By Bryan Derman

Some thoughts from Bryan on reading leading indicators in Consumer Financial Services.

Maybe it’s the lingering winter days here in the Northeast, but I’ve been feeling pretty depressed recently about the state of the US credit card issuing business. We’ve been aware for some time that the account base was fully saturated; that debit cards (and other instruments) were cutting into payment volume; that home equity lines were cannibalizing loan balances; and that direct mail response rates were becoming asymptotic with zero. So, what has me suddenly racing for the Prozac?

In a word, it’s the contents of my mailbox. I learned a long time ago that earnings are a lagging indicator of corporate performance and condition. When you want to see where a company is and where it’s going, you need to examine their marketing statements rather than their financial statements. That’s one reason that I’ve made a habit of opening and reading those credit card solicitations with which issuers routinely carpet-bomb so many of our zip codes (opening and unfolding them also makes it easier to run them through my paper shredder).

I’m worried that what I’ve seen in those envelopes during the past few weeks reflects a level of desperation (and disingenuousness, frankly) that may just be signaling the coming end of an era in consumer financial services. Let me share the details of three distressing direct mail offers I received recently, each from one of the paragons of this great industry.

A Card Game

To dislike the first of these packages, one need not even open the envelope. To aid rookie fraudsters in the identification of high-risk mail, this issuer has imprinted its mailing envelope with the shadowy outline and embossing marks of a payment card. To bolster its authenticity, the words “DO NOT FOLD” have been printed on the envelope. While in fact, there is no card in the package, it does contain a pre-approved credit application which requires only three pieces of information, each of which would be readily accessible to someone who has been making regular visits to my mailbox. In an environment of skyrocketing identity theft, does this really qualify as slick marketing? What does it say about how seriously this issuer will take my security if I do become a cardholder?

A Word Game

My wife received the second solicitation, which to me exhibits the kind of murky word-parsing usually reserved for use by government officials. It proudly promises the applicant a 0% Fixed APR—in exchange for a “finance charge” of $5 a month for every $1,000 borrowed (I can only think that the use of the word “fixed” in this context is a sarcastic double-entendre).

No doubt a cadre of well-credentialed attorneys approved this unusual description of what, to any layman, would simply be called “interest”, but I find little to admire about this bit of linguistic legerdemain. In fairness, the charges are clearly disclosed on both the front and back of the letter, and under some circumstances the borrowing cost would be reasonable—$5 per month on a $1,000 balance implies an annual interest rate (if I may use that term) of only 6%. However, there are some interesting threshold effects inherent in the pricing structure of the offer that would produce much higher interest rates. For example, the $5 monthly charged is levied against balances as low as $200.01 (about 30%), and a balance of $1,000.01 would be charged $10 per month (about 12%). The creators of this offer might consider whether these tactics are likely to lead to the kind of enduring customer loyalty that drives sustainable profitability.

A Game of Hide and Seek

The final mailing is perhaps the most disturbing, and comes from an issuer whose card I hold. It’s one of those “activation mailings” that contain a set of handy balance transfer checks. It immediately commanded my attention with a prominent offer of 0.0% APR for life on transferred balances. All I have to do is spend $50 on the card each month, an eminently reasonable request I’d say. I have to admit that this headline had me hooked. I would have to dive into the “squint print” on the back of the page to figure out what was actually happening here before I could take this one to the shredder.

It took my middle-aged eyes a couple of minutes to locate the offending provision, but I eventually found it, clear as day, right there in the second sentence of the eighth bullet point, where the issuer describes the method it will use to apply payments. In essence, any payment I make would first be applied to the balance subject to the promotional APR, and thus my savings may be reduced by interest accruing on other purchases (that is, the $50 a month required to keep the transferred balances at 0.0% APR). Interest on those purchases is, of course, calculated at the standard APR, currently 14.24%.

At this point, I was reaching for my blood pressure medicine and trying to find my HP 12c. According to the cardholder agreement, the minimum monthly payment on my transferred balance would be 2% of the balance, so it will take just over four years (50 months) for it to amortize away. During those four years, I’ll have to spend at least $2,500 on other stuff ($50 times 50 months), and with accrued interest at 14.24% (plus any Fed tightenings that may occur between now and mid-2009), I will owe $3,386. By the way, if I commit any one of several transgressions during the next four years (exceed my spending limit, make a payment late, chew with my mouth open), my transferred balance will revert to the standard APR. I can remember when this industry’s goal was to “surprise and delight” its customers; this offer is destined to accomplish only the former.

Didn’t We Once Know Better?

I may seem overly critical, but in part that is because I’m such an enormous fan of the credit card and of how artfully the product has been managed over the years. It is probably the pre-eminent financial service invention of the 20th century—a small, low tech rectangle of plastic that lets you “run a tab” at virtually any store, restaurant or service provider in the world (with any necessary currency exchange done automatically in the background at a reasonable rate).

Better still, once you make a purchase, you have another 30 to 45 days to decide whether you feel like actually paying the bill (for that night of wild indulgence in Paris). If so, all of this benefit has come at no cost to you, the consumer. If not, you can unilaterally decide to borrow the money you already spent, and (for better or worse) take most of the rest of your life to pay it back. It’s no surprise that the credit card has stood as the most profitable product in banking for many years now.

Equally remarkable has been the record of revenue growth that the credit card industry has engineered. While the basic product is itself superb, the credit card business has been the singular hotbed of marketing innovation in the consumer financial services space for about two decades. From the advent of pre-approved credit to co-branded cards and air miles programs to no annual fees, cash-back bonuses and offline debit cards, the history of bankcard marketing is a story of recurring creativity and reinvention done in a generally forthright and consumer-friendly way. That’s why I despair that we may now be losing our way.

Peter Drucker famously said that, “consumerism is the shame of marketing”. Misleading customers into buying products that sound good but don’t solve their problems is a bankrupt business strategy that may work once (at most). Offers of the kind I’ve described above only invite more consumerism into our industry; I thought the point was to invite more consumers.

Opportunity Morphs

I understand that times are tough and that the low hanging fruit in this industry was all eaten long ago. It was concerning to me to learn that the Federal Reserve’s reporting for November 2004 showed the largest percentage decline in credit card outstandings since those balances have been tracked. But that just means that a little higher level of creativity and consumer advocacy will be required. The underappreciated acquiring side of the card business has continued to show real dynamism in bringing card payments to so many new venues over the past few years—think mail order catalogs, movie theaters, fast food restaurants, the Internet, and that RFID transponder on your windshield that pays highways tolls.

We’re lucky—consumers never run out of needs and wants; but over time those desires change, tending to become more sophisticated, nuanced and variegated. The marketer’s challenge is to keep up with the changes, offering ever more effective and tailored solutions. In this space, the opportunities to extend and innovate still seem plentiful, for example:

• Home Equity Cards. If home equity lines (and loans) really do represent a better way for many consumers to borrow (as they have since the Tax Reform Act of 1986), we should tell them so and provide them with products that combine the access advantages of bankcards with the tax advantages of mortgage debt. I realize that several issuers already have such a product, but I wonder why I haven’t found offers for any of those cards in my mailbox.

• Debit Card Enhancements. Stop lamenting the popularity of debit cards, and start embracing it. A few issuers have brought air miles rewards to their debit cards, but so much more could be done, particularly by partnering with merchants in debit-intensive categories. Couldn’t we offer to increase the consumer’s coupon and loyalty savings when they pay with our debit card at the supermarket? I’m sorry, but surcharging PIN debit transactions does not constitute a marketing strategy.

• Transaction-level Management. Account-level management, long a central tenet of the bankcard business, is gradually slipping into the category of ‘necessary but not sufficient’. A revitalized private label card industry, along with disruptive entrants like PayPal and Bill Me Later, are now capable of establishing unique financing terms for each individual purchase transaction. In doing so, they allow their merchant-customers to hone their marketing strategies and correct inventory imbalances, much as the auto manufacturers have been doing for the past several years (do most bankcard issuers even think of card-accepting merchants as customers?). The structure of the bankcard industry makes it somewhat more difficult to respond to these initiatives, but it is probably unwise to look the other way as these Barbarians gather just outside the gates of the City.

• iPod as Payment Instrument. You can’t swing a dead cat at a banking conference these days without hitting three vendors raffling off iPods, yet I still haven’t received a credit card offer where I can get one free or cheap (even though two major US issuers have co-branded deals with Apple). Better yet, why not integrate payments right into the iPod? People sometimes forget their wallets, but nowadays it seems like no one goes out in public without their iPod. Adding RFID capability to that device (a la the ExxonMobil SpeedPass) seems almost obvious—“Just wave your white earphones over the POS terminal, and you’re on your way.”

Again, these are just illustrative examples of consumer-centric marketing notions. Pricing promotions, such as the many different flavors of 0% APRs in the market today, are a blunt instrument that really represents old-style mass marketing (the attention-grabbing 0% figure will also become less affordable and sustainable as market interest rates continue to rise). The real objective is to have a process that discovers new opportunities to add value and leads customers in compelling new directions based on their individual preferences.

We Can Do Better

Historians tell us that when depraved, selfish behavior becomes more commonplace and accepted, it often presages the decline of a once great society. I believe the same may be true, in a smaller way, of enterprises and industries. Let’s hope I’m just over-reacting to a few pieces of bad mail. If not, it may indeed be growing late in the days of the great credit card empire.

Publication History

Initial Publication Date: January 19, 2005