Why Banks Only Care About the 1%

Activist movements like Bank Transfer Day have been instrumental in getting ordinary people to take action when banks are taking advantage of them. But as much as banks claim to want everyone's business, the reality is that some business is a lot more lucrative than others. And when it comes down to it, banks will go to where the profit is -- even if it means treating its ordinary customers worse than they deserve.

One niche in which this emphasis on high-wealth customers is obvious is in the credit card industry. While everyday Americans worry about getting a low interest rate when they carry a balance or avoiding expensive fees, venerable Wall Street financial institutions are fighting tooth and nail for customers in what Occupy Wall Street would call the 1%.

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Credit and debit cards have become nearly a necessity for most Americans. Simple tasks like renting a car or reserving a hotel room become a lot more complicated without some kind of plastic. In particular, credit cards are far more flexible in letting you get things done without worrying about your current bank account balance.

But for the well-to-do, credit cards are often far more about status. Ever since its beginning, American Express (NYS: AXP) has appealed not to necessity or convenience but rather to status and exclusivity. Starting with its legacy Green Card and going up through gold and platinum offerings to the current pinnacle, its Centurion Card, AmEx has built its reputation on encouraging its cardmembers to climb the status ladder -- regardless of cost.

More recently, other Wall Street institutions have taken aim at challenging AmEx's dominance of the 1% set. As an article in Barron's over the weekend explained, JPMorgan Chase (NYS: JPM) has built up its own lineup of high-status cards, including a card made of the precious metals palladium and gold that's available only to the Wall Street bank's private banking clients.

What's at stake
Obviously, serving the 1% carries its own rewards. Even with only a small fraction of AmEx's customers holding Centurion Cards, the $7,500 initiation fee and $2,500 annual fee adds up -- and the word-of-mouth value of having celebrities among the cardmember ranks is valuable for marketing. High volume of purchases also lets banks earn more transaction-based income from sources like interchange fees. Moreover, if JPMorgan can get new private banking clients simply because of a credit card offering, the cross-selling profit opportunities are certainly worth it, giving it a potential competitive advantage over rival Goldman Sachs (NYS: GS) in offer lucrative financial services to the ultra-rich.

But the greater potential impact of high-end credit cards is an industry-wide change in the playing field. In many industries, the well-to-do can count on free perks that regular customers don't get. If even the rich have to pay for credit cards, however, then it justifies card companies' imposing fees on their lower-end customers -- even for cards that don't offer anything close to the benefits 1%-targeted cards have.

Winners and losers
AmEx stands to win twice from its high-end card offerings. Because it retains credit risk on its cards, AmEx both reaps more income and avoids more losses with financially secure customers, versus run-of-the-mill cardholders.

Yet even without that consideration, rival card networks Visa (NYS: V) and MasterCard (NYS: MA) have to challenge AmEx's status in order to compete for the best customers. With the help of issuers like JPMorgan Chase, card networks can boost their own image to rich clientele -- and that's an important draw for prospective issuers choosing which network to use to back their cards.

What to do
Unless you're rich enough that you don't need to worry about annual fees on credit cards, high-end offerings are only worth getting if you particularly value the specific perks a card gives you. With so many lower-end cards offering rewards like cash or frequent-flier miles at little or no annual cost, most people outside the 1% will do much better choosing a plain vanilla rewards card over a high-priced status card.

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At the time thisarticle was published Fool contributor Dan Caplinger loves his credit card rewards. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of JPMorgan Chase and MasterCard. Motley Fool newsletter services have recommended buying shares of Visa and Goldman Sachs, as well as writing a covered strangle position in American Express. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy yells, "Charge!"

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