Joint card approval impasse still to be broken: rumor has it that J.P. Morgan Chase (JPM.US) is preparing a “second review” plan to induce private equity credit to accept rejected applications

The Zhitong Finance App learned that J.P. Morgan Chase (JPM.US) recently studied a set of solutions to try to resolve its long-standing conflicts with credit card co-branded partners such as airlines and retailers. And once the plan is implemented, private equity credit will gain new opportunities to enter the consumer credit field.

According to information, co-branded credit cards that millions of consumers use on a daily basis have long been the focus of love-hate relationships between large merchants and banks. Airlines, department stores, and various types of merchants rely on co-branded card programs to attract new customers, increase user stickiness, and increase revenue; banks bear most of the risks caused by cardholders' credit card defaults.

However, there is often tension between the two sides: merchants want banks to relax standards and approve more applicants who fail to meet bank credit reviews and other requirements.

According to people familiar with the matter, J.P. Morgan Chase, which is the largest credit card issuer in the US based on total transactions, has recently begun studying whether other funding channels can be introduced to accept some credit card applications rejected by the bank. According to the news, J.P. Morgan Chase has sent inquiries to more than 10 institutions to discuss whether they are willing to participate in the so-called “second review” business — these institutions will take on the credit risk of J.P. Morgan Chase's refusal to approve the application.

Such institutions usually set up credit card projects behind the scenes. Most of them are not part of the large-scale banking system. They are responsible for providing customer service and raising funds, so that the credit card issuance business can be implemented.

Some of these institutions have already connected with private equity finance companies to test whether they are willing to fund this batch of credit from J.P. Morgan Chase. Private equity institutions raise capital from investors and then lend to the outside world, mainly to lower investment grade borrowers; however, in recent years, they have continued to enter the consumer credit market.

According to people familiar with the matter, executives from loan institutions such as Blue Owl (OWL.US), Blackstone (BX.US), KKR (KKR.US), and Sixth Street (TSLX.US) have been contacted about J.P. Morgan's plans. People familiar with the matter said that the relevant documents have been shared with at least some of these agencies.

If a partnership can be reached with J.P. Morgan Chase, it means that private equity credit is further recognized by mainstream financial markets. J.P. Morgan has a number of heavyweight co-branded card partnerships, including United Airlines (UAL.US), Amazon (AMZN.US), Marriott (MAR.US), and Apple (AAPL.US) credit cards that will soon be taken over by J.P. Morgan Chase.

According to several people familiar with the matter, this potential deal has already sparked a buzz in the private equity and credit industry.

However, people familiar with the matter warned that J.P. Morgan Chase's idea is still in its early stages, and even if it is implemented, it will take a long time, and the bank may eventually abandon the plan. A J.P. Morgan Chase spokesperson said that the bank currently has no plans to launch a “second review” project.

According to reports, the tension that J.P. Morgan Chase is trying to ease is common in the credit card industry.

Walmart (WMT.US) ended its 20-year partnership with Synchrony Financial (SYF.US) in 2018, partly due to approval rate issues — and after a turbulent partnership with First Capital Credit (COF.US), Walmart returned to Synchrony. Banks sometimes choose to compromise and relax approvals, but this causes other problems: Apple once asked Goldman Sachs (GS.US) to approve Apple Credit Card applicants as much as possible, which led to the card's high subprime loan exposure. The two sides eventually terminated the cooperation, and J.P. Morgan Chase took over the project.

According to some people familiar with the matter, J.P. Morgan Chase's rejection rate has always been one of the sources of tension between it and its important partner United Airlines. United Airlines is one of J.P. Morgan's largest co-branded card programs. A person familiar with the United Airlines project said that the two sides have made efforts to resolve this issue.

People familiar with the matter said that J.P. Morgan Chase is interested in discussing insurance cooperation for United Airlines credit cards. A person familiar with the project said that United is aware that J.P. Morgan is considering such plans and sees this as a positive sign.

People familiar with the matter said that United Airlines had previously expressed its desire to find another lender to approve applicants rejected by J.P. Morgan Chase. The vast majority of co-branded card agreements are exclusive, meaning the partner cannot introduce another bank to issue a credit card unless the existing banking partner agrees.

The details of how J.P. Morgan Chase's potential system works are unclear, including whether consumers will know whether they have entered private equity credit channels, which lender's name is marked on physical cards, and whether private equity credit will hold these loans or sell them after securitization.

Over the past ten years, the private equity industry has grown by taking on loans contracted by banks after the financial crisis of 2008-09. As the scale has expanded, private equity credit has become an important source of funding for fintech lenders that do not have balance sheets and require continuous funding. The funds it provides support for various financial activities, from credit cards to “buy now, pay later” loans to dealership Harley Davidson motorcycle financing.

Private equity credit also buys outstanding consumer debt from banks that are unwilling to keep consumer debt on their books.

For banks with huge balance sheets like J.P. Morgan Chase, private equity firms can be an opportunity to expand credit coverage, thereby approving applicants with low credit scores or other characteristics commonly rejected by banks. Approximately 85% of J.P. Morgan's credit card balance comes from consumers with a FICO credit score of at least 660 points (300 to 850 points).

Private equity can also help stop rival banks from encroaching on J.P. Morgan Chase's biggest partnerships. Private equity firms mostly hide behind the scenes, don't interact with consumers, and don't brand their credit cards. But credit card partnerships involving multiple banks tend to be competitive, with one bank trying to steal another bank's customers.

“Second review” transactions usually end up approving very few credit cards, in part because many applicants have flawed credit records or no credit history at all. If the J.P. Morgan Chase project eventually takes shape and involves private equity, then the credit cards issued as part of the second review process will only account for a small portion of the bank's own approval amount.