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By David Henry and Dan Wilchins
October 4, 2011 12:14 PM EDT
Gordon Smith, credit card chief of JPMorgan Chase
As he takes apart an engine, he puts pieces in plastic Ziploc bags to keep track of where they belong. He videotapes the disassembly, in case he forgets how to rebuild.
"It would be really embarrassing to take a pile of pieces back to the shop and say, 'I took it apart. I'm an office worker. Could you put it back together for me?" Smith quipped in an English accent in a recent interview.
Smith is using that same careful approach to rebuild Chase's credit card unit. And the model he is using resembles that of American Express Co
Smith, who joined Chase in 2007 after 26 years at American Express, took over operations of a travel agency in JPMorgan's private equity unit, allowing him to offer better travel rewards and a better corporate card.
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He built up the bank's Paymentech unit, which processes card transactions for merchants. He created the Sapphire card for wealthier customers whose big spending earns him more processing fees.
Smith is also applying several lessons taken from the consumer finance industry's playbook: improving customer service, combining many rewards programs into one and shedding cards that are not profitable enough. Along the way, he is spending hundreds of millions of dollars mailing card offers.
Step back and look at what Smith is building, and it looks a lot like American Express: a business that caters to rich clients and relies increasingly on processing fees to make money.
That has made American Express the most consistently profitable of the major financial services companies, outpacing more glamorous businesses like Goldman Sachs Group Inc
There's big risk in this strategy for Smith, though, and at stake is more than his 1969 Jaguar XK-E or his 1972 Triumph TR6. Credit card companies have tried to follow American Express's strategy for years and have failed.
Chase starts with some big disadvantages. Although its Paymentech processes transactions for merchants, it does not run the Visa or Mastercard global networks that accept its cards and influence how much it can charge for credit card transactions.
American Express runs its own network, which allows it to charge merchants a higher price for delivering wealthy clients. American Express can earn more on transactions than Chase.
But Chase's credit card business is second in size only to American Express's, and contributed 12 percent of JPMorgan's $17.4 billion of profits last year. If Smith pulls off the transformation, the rewards could be handsome.
Some analysts believe he is among a small group of potential successors to Chief Executive Jamie Dimon, even though the 53-year-old Smith is just 2-1/2 years younger than Dimon, 55.
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