' borrowed money? Old-fashioned retailers have a long, and not always happy, history with credit cards.

Sears, Montgomery Ward, JCPenney, Federated/Macy's, and most recently Cabela's boosted sales for years by adding varied combinations of branded cards through their own proprietary banks and "cobranded" deals with partners like Chase.  

Those arrangements, particularly the store-owned cards, followed a familar cycle:

First, shoppers flocked to open card accounts, drawn by bonuses like Amazon's discounts.

The new cardholders spent more, boosting sales reports. They ran up card debts, juicing company profits as consumers posted monthly interest payments.

And then, as the loans "matured" over a few years, the issuers booked rising losses, sometimes leading to the sale of the portfolio and a writedown or fall in profits. Cabela's sold its card bank to Capital One Inc. as the chain faced bankruptcy reorganization and was taken over by Bass Pro Shops last year.

Has Amazon and its partners learned from others' credit adventures? "From Amazon's point of view, they can't lose," insists Bill Keenan, chairman and CEO of Wilmington-based credit card advertising agency and consulting group DeNovo Corp. 

Amazon issues cards through two different bank partners -- GE's former Synchrony Financial unit, and Chase. "They don't own the infrastructure, they don't own the assets, they aren't burdened by the bank regulators," Keenan said.

How can Chase and Amazon share profits after a 5 percent upfront discount? "Chase is looking for low cost of account acquisition, which can significantly compensate" for finance costs, Keenan told me. "The Amazon card is a reminder in your pocket." Like a portable ad, offering an instant discount.

"You can bet Chase is funding a good portion of that incentive," Keenan added. Martinez said Chase won't comment on how large Amazon's program has grown.

Keenan says Chase and Amazon have plenty of customer spending and targeting data to help maximize sales -- especially to customers who can be counted on to run up a tab and make lucrative double-digit interest payments every month -- while minimizing losses to fraud and people unable to pay.

"The big challenge is the customer who doesn't revolve" -- which is to say, doesn't borrow, Keenan added.

Consumers who can afford to pay off what they owe every month, and are disciplined enough to do so, are less profitable than borrowers who become accustomed to sending monthly double-digit interest payments.

Amazon has shown before it's willing to wait for its markets to mature, deferring profits if it can boost its share of customers' wallets in the meantime.