UBS Wealth Management US last week launched a new payments-card package for its brokerage customers that among other things cleverly turns an ordinary American Express card into what amounts to a debit card. The program was created for UBS by Barclay’s PLC’s Juniper Bank unit.

The whole idea is to bind its customers to the U.S. brokerage unit of Zurich-based UBS by giving them a payments-card package that the firm hopes will be their primary spending vehicle, says Peter Stanton, executive director of the UBS unit’s Banking Strategy Group. It’s not an effort to enter the very tight U.S. credit card business

“It’s definitely not our intention to be another credit card provider,” he says. “This is a consolidation strategy; it’s all connected to our role as their primary wealth-management advisor, and ties them closer to us because of the services we provide.”

On the surface, the package is an ordinary Visa credit card and an ordinary American Express charge card, bundled with a very extravagant rewards program that offers cardholders enticements like jet fighter rides or a sleepover at FAO Schwartz. Rewards run from one point to 1.5 points per dollar spent, depending on whether the customer chooses the basic “Select” Visa card or one of the more elite Visa cards that carry annual membership fees of up to $1,500. UBS says it has about 15,000 such accounts.

By offering its brokerage customers such payment packages, UBS joins a widening club of brokerage companies trying to retain customers whose loyalty is mercurial at best. “With acquisition costs so high, and turnover very high also, the emphasis has been to keep the customers they already paid for, happy,” says Ariana-Michele Moore, a senior analyst with Celent Communications.

The Amex card allowed UBS and Juniper to create a vehicle that functions like a debit card from the user’s perspective—UBS calls the card a “delayed debit card,” though Amex insists that the cards are ordinary Amex cards—while earning the issuer the much higher American Express interchange fees.

It does this by an interesting sleight of hand that seems to be built around the fact that none of the parties to the deal care what the card is called, as long as they get what they want from it. Cardholders use the Amex card like an ordinary debit card, including being able to use it to withdraw surcharge-free cash at ATMs that accept Amex cards. At the end of the month, their central brokerage account, or RMA (resource management account), is automatically debited, and no bill is sent to the customer. Purchases are limited to the funds available.

This way, UBS gets what amounts to a debit card for its customers, while Amex and Juniper get full price for an Amex card. And as an added bonus, Juniper gets a piece of the debit card market, which is quickly overtaking credit cards as the payment vehicle of choice in the United States.

How the parties came up with this deal is unknown. UBS’ Stanton says his shop approached Juniper around August of 2004 as part of a typical RFP process, and went to contract last April. Juniper refused any comment on the matter, referring all questions to UBS.

“It has in-between functionality,” says Stanton. “It functions as a debit in the sense that it accesses your available funds; it functions as a charge card because the charges accrue, and instead of having to make some sort of payment, the payment is automatic.” The idea, he adds, was to allow purchases to be made without interfering with a client’s trading accounts.

All in all, it’s a smart deal, says Celent's Moore—among other things, because people with brokerage accounts are typically wealthier, and travel overseas, so that the package gives UBS clients a secure spending vehicle.

“It’s all about providing flexibility to their brokerage customers, but it could also be enticement for people considering opening a UBS account—it could be the thing that tips the scale,” she says. (Contact: UBS Wealth Management US, 212-882-5698; Celent Communications, Ariana-Michele Moore, 503-617-6112)

Contactless payments systems in their various stripes are the future of retail point-of-sale systems, and banks still own the networks. But unless they stop trying to control the process, they could lose the system to merchants with their own private-label card programs, thinks Bruce Cundiff, a research analyst with Javelin Strategy and Research.

There’s really nothing to stop such merchants from outmaneuvering the banks, if they want to, he says. “The possibility exists among those merchants considering contactless, and really have a robust card issuance card network to begin with. They’re well-versed in credit, debit, and closed-loop card operations—and they see their private label brand as a lower cost channel.”

The merchants have plenty of good reasons for moving away from bank-owned cards. Doing so would not just give merchants more money from each transaction, it would also reinforce customer loyalty—making for more repeat business—and enrich marketing programs by giving merchants better access to the customer data in the payments stream.

Merchants increasingly view private-label, contactless payments as their best bet for driving revenue. According to Cundiff’s research, 20 percent of merchants considering enhancements to point-of-sale payments consider the technique among the most productive choices they can make. Only signature debit (31 percent) and ACH payments (33 percent) scored higher among merchants as possible new payments options.

Even worse news for banks: Cundiff’s survey of 900 retailers included all sorts of merchants, from large chains to the iconic Mom-and-Pop store. “We reached out to all types of merchants, even to those with only one location,” he says.

The irony here is that banks started this phenomenon in the first place.

“Contactless payments are the wave of the future because issuers like (JPMorgan) Chase got into the game,” he says. It was Morgan Chase’s decision to jump into contactless payments with both feet that solved the chicken-and-egg question surrounding contactless payments, because it was a signal to cell phone manufacturers that there would be a market for RFID (radio frequency identification) chip-enabled cell phones that can facilitate payments. “Prior to that, merchants were saying ‘It’s not broke, and I’m not going to fix it. They didn’t think people were going to come in and ask ‘Where’s your contactless terminal?’”

But that historical fact is irrelevant to the future, because with the genie out of the bottle, the challenge for issuers is to do everything they can to enable the technology now, before merchants do it for them. And since, as Cundiff’s research indicates, those merchants are a substantial fraction of the overall universe, the prospect that banks could be disintermediated by these merchants is a very strong possibility.

The fact that banks will have laid the foundation for this turn of events by educating merchants about the benefits of the technology is merely one of life’s injustices; the most disturbing element in this scenario is that bank disintermediation is entirely avoidable, if institutions will just make it in the merchants’ interest to work with the banks—even if that won’t be so easy. “If I’m Macy’s, and I’ve invested millions of dollars in contactless, I’m going to make sure that as many transactions that flow over that system are going to be Macy’s cards,” says Cundiff.

That prospect will be made easier by the widespread availability of cell phones that can make payments, he adds. The logic is perfectly clear, if brutal: With so many people carrying payments-enabled cell phones, he says, it makes perfect sense for stores to offer to download their own card onto a customer’s cell phone at the point of sale. Then, unless the banks have already beaten the merchant to it, more and more payments volume will go to merchant cards—edging out the bank and cutting into the fastest-growing segment of payments-fee revenues.

How to avoid this? “They (banks) need to consider the fact that they need to work with the merchants in a more integrated fashion—especially a large merchant that has a high profile and has plenty of locations and payments volume,” he says. A promising tactic to make sure the banks are still involved is to approach the merchant and offer to issue a co-branded, contactless card.

But to do this, banks have to recognize that contactless payments are the key to the future at the point of sale, and that they either turn the lock, or don’t. And if they do, they either continue to insist that everything be done their way, or they can start working with their customers to integrate themselves into that next generation of payments.

Luckily, the best banks already get this, says Cundiff. When Morgan Chase went to market last year with their Blink contactless cards, for instance, “they were talking about how they had to approach merchants and not only build acceptance, but build affinity for the product with both cardholders and merchants—that meant co-marketing agreements and signage,” he says.

But what this also means is an apparent shift in the balance of power between issuers and merchants. While some will argue that issuers have always valued their customers and tried to accommodate them, that posture is undermined some by the ongoing interchange war: After all, if the issuers had always been so accommodating, the years of complaints from merchants that interchange was too high would have resulted in adjustments—not lawsuits.

At this point—as many observers have argued—the better part of valor for issuers may be collaboration with merchants instead of battle, lest contactless, private-label cards prove to be yet another army rising on the issuers’ flanks. (Contact: Javelin Strategy and Research, Bruce Cundiff, 925-225-9100)

By 2007, debit cards will edge out credit cards as the Internet payment vehicle of choice, says Ed Kountz, senior analyst at Jupiterresearch.

According to Kountz’ research, online credit card payments accounted for 42 percent of all online purchase volumes, compared with 39 percent of payment volumes for debit. But by next year, those numbers will reverse—39 percent for credit and 42 percent for debit. And by 2010, says Kountz, credit cards will account for 35 percent of online purchase volumes, compared with 46 percent for debit. That translates to an 8 percent annual compounded growth rate for credit between now and 2010, compared with 14 percent for debit.

“The conventional wisdom you’ll hear from the associations is that there’s really no overlap (between credit and debit),” says Kountz. “And from a value perspective, credit will continue to predominate. I don’t think you’ll see debit wipe up the floor or eliminate credit—that’s much too simplistic to say. But issuers need to be prepared for that shift as it comes down the pike; the short-term impact on credit will be moderate, but longer term, it does clearly pose a challenge for what has traditionally been a credit-dominated world.”

Credit’s predicament is only compounded, according to Kountz’ research, by the rise of non-card payment alternatives available online, such as stored-value cards and peer-to-peer payments. Such alternatives won’t be taking over the space anytime soon, but the growth rates will be strong: 21 percent for stored-value cards and 12 percent for peer-to-peer payments. And even though they’ll be coming off a very low base (4 percent of online payments in 2010), and be restricted to items like wireless content, market share for those payment vehicles will more likely be cut from credit’s hide than debit’s.

This can’t be good news for the credit card business. Even though some analysts like to spin the shift in consumer preference from credit to debit spending as no big deal, since the issuers collect their fees from whichever card a buyer uses, the fact is that the credit apparatus is deeply entrenched in issuers’ establishments. This means that at a minimum, the increased use of debit will create internal shifts at those companies as credit revenues and transaction volumes decline. Since e-commerce sales is the fastest-growing segment of card payments, Kountz’ research is at best unlikely to give credit establishments much comfort looking forward.

This is especially true because, as Kountz points out, paying online with a debit card means low-fee, PIN debit transactions, since no signature can be given to authenticate the transaction. Today, no adequate online PIN-entry mechanism is widely deployed, but so-called screen-based floating PIN entry is one possible solution. That innovation involves an on-screen PIN pad into which the buyer makes PIN entries by mouse click, instead of using numbers on their keyboard, thus maximizing security by making it impossible for a keylogger virus to steal the PIN. ATM Direct is currently conducting a pilot program for this system.

”The alternative is some sort of token that’s not necessarily a hardware plug-in,” says Kountz. “I’m still skeptical of the whole token approach. You can lose them or not have them with you when you need them, and for a consumer, it’s just one more thing they have to manage. But assuming (floating PIN entry) can be done securely and effectively from a consumer perspective, it’s a much more intuitive approach than adding hardware.”

The implications of Kountz’ observations for issuing banks can’t be encouraging. Although he declined to speculate on how the phenomenon he describes would affect them, the fact is that revenues from credit card operations are a significant fraction of the largest American banks’ earnings. Some 60 percent of credit card earnings are debt, and PIN debit interchange is significantly lower than signature debit and credit card interchange.

To the extent that online transactions migrate from credit cards to PIN debit, then, it’s a small step to conclude that the fastest-growing payments sector today is set to yield lower per-transaction revenues than the rest of the cards sector, in turn minimizing the revenues growth curve for those banks’ overall card operations. This hardly means that credit cards are disappearing, but combined with the likely future minimization of interchange fees, either through regulation or litigation, it does mean issuing banks are going to have to start running faster, just to stay in place, and much faster to get anywhere.

“Certainly, credit profitability, and credit overall, has been moderating growth-wise, and I expect that trend to continue,” says Kountz. “Resting on the laurels of the past is no longer enough.” (Contact: Jupiterresearch, Ed Kountz, 617 423 4372)

Capital One Financial Corp. will be one of the nation’s 10 biggest banks based on deposits and managed loans when it buys Long Island’s $57.6 billion North Fork Bancorporation for $14.6 billion in cash and stock.

That Capital One has turned itself into a national depository institution with branches and checking accounts is yet another indication, if one is needed, that credit cards are no longer a stand-alone business.

The deal gives Capital One a toehold in the lucrative New York market, and apparent expansion prospects there. It also builds on last year’s $5.3 billion acquisition of Hibernia Bank, which closed in mid-November. According to Capital One’s 10-K, Hibernia experienced what it called substantial growth in deposits after Hurricane Katrina.

Unremarked by media coverage was the irony that a business that’s still very profitable apparently feels it needs a cheap source of funds, and customers to sell to, in order to weather the many challenges now threatening its core competency.

Unremarked by the media, perhaps, but not by the stock market, which didn’t respond well to the news: Capital One stock, which closed on Friday, March 10, at about $90, closed on Monday March 13, the day of the announcement, at $83.10, and at $82 the next day. Morgan Stanley’s Kenneth Posner estimated in an investment advisory that the deal was neutral to Capital One earnings, and allowed Capital One modest synergies from the deal, worth $400 million in strategic value at best. He recommended buying on Monday if shares fell.

Standard & Poor’s said in a note that it felt the deal was priced fairly at about 15 times their 2006 earnings estimate for North Fork of $2.08 per share, and a price/book ratio of 1.6 times earnings. “We thought the recent weakness (in North Fork stock, prompted by concerns about its deep exposure to residential mortgages) presented investors with an attractive entry point. Apparently, Capital One arrived at the same conclusion,” wrote the note’s authors, Jason Seo and Mark Hebeka.

At least Capital One was acting out of relative strength: Its 2005 net income was $18 billion, up from $15.4 billion in 2004. But the company clearly felt it was wise, at a minimum, to continue diversifying away from credit cards. Capital One’s year-end credit card balances were $19.7 billion, compared with $20.5 billion in 2004, and average loan balances fell in 2005 to $12.07 billion, compared with 2004’s $12.24 billion. Interchange revenues grew to $514 million, compared with 2004’s $475 million. On a managed basis, Capital One reported $105.5 billion in outstanding loans, compared with $79.8 billion in 2004. Hibernia’s results were not included in Capital One’s 2005 results.

The company was clearly acting defensively, and recognizing that future growth in the credit card sector will be nothing like what it was only a few years ago—even for a company as well managed as Capital One—and that it won’t be again, anytime soon.

“(The deal) says a lot about their future as an entity,” says Michael Auriemma, president of Auriemma Consulting. “I’m not sure I’d have predicted they’d be buying banks, but there’s a strong realization that credit cards belong in an institution with retail customers—the amount of information- and data-sharing synergies by having both is phenomenal, and credit cards are challenged in terms of growth of new acquisitions these days.”

Capital One apparently has no bone to pick on that score. In its recent 10-K, it said that “The competitive environment is currently intense for credit card products. Industry mail volume has increased substantially in recent years, resulting in declines in response rates to the Company’s new customer solicitations over time. Additionally, the increase in other consumer loan products, such as home equity loans, puts pressure on growth throughout the credit card industry. These competitive pressures remain significant as a result of, among other things, increasing consolidation within the industry.”

Auriemma thinks, though, that Capital One can continue to be highly successful in the future. “There’s a lot of room to make a lot of money, and to grow your credit card business without growing new accounts,” he says. This, he says, includes building bigger balances, increasing consumer spending, and using the data from the payments stream to cross-sell other products to credit card customers. “This (deal) is less about new customer acquisition and more about managing existing customers, looking for a funding source, and diversifying revenues.”

By remaining on the offensive, Capital One apparently also hopes to keep Wall Street happy, and itself independent. Aside from Advanta Bank Corp., which reported 2005 net income from continuing operations of $116.7 million, America’s other monoline banks, once wildly profitable businesses, are gone with the wind. And Capital One itself isn’t entirely safe from acquisition; its float is only $25 billion, so it could clearly be bought by a large bank. Last year, Bank of America bought MBNA for about $35 billion in cash and stock, and other large banks—Wachovia Corp., for one—have said they’re interested in getting back into the credit card business.

North Fork reported 2005 net income of $948 million on revenues of $3.48 billion, and more than doubled its asset base after two 2004 acquisitions—Greenpoint Financial and The Trust Company of New Jersey. It has 360 branches in the New York area, including in northern New Jersey, and, according to Standard & Poor’s, it has about 4.8 percent of the area’s deposits. When the deal, subject to regulatory and shareholder approvals, closes in the fourth quarter, its top executives stand to get a payout of about $288 million, including chief executive John Kanas, who could receive as much as $185 million. Kanas joined the bank in 1971 and became president and chief executive in 1977. (Contact: Auriemma Consulting Inc., Michael Auriemma, 516-333-4800; Capital One Bank, 804-284-5800; North Fork Bank, 631-531-2058)

We are beginning to hear intriguing whispers that, post-IPO, MasterCard will begin authorizing non-banks to be card issuers.

Continue reading "Will MasterCard Allow Non-bank Issuers?" »

Right around the corner is a world with neither cash nor payment cards. Contactless payments mechanisms—built into cell phones or even jewelry—are helping create this world, and the result will help change banking, thinks Theodore Iacobuzio, managing director of Tower Group’s executive research office.

The reality is that companies that once fed the banks’  payment networks—merchants, for instance—will be future competitors. But banks shouldn’t panic about this, any more than when, not so long ago, the Internet was supposed to be extinguishing banks. And banks won’t be disappearing now, either, thinks Iacobuzio: the anxiety over banking’s future, so prevalent in boardrooms around the country, is overdone.

Continue reading "Cash and Cards Are Both Endangered Species" »

People have grown wary of credit cards. They’re paying them off faster; generally, debit cards are edging them out as payment vehicles. And at least for now, home equity loans are increasingly more popular than credit cards among consumers (click on inset for more details and see tables below).

The result? Credit card portfolios are losing profitability, even though net losses and delinquencies are down, and serious questions about the industry’s future are surfacing. So are questions about how wise banks were when they snapped up most of the monoline credit card operations last year. The business model needs an overhaul, says observers, but so far, issuers are just changing the oil. And there may be no way out.

Continue reading "Credit Card Portfolios: More Pressure, Less Profitability." »

The potential of cellphone-based mobile payments to eventually squeeze banks out of their central role in payments can already be seen in East Asia, says Andrei Hagiu, a principal at Market Platform Dynamics, and by ignoring it, American banks have nothing to lose but their business.

Hong Kong’s Octopus prepaid debit card (see inset) is one example: Issued by Hong Kong’s subway system and several other transportation companies—with no bank involved—Octopus cards drive about $2.2 billion in annual payments volume.

Continue reading "Mobile Payments: Japan Leads the Pack" »

Germany’s federal monopolies body, the Bundeskartellamt, received a legal complaint from the German Retail Association, alleging that interchange fee charged MasterCard and VISA, which average 150 basis points, prevents widespread credit card acceptance in Germany.

In a statement, the Association, a lobbying group, said that credit card payment account for only 5 per cent of all retail sales in Germany. The complaint calls on the Bundeskartellamt to cut interchange fees and to increase payment card transparency. It claims these steps will improve competition in the credit card sector. Spain, says the group, has ordered a step-by-step reduction of interchange to between 0.54 per cent and 1.10 per cent by 2008.

Without expansive brick-and-mortar operations to generate business, card companies typically devote far more resources to direct marketing and cardholder retention than retail banks. You can learn a lot by watching what the card companies do online.

One

Develop a Killer App

Profitable online originations involve good marketing and a great application. It must be short and sweet and loaded with imbedded help for every term, otherwise only the desperate or dishonest will submit it. Most major credit card applications today are a model of simplicity. For example, Juniper’s online application (below) consists of a single screen posing just seven questions beyond standard identification information (name, address, phone number, etc.).

Two

Screen Out Improper Applications Before Submission

One of the main problems with non-preapproved credit card applications is all the worthless applications received. Not only has time been wasted researching the applicant’s credit report, but also your company must carefully follow regulatory requirements for communicating denials, lest you become a target of class-action litigators. Financial institutions, especially credit card issuers, now start the application process with two or three screener questions to reduce the number of applicants applying for products for which they are completely unqualified. This is a win-win, saving the bank application-processing costs, and helping applicants prevent lowering of credit scores due to application denial. Juniper uses a popup to deliver the screener questions (below).

Three

Segment Your Base with Regular, Gold, Platinum, and So On

We believe that premium channels will be the next big thing in online banking. That’s why we selected Money HQ from Online Resources as our top innovation of 2003. A review of the credit card industry provides clues as to how online banking may play out. American Express was a segmentation pioneer, rolling out a Gold Card in 1966, only eight years after the introduction of its standard charge card. After the huge success of the Gold strategy, widely copied by bankcards in the late 80s, the company further segmented its card base with the Platinum in 1984—again, widely copied by bankcards in the mid-to-late 90s. Now American Express operates a half-dozen card lines: Green, Gold, Platinum, Optima, Delta SkyMiles, and Blue, with plenty of sub-segments of each.

We expect to see the same thing happen with online banking. Now that leaders such as BofA, Wells, and Citibank have offered online banking for 15 years or more, and with penetration closing in on 50% of their checking account bases, the companies will begin offering different versions of their online programs. Expect to see differentiation around payment capabilities, credit access, account aggregation, service levels, human attention, and account alerts (see Table 9, below).

Table 9
Premium Online Banking Offerings

possible features and benefits

Source: Online Banking Report, 2/04

Four

Use Real-time Payments to Drive Users Online

According to Gartner’s latest research,* in the United States, biller direct payment is used by six million more adults than online bill payment through a bank, 18 million vs. 12 million. However, according to Gartner, respondents prefer bank sites for payment by almost two-to-one, 19 million vs. 10 million, although both options trail preauthorized debit, preferred by 26 million, and snail mail preferred by 116 million.

Banks can tap into the growing popularity of electronic payments by offering simpler bill-payment sites that allow users to make one-time payments or setup preauthorized debits, without a lengthy signup process.
Banks can also win more user by offering more choices, such as paying via credit card.

Table 10
Bill Payment According to Gartner

millions of U.S. adults paying bills online

Source: EBPP Future Blends Direct Bank Aggregation Models, Jan 13, 2004, by Avivah LItan, Gartner, http://www.gartner.com/  $95,
data from survey fielded May 2003
AutoPay =  preauthorized electronic debit
*Can choose more than one option, so the sum is higher than 100%
**Total the still wants to receive bills via snail mail

Five

Cross-sell

Credit card issuers have long been far more aggressive than banks pitching ancillary services, such as credit card registration, credit report monitoring, and credit insurance. They are beginning to take that approach to online marketing. For example, last year, Chase’s credit card group sent me more than 40 sales/service email messages. Issuers have also found profits selling all types of unrelated products and services from flashlights to magazine subscriptions. While, we don’t think banks should start pitching knife sets online, they could be more aggressive in selling related products, especially credit report monitoring, insurance, and value investments.

Six

Use Email for Retention

Credit card issuers are much further along in providing email messages to users. Card companies are using email to remind users of payment due dates, confirming charges and payments, marketing messages, balance transfer offers, line increase notifications, credit card check offers, e-statements, credit report and other ancillary product sales, holiday messages, and other relation-enhancing messages: even early collection efforts have gone electronic. Chase is one of the most prolific emailers. During 2003, we received  at least 70 email messages from the bank about our active credit card account, 46 of the messages (at least the ones we saved), were marketing/service oriented (see example left) and the other 24 had to do with scheduling and confirming payment of the bill (see OBR website for more examples).

Seven

Provide Compelling Online Account Management

Card issuers provide an online experience on par with similarly sized banks; however, some are becoming more creative with their account-management websites. For example, American Express offers its Small Business Dashboard to manage charge card (see screenshot left). One of its distinguishing features is a credit-status bar that graphically shows whether the charge account is approaching its limits (e.g., green means in good standing, yellow means charging privileges at risk, and red is account suspended).

Card issuers are also making online statements interactive with the ability to click through to get more information or dispute a charge, contact the merchant, or re-sort transactions.

Eight

Make Transfers Simple

For several years, companies such as Bank of America www.easybt.com  have provided simple online balance-transfer solutions for cardholders. Banks too should make it simple for users to consolidate deposit and loan balances in a similar manner using account aggregation technology and interbank-funds transfers. Citibank’s new A2A service and Money HQ from Online Resources are on the right track.

Nine

Integrate with Direct Marketing

The latest trend is to provide special URLs and/or application numbers in preapproved snail-mail solicitations so recipients can respond quickly online. For example, Fleet’s www.applybizcard.fleet.com  This is a win-win, giving the customer faster direct access to the special offer and providing an interactive environment for the card issuer to encourage balance transfers or other upsells. This integrated technique will quickly become a standard practice for financial direct marketing.

Ten

Get Rid of the Paper

With ever increasing printing and postage costs, the business case for e-statements continues to grow stronger. Although paper-suppression efforts are still in their infancy, we expect credit card issuers will be the first to successfully wean a critical mass of users off paper. Although it will take years of marketing efforts, for example, we’ve already received eight messages from Chase encouraging us to switch to a
credit card e-statement; the formula for adoption is relatively simple: 

Innovating in online marketing and delivery

Credit cards have always fascinated me. From my first card in 1982, through my stint as a card product manager in the late 80s, I’ve been a student of the industry, watching and learning from the best: American Express, Citibank, First USA, Capital One, and others.

As we entered the Internet era in the mid-to-late 90s, I fully expected the credit card issuers to lead the financial services sector online. For a while, it looked like a good prediction. Many of the early online banking pioneers, NextCard, Providian/GetSmart, Wingspan Bank, C2it, Juniper Financial, had their roots, and business plans, centered on credit cards.

But a funny thing happened as that story was being written. Recession. Whether it was an unseasoned portfolio (NextCard), problems at the parent (Wingspan), or an over reliance on sub-prime (Providian), these pioneers lost their funding and retrenched (Providian, Juniper) or disappeared (NextCard, Wingspan, C2it).

But as card companies recover from the beating they’ve taken during the past three years, we are seeing renewed innovation from the sector. For example, after a decade of struggling to get traction, the card companies have put online bill payment on the map with their convenient card-payment options. As a result, card issuers have some of the largest registered user bases in the financial services arena (Table 1 below):

Table 1

Top 5 Online Cardholder Bases, Year-end 2003
number of online cardholders

Source: Companies, (e) Online Banking Report estimates, +/- 25%, 2/04

We still believe that long-term you are better off wrapping your direct banking efforts around plastic rather than paper ( “Will that be Paper or Plastic?”). If NextCard had been more patient in building its portfolio, they could have been a powerhouse today. So who will take their place as The Internet Credit Card? It’s one of the more intriguing opportunities of the decade.

Table 2

Top 5 Online Cardholder Bases, 2000 to 2003
number of online cardholders

Sources: Companies except, (d) Dove, (e) Online Banking Report estimates, +/-25%, 2/04

Online Card Usage

According to a recent Forrester report,¹ 75% of U.S. credit card customers have online access, and of those 36% (20 million) access their card statements online. More than 60% of those users (12 million) accessed their account regularly. Fisite Research, a company founded by ex-Gomez payments analyst, Paul Jamieson, found even higher usage; with 57% of online cardholders saying they manage some aspect of their card online² (see Table 3, right). Whether the true number is 20 million or 30 million or somewhere in between, we do know that the use of online credit card management has exploded. Three years ago (year-end 2000), fewer than five million households accessed cards online (see full details, Table 5, opposite). Now, at least five individual card issuers have online user bases of five million or more (see Table 2, above).

There is even a greater disparity in estimates of the number of cardholders paying their card bill online. Forrester found that just 36% of online card statement viewers
(7 million HHs) pay their bill online, while Fisite reported 74% of online card managers paid online.² Gartner estimated that 22 million adults pay their card bill online, either directly or through third-party bill pay.³ Based on these estimates and usage numbers from individual card issuers, we estimate 16 and 18 million households pay their card bills online directly at the issuer, up nearly 20-fold since less than one million users at the beginning of 2003.

¹How To Right-Channel Credit Card Customers, by Catherine Graeber, Forrester Research, Jan. 2004, $675, http://www.forrester.com/ , fielded, Q2, 2003
²The TSYS Summer 2003 Executive Online Credit Card Survey, Finite Research, $2495, http://www.fisiteresearch.com/  fielded May/June 2003; the numbers may be higher because respondents included pay-anyone third-party payments in their answers
³EBPP Future Blends Direct Bank Aggregation Models, Jan 13, 2004, by Avivah LItan, Gartner, http://www.gartner.com/  $95, fielded May ‘03

Table 3
U.S. Online Credit Card Usage Estimates

Source: Companies, Online Banking Report, 2/04
*OBR estimates, Fisite reported usage as a percent of cardholders responding
to its online survey fielded summer 2003, household extrapolations by OBR
**Includes online payment direct at card issuer or through third-party bill pay

Table 4
Online Card Evolution

Source: Online Banking Report, 2/04                                                      

Forecast

The convenience and reliability of paying card bills online will continue to drive online credit card growth. For 2004, we project overall growth of five million new online credit card households (range: 4 to 7 million), the same number of newcomers as in 2003. However, the rate of growth will slow slightly to 25% compared to 33% last year. Ten years from now, online credit card penetration is projected to grow to 47 million, 40% of U.S. households, compared to 19% today.

Table 5
Online Credit Card Forecast

U.S. households using online credit cards at year-end*

Source: Online Banking Report projections based on industry data (+/- 30%), 2/04

Table 6a

Consumer Households Using Online Credit Cards: U.S. vs. Worldwide
millions of households actively using online banking and/or online bill payment

Source: Online Banking Report estimates 2/04, accuracy estimated at plus or minus 30% U.S., 40% worldwide

Table 6b

Annual Growth Rate of U.S. Credit Card Households

millions of U.S. households and percent change from previous year

Source: Online Banking Report estimates, 2/04; accuracy estimated at plus or minus 30%

Table 7

OBR Definition: Online Credit Card Household

•         Someone in the household must have done at least ONE of the following during the past 6 months:

•        Viewed balance/available credit or transaction data online¹ for a general purpose² credit or charge card

•        Authorized a card payment at the site of the card issuer (not at a third party such as a bank’s pay-anyone bill-pay service)

Does not include:

•        Online point-of-sale transactions using a credit card

•        Debit or prepaid card account management, application, or purchase

(1) Any connection from home, work, school, or other place where data can be viewed through any device (Web phone, browser, proprietary software, Quicken, Money, etc.)

(2) Visa, MasterCard, American Express, Discover

Table 8

Gomez Top Card Companies

Q3 2003 Scorecard

Source: Gomez, 1/04

Before you reach beyond your customer base with the marketing techniques described on the previous seven pages, make sure you are maximizing the loan business among your existing customers. Here are 40 tactics to help you defend your current portfolio from the online poachers.

New Loan Originations

1. Rate Search/Rate Watch: Users select the loan type(s) they are interested in and you provide a comparison table with rates, points, monthly payments, and other loan details. Offer an option to be kept up to date via e-mail.

2. urrent Loan Analysis for Refinance/ Trade-in: Users input the details of their current loan (amount, month it closed, current home value, APR, variable rate info), then choose from a list of attributes they are seeking from a new loan (lower rate, fixed rate, cash-out, etc.). Then your server returns a list of loan programs that fit their needs. Provide a “trade this loan in” button for users to act on the advice. Offer an option for continued e-mail updates to the analysis.

3. Loan Recommendations for Existing Homeowners: Same as above but for users interested in a new loan, rather than a refinance.

4. Loan Recommendations for First-Time Buyers: Same as above but with an emphasis on rent vs. buy analysis.

5. About Your Company: Provide as much information about your company as you can find, especially if you are originating mortgages. These are complicated, risky deals, and users want to know they are dealing with an established/successful firm. On the Web there is no such thing as too much information, only poorly organized info. Organize the details into a pyramid, with a single page of key facts on top (such as licenses, affiliations, FDIC insurance, etc.) and allow users to drill down for more. Hire an intern to spend a month digging up information and transferring it to HTML.

6. Use a Two-Step Loan Approval Process: For most loans, concentrate on prequalifying the applicants as fast as possible, ideally while they are still on your Web. Make the approvals conditional on verifications of collateral value, employment, etc.

7. Make the Loan/Prequal Application Interactive: On the Web you will no longer have such a thing as a “standard” loan application. It will be dynamic, changing as each user fills it out, so that only the key questions are presented. A simple example: If the applicant doesn’t own a home, skip the mortgage payment questions. A more advanced application: Do a credit score during the first part of the application, if the result is marginal, ask more detailed questions about other credit references and household income sources.

8. Lock-in a Rate: Offer a rate lock-in button for both new and existing applicants. Pressing the button would take existing applicants to a summary of their loan application and the choice to lock in now or continue to monitor the market. For new applicants, the button would link to a prequalification application that included the option to lock in today’s rate.

9. Lead-Generation Devices: Put something on your Web of value that requires loan shoppers to identify themselves. For example, Salem Five’s online coupon for $100 off closing costs (see previous page).

10. Provide an Instant Prequalification Letter Online: After an application is approved online, offer users the option of printing a prequalification letter for use in home/car shopping. The letter should be on your letterhead with a digitized signature. Also send an e-mail for further proof of the applicant’s prequalified status.

Cross Sales to Existing Customers

For your line of credit and credit card products (i.e., revolving credit), the road to a profitable customer is two-fold. First, you must book the new account, then get the line activated. Your Web site provides a number of cost-effective ways to increase usage/outstandings from your existing portfolio.

11. Balance Transfer Form/Special Offers: Allow revolving credit customers to transfer balances online with a few keystrokes. Incorporate an
e-mail confirmation so users know the balance transfer was properly executed. Test balance-transfer rate specials delivered online (via Web/e-mail).

12. Online Bill Payment/Credit Card Checks: Allow revolving credit customers to write online checks directly from their credit accounts. Incorporate an e-mail confirmation as above.

13. Skip Payment Application: Allow users to apply online for permission to skip a payment. If possible, give the user an instant answer based on past account performance. At least, provide an answer by
e-mail within 24 hours.

14. Line Increase Application (emergency and permanent): Same as above except for temporary and/or permanent line increases. Use e-mail to confirm.

15. Line Increase Notification/Usage: Whenever you increase a credit line, whether the user applied for it or not, post a message of congratulations on the Web and offer options for accessing the new credit amount. You might also consider an “opt out” option so users could click on a button if they don’t want the line increase.

16. Installment Loan Increase Application: To increase outstandings and profitability, it may be useful to think of your installment loans more like revolving credit than fixed obligations. Let loan customers apply online to access the paid-down portion of an installment loan and/or increase the size of the loan. The additional loan amount could be accessed online.

17. Installment Loan Rollover Application: Along the same lines as number 16, think of your installment loans as portable. For example, if the user is thinking about trading in the car you’ve financed, allow them to simply roll over the existing loan balance while applying online for any additional amount needed to cover the new car. Naturally, you would reserve the right to reset interest rates to current market rates.

18. Ancillary Loan Services Sign-up/Offers: Sell your fee-based services online (credit insurance, card registration, credit bureau monitoring, etc.) with a simple “one click” sign up. Consider offering a new kind of credit insurance that provides better value to the more financially savvy individuals likely to interact with you online.

19. Annual Insurance Check-up: Each year, remind loan customers to login to your Web for an insurance check-up. Users would compare their existing coverage vs. recommended levels, and purchase additional insurance if needed.

Don’t skimp on the customer service portion of your loan origination Web. Make sure it does a good job of highlighting the services you provide on- and off-line. Many loan shoppers will check out the customer service area before proceeding with the loan application.

20. Twenty-Four Hour Online Loan Service Center: Even if it’s just being staffed by your regular loan center group, we think it’s important to give prospects the sense of your commitment to online customer service. Include simple check-box forms to handle routine customer service queries. Confirm every e-mail received with an immediate “we’re working on it” e-mail response. A few days after a question is resolved, at least from your end, you might consider sending a follow-up message asking whether the matter had been resolved to the user’s satisfaction.

21. Online Service Guarantees: Back up your marketing hyperbole by putting your service standards in writing. For example, “e-mails answered within four hours,” or “or line increase applications approved within 15 minutes.” In a world where no one wants to commit to anything in writing, this alone could make your loan services stand out from the competition.

22. Loan Status Reports: For loans in process, post loan status reports on the Web and send daily e-mails until the loan is closed or the user opts out.

23. Account Access: Allow users to login to see current balance, available credit, loan disbursements, payments credited, next payment due date, previous year and YTD interest paid (for tax returns), escrow account balances/transactions, and any other loan transactions.
24. Online Payment: Allow users to make loan payments online. Include a checkbox to indicate whether the user is paying only the minimum due, or the entire balance, or something in between. A link to a calculator would be helpful here. Users could also be given the option to set up autopay (preauthorized debit) by checking a box on the payment form. Finally, a link to the skip-pay application would be appropriate.

25. Payment-Due Reminder: Post payment-due reminders on the Web, and more importantly, send reminders via e-mail. Consider allowing payment to be authorized by replying back to the e-mail.

26. Payment Confirmations: Post payment-received confirmations on the Web and send via e-mail.

27. Collection Reminders: Use the Web/e-mail to gently remind users when payments are overdue. Provide one-click payment options including charge to a credit card.

28. Balance/Overlimit Alerts: Post alerts on the Web when the loan balance reaches a preset maximum dollar amount or line utilization percentage. Also send via e-mail.

29. Activity Alerts: Post alerts on the Web when loan transaction activity is more than a preset maximum level. For example, more than three charges received on a credit/debit card during a 24-hour period. Also send via e-mail.

30. Extra Principal Payment Option: Allow users to make extra principal payments online. Send an e-mail to confirm the extra payment amount.

31. Personalized Amortization Table: Allow users to generate a complete amortization table for their loans. Integrate the table with a payment calculator to run “what-if” calculations on additional principal payments, lower interest rate, higher loan amount, etc.

32. Refi Watch: Allow users to set a rate and points target for refinancing. Then send an e-mail when prices hit the target. Though you may be cannibalizing your higher-rate loans, you’ll have saved a customer.

33. PMI Insurance No Longer Needed Notice: Post a notice on the Web when mortgage insurance is no longer required. Also send
an e-mail.

34. Searchable Loan Agreements/ Disclosures: Post the actual loan agreement and any additional forms signed by the customer when the loan was originated.

35. Credit Bureau Monitoring: Include information/links to the major credit bureaus to assist users in monitoring/evaluating their own credit history.

36. Credit Counseling Services: Post information and links to legitimate credit counseling services available on- and off-line.

37. Home Value Reports: Provide links to Web-based services that provide home values based on a search of public records.

38. Real-Time “Chat” Customer Service: Offer real-time customer service via “private chat mode.” For example, users could enter a virtual service booth, type in a question (or click on a form), and receive answers immediately on-screen from a real person.

39. Personal E-Loan Reps: Private banking customers have someone on call to attend to their every borrowing need. Online customers could have the same type of service, provided it was highly automated. Set up new customers with a real rep they can reach online via e-mail or Web form. This real person would provide individualized answers using a large database of prepared e-mail responses. This level of personal service could be made available in the VIP center described below.

40. VIP Online Service Center: Create a “VIP lounge” on your Web for your best customers. The lounge could be hidden from other customers via a special URL only provided to VIP members. Or it could be highly visible on your regular Web to encourage whatever behavior is necessary to join the club. Services could include: real-time customer service via online chat; discounts on ancillary services; loan rate discounts; higher line sizes; more payment flexibility; etc. Delivering premium services online has the potential to be far more cost effective than through traditional direct mail. Essentially you can clone your regular Web, add some new graphics, drop-in a couple VIP services, and you’re in business.