Secret History of the Credit Card
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the battle over share of wallet by andrew becker

A look at the marketing and advertising of credit cards in an increasingly saturated market and the techniques being used to recruit new customers.

Andrew Becker is a student at the Graduate School of Journalism at the University of California, Berkeley. His articles have appeared in The Boston Globe, the San Francisco Chronicle and The Sacramento Bee.

It seems to show up in the mailbox nearly every day: a credit card offer promising zero percent interest rates, free airline travel rewards or scratch-and-win promotions like Capital One's latest -- an offer to win a private tropical island.

Credit card marketers are on track in 2004 to break the industry record for credit card mail solicitations. According to Andrew Davidson, vice president of competitive tracking for Synovate, a Chicago-based research company, U.S. households will likely receive more than 5 billion credit card offers this year.

But despite this flood -- an average of six credit card offers sent to American households each month -- the response rate is only about one-third of 1 percent, says Davidson. The rest land in the garbage.

"That's right on the borderline of losing money," says author and marketing expert Seth Godin. Typically, a successful direct marketing campaign gets about a 1 percent response.

To counter the dismal response rate problem, marketers keep ratcheting up aggressive and expensive marketing, advertising and promotion campaigns. CardWeb CEO Robert McKinley, who has tracked the credit card industry for 18 years, expects that 2004 will mark the first time the major credit card networks (Visa, MasterCard, Discover and American Express) will top the $1 billion currently spent on advertising. Add to this the $4 billion spent on direct mail marketing costs and the result is at least $5 billion of marketing for this year alone, says McKinley.

» Zeroing In on the New Customer

So who's sending all of these offers?

Ninety percent of the direct mail marketing comes from the top 10 credit card issuers. And a lot of these issuers are monolines, like MBNA, which don't have physical branch offices. Lacking this, says Davidson, direct mail is their "major channel."

In those direct mail campaigns, the companies spend on average about $80 to market and process each new customer, according to R.K. Hammer, a privately-held bank card advisory firm. More than half of these offers involve a reward or a rebate incentive. And, in recent years, banks are copying what monolines like MBNA did so successfully in the 1990s: They offer products with built-in "stickiness" -- affinity cards -- to entice consumers. While banks compete on price with zero percent and teaser offers, they know that to keep those customers, they have to rely on more.

"It's the competitive nature of the mailbox," Davidson says. "We're seeing more and more of these. And they're more and more creative in reward and rebate schemes." He ascribes the current marketing increase to a modest improvement in the U.S. economy and the fear of a potential jump in the prime rate, which has spurred issuers to hype the opportunity to take advantage of current low rates before it's too late.

» Getting to Know You

But the marketers aren't just stuffing everyone's mailboxes with the same offer. As they increasingly hone in on an individual's gender and spending habits, different people in the same household get different, "customized" solicitations.

It's all due to the information technology revolution and the data that now can be mined from networked computer databases. (And it's certainly a long way from when Bank of America, back in 1958, first issued its credit card -- later to become the VISA card -- by simply mailing out unsolicited cards to roughly 60,000 residents of Fresno, Calif.)

Before the arrival of networked computer databases, credit cards marketing was based out of individual bank branches. When risk-based pricing came into play -- the practice of charging different interest rates to different people based on their credit risk -- the monolines seized the opportunity to offer lower annual percentage rates (APRs) through direct marketing, thus offering their cards to a far larger population.

What propelled this wider marketing was the use of "attributes" to identify and target consumers. Identifying particular attributes of a potential customer had started in the late '70s and early '80s -- the days before national credit bureaus -- with direct mailings from banks to their existent customer base. Back then, in order to target potential customers outside of their base, banks and credit cards companies turned to public records like marriage licenses, new home mortgages and data from gas card usage to identify people who might be predisposed to obtain credit.

With the boom of information technology during the 1990s, the marketers were able to start drawing on data culled from the national credit bureaus -- Experian, Equifax and TransUnion. Marketers created mini-profiles of existing and potential consumers based on people's spending habits, credit history, address and tendency to pay bills on time (or not). This information was crucial in creating ever more sophisticated marketing techniques.

» The Early Pioneers

The credit issuer Providian was one of the first companies involved in experimental marketing based on attributes. The company developed mathematical models that helped Providian "find" the right customers. By blending marketing response and credit history in its testing, Providian used gender and geography to select the precise advertisements and mail offers.

To see whether testing worked, Providian marketed to non-traditional populations who do not use credit cards or banking services (known in the industry as the "unbanked" population). Testing allowed Providian to look at two different individuals with the same credit history -- and who maintained the same revolving balance -- to see which person would most likely maintain his revolving balance. By analyzing when and how customers paid over a select time period, Providian could track how consumers who once paid their entire balance would start to pay less and less each month, then the minimum payment, and then fall behind. That's how they determined who'd be more likely to default.

Capital One was another pioneer in marketing cards to consumers through the intensive use of raw data and complex computer-based modeling, according to Chris Meyer, CEO of Monitor Networks in Cambridge, Mass. and the co-author of It's Alive, which features a case study of Capital One based on extensive interviews with the company.

By identifying lower-risk individuals in high-risk groups, Capital One was able to market to reliable consumers other companies wouldn't touch, says Meyer. In just six years, Capital One became the sixth-largest credit card issuer in the country. "When others were attacking the market with blunt instruments, Capital One used a scalpel," says Meyer.

Capital One was able to predict consumer response through models of targeted markets; then it would test these predictions with tens of thousands of product offers. In 2001, the company tried more than 60,000 separate tests to identify what the market wanted by watching which offers customers were responding to. This told the company which of the offers to roll out more widely. It also provided insight into what would not work, allowing updates for the next cycle.

Credit issuers also monitor whether a consumer's purchases go down over a certain time period -- a process known as "diminishment," that could lead to defection to another credit card company. If the signs are there, marketers might then send the customer new offers. They know the consumers must be using different cards because they aren't using theirs.

» The "Golden" Road to the Wallet

Over the last 40 years, the advertising of credit cards has evolved along with the marketing and the ads have mirrored credit cards' growing availability.

Back in the 1960s, American Express ads targeted the traveling business class with lines such as "Away-on-business-miss-your-wife-blues?" and "Another lonely business trip?" The message was, an American Express card cured the loneliness that "comes with the territory."

About the same time, in another magazine ad dating from 1965, American Express answered the question "Are credit cards for show-offs and status seekers? Not this one." But just three years later American Express began advertising its gold card with ad copy that read, "at a time when everyone seems to be giving away credit cards…"

According to CardWeb CEO Robert McKinley, 20 years ago, a gold VISA or MasterCard did mean prestige. With an annual fee of two to two-and-a-half times a standard card's fee, they offered a minimum credit line of $5,000 and various perks. And they were not available to just anyone. "Gold was perceived as 'affluence' at that time, given the marketing of the American Express gold card," says McKinley. "There was very little color choice in the market."

But then, starting with the deregulation of the banking industry in 1978, the advertising focus turned away from prestige to "merchant acceptance," says McKinley. And in the 1990s, as competition intensified, it shifted to pricing and perks.

During the past five years the marketers' focus has been on fraud protection and responsible card use. In recent years, for example, Citibank has aggressively marketed itself as a kinder, gentler credit card issuer. Its latest ad campaign, dubbed "Live Richly," features little bits of wisdom on television, billboards, bus shelters and phone kiosks. "You are not silver, gold, or platinum," Citibank tells potential customers. "You are you."

Mercedes Cardona, financial editor for the weekly trade magazine Advertising Age, says warm fuzzy campaigns like Citibank's are a response to consumers' frustration with bank giants like Citibank's parent company Citigroup, and the perception that such corporations care little about cardholders.

Most recently, with the economic downturn over the past few years, banks have come to realize that every customer counts, Cardona says. And this has spurred the personal touch, particularly with credit cards.

American Express designed its Blue Card for a younger, hip market. Clear or translucent cards are aimed at Generation X. Some cards issued in black -- be it the innovative American Express Centurion or the VISA Infinite or Signature -- are what Robert McKinley of CardWeb calls the "snob" cards. Cards like MBNA's Quantum can carry credit lines up to $250,000, with some going as high as $1 million -- "so, even if the private seller of a rare collectible doesn't accept credit cards, the Quantum Customer can simply write an access check," as one press release states. These cards come with a panoply of benefits, like concierge services, access to private jets and seven-figure travel insurance.

Today, consumers can even customize their own credit cards. "Have it your own way," is how Cardona describes the options, comparing the process to "getting a fast-food burger."

At Bank One's Web site, for instance, customers can choose from an affinity credit card menu, offering everything from The American Kennel Club and the Massachusetts Teachers Association to Yahoo and Disney. If none of the affinity cards grabs the customer's attention or purse strings, there are more than three dozen "unique card designs" to choose from, including cute kittens, all smiles and serenity.

First National Bank of Omaha is among those that have taken personalized card design to another level. Cardholders can choose their card's background from a personal photo, be it of a child, pet or nearly anything that comes to mind, and they can design the card online. Part of the personalization is allowing customers choice, Cardona said. But a lot of it has to do with getting customers online and lowering the cost of banking.

» The New Growth Sectors

During the 1990s, with much of the market saturated or nearing saturation, credit card companies began to look at two demographic groups on either end of the financial scale they previously had avoided: "subprime" consumers who weren't perceived as creditworthy, such as students, young people, and others with poor or no credit history; and affluent customers who didn't need credit (and who now are being targeted with the aforementioned customized cards). These two groups have become the biggest growth areas for the companies, says CardWeb's McKinley.

According to CardWeb, there are some 25 million American households who do not have a banking relationship. Credit card issuers went after this market vigorously in the 1990s, charging high interest rates and fees, and extending credit to millions of people. However, it was a bust for issuers and it still haunts the industry, says McKinley.

Credit card issuers also began pursuing college students, a previously unattractive market because students don't have a credit history and many don't have a steady income. But by the mid-1990s, Congress was holding committee hearings on the impact that "kiddie credit cards" had on young people. And following a lot of bad press on the growing number of students in debt, some universities have started regulating or banning credit card marketers from making campus visits with offers of free t-shirts in exchange for setting up a new account.

But the companies have returned to the subprime market lately, targeting them with increasingly popular prepaid cards. The recently introduced "Hello Kitty" card and another card featuring the mug of pop music star Usher are evidence that pre-teens and other subprime consumers are no longer off limits.

» The Perk Wars

Since the mid-1980s, when Discover introduced the first cash-back product, credit card marketers have been racking their collective brains for perks to entice consumers. AT&T launched its no-annual-fee-for-life Universal Card in 1990, which eventually drove annual fees out of the market, according to McKinley. Although industry experts thought the perk wars would be over by now, they rage on, he says.

The hot things now are prepaid cards and around the corner, the "super" smart cards, which can carry information far beyond just listing your account balance. Such cards can track and manage rewards points; store a cardholder's medical information; provide access to subways, buses and even buildings; or be used as either a credit, debit or prepaid card, so you can pay now or later.

Part of the reason these haven't as yet caught on in the United States is privacy concerns. But if Americans are worried about who knows what about them, they're a little behind. Credit card companies know where you live, who you are and what you want. And as competition intensifies, they're willing and able to spend the money to find out more.

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posted nov. 23, 2004

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