Credit Card Programs
Okay, so you now have a loyalty program. Congratulations. While there are a number of vehicles available to loyalty program operators to allow program members to accumulate the chosen loyalty currency (e.g. "collector" cards, punch cards and credit cards), the focus of this section will be general purpose credit cards (i.e. American Express, Discover, MasterCard, Visa). Note that while the focus of this section will be general purpose credit cards, Collector cards and punch cards continue to serve a purpose in this day and age of saturated credit offerings.
We really can't have a discussion about general purpose credit cards without first discussing private label credit programs. Contrary to popular belief, private label credit card programs are not dead nor are they dinosaurs (they are quite alive and well) - although critics have been predicting their extinction since the early 1990's. For some retailers, 35 - 42% of sales are on a private label credit card.
Against the judgments of so called "experts," we continue to believe in the power of private label programs - a strong strategic argument remains for keeping these programs in place and perhaps launching new programs on a private label platform. Without a doubt, private label programs offer loyalty program operators in the retail environment a great degree of flexibility (see our Loyalty Marketing section).
A continued outcome of the global recession may actually be the resurgence of private label programs as consumers shift their spending from credit to debit (debit tends to be used for consumables and credit for discretionary spend e.g. high-end electronics and other big-ticket items) and banks pull back from underwriting new credit accounts in the face of increased loss rates and increased regulation. As debit becomes the ingrained payment of choice for everyday purchases, private label could become a replacement for general purpose credit cards for discretionary spending.
With that said, there are a number of arguments for moving a program off a private label platform. Aside from the utility argument, one powerful argument these days is the fact that the merchant partner is the one that funds the benefits associated with the card program. This can be expensive. And this is one of the primary reasons why we see so many wholesale flips, from private label to general purpose co-branded credit cards (the finance department somehow usurped responsibility for determining what is best for the customer). Keep in mind that not everyone wants credit.
Some people acquire loyalty cards for long term benefits like a big trip or an expensive purchase e.g. large screen television. Others acquire loyalty cards for short term reward benefits e.g. gift cards. It is important it understand your member's motivation (not to mention, affinity to your brand). That will be the first step in understanding the need for a general purpose credit card as a rewards accelerator.
In talking about the co-branded credit card industry, you will no doubt come across two types of programs in the marketplace: co-branded and affinity. Some definition for each:
Co-branded card programs: Bank partners with a marketing partner (e.g. airline, hotel) to issue a general purpose credit card. The value proposition (i.e. reward currency) is usually generated back to the end user (you the cardholder).
Affinity card program: Pure affinity cards are similar to co-branded cards, except that the bank's marketing partner is typically a charity, an association, educational institution or a similar organization for which consumers would have a partiality. The end user receives no tangible benefit for using the card. Each purchase on the card results in a donation to the organization (usually very small percentage). These days, affinity cards are beginning to straddle the two concepts (i.e. affinity and co-brand).
Airline frequent flyer programs are usually considered a model for the current co-branded credit card (in terms of benefits and the monthly spend). Depending on the rewards segment that you choose to compete in, the clarity and persuasiveness of the rewards offer may represent a relatively higher or lower marketing communications challenge. Not all rewards credit cards provide the spending advantage typically associated with co-branded credit cards (e.g. airline co-brands). So you're not guaranteed success just for putting a card into market, even if you do have a strong brand - just look at the recently launched and failed Neiman Marcus American Express card (program launched in 2006 and marketing efforts have reportedly ceased in 2007).
In considering the addition of a co-branded credit card to your loyalty program, don't lose sight of the macro market. There are thousands of co-brand and affinity programs in the market (well over eight thousand). Co-brands have appeared in virtually every industry. The average U.S. household belongs to 12 loyalty programs and is active in 4.7 of them (source: Colloquy). Then consider that a record 3.8 billion credit card offers were received by U.S. households during 2008 alone with record low response rates.
Layer onto that, 64 - 78% of credit cardholders own at least one rewards general purpose credit card and, depending on whom you believe, 16 - 33% of credit cardholders own at least one co-branded or affinity credit card (Note: An individual may have more than one credit card account).
Make no mistake, the above stats are meant to scare you. With that said, despite the obstacles mentioned above, banks continue to aggressively pursue new alliance. We are operating in an era of loyalty and credit card saturation. If your intention is to proceed, then make sure you can answer the following questions regarding your program:
a) How is your program different (and don't say that your brand is what makes you different!): Is differentiation possible?
b) How will you combat consumer fatigue?
IF you are a merchant looking to launch a co-branded credit card, do yourself a favor and hire a consultant to help you with the Request For Proposal (RFP) process. Most co-brands these days are brokered by a consultant. There are a number to choose from:
Your consultant will help you navigate the process, find the best partner and negotiate the best deal through the (RFP). Although these days, the consultants have gotten so good at squeezing money out of the banks and the Brands that in many cases, few funds are available to properly launch and market the program.
As such, agree in advance with your marketing partner on a Marketing Fund and the method by which it will be funded (real dollars vs. percentage of charge volume).
Once you have your consultant on board, the RFP process will usually involve two stages:
1) Bank: Based on your objectives (e.g. increase store sales, increase loyalty of customers, money), the consultant will RFP appropriate bank partners. Depending on your objectives, some banks are better than others.
There are three primary partnership structures that exist with banks (many deals involve a combination of some, if not all):
a) Volume Based: Merchant partner receives royalty payment on credit card sales volume (60 - 80 bps), and in some cases, new account bounties (Range from $5 - $100+)
b) Revenue Sharing: Merchant partner receives a share of the finance charges/late fees
c) Profit Sharing: Merchant partner receives a percentage (50 - 100%) of all profit above the bank's targeted return
While your co-brand consultant will be focused on the financials (after all that is how they are paid), it will be incumbent upon you to look beyond financials in reviewing potential bank partners. You not only want a vision and cultural fit, you will also want a customer fit. What we mean by that is, will your chosen bank give credit to your customers and will they give appropriate credit lines for your customers (See our FICO section below for a more thorough discussion)? This is an often over looked area in choosing a partner bank as consultants tend to get dazed by the outrageous sums of money garnered for solid brands.
IF you already have a private label card in market, it is likely that your private label Issuer will have the right of first refusal for any new co-branded offering. As such, depending on the structure of your agreement with the private label Issuer, you may only need to go to step 2 below:
2) Brand: Once a bank partner is chosen through the RFP process, a second RFP is issued for Brand i.e. American Express, Discover, MasterCard, Visa. Everything that was important in step 1 above will be important here as well.
Questions you should ask yourself in undertaking in partnership with a bank:
i) Do you have a partnership approach?
ii) Do you operate with full candor and trust?
iii) Is there a mutual investment in the business?
iv) Are you open to change?
v) Do you strive for innovation?
vi) Are you responsive?
vii) Is there broad corporate engagement (i.e. C-level engagement)?
Questions that a good consultant will ask you - so be prepared to answer them:
i) What are the goals for the program - again, are you looking to increase store sales, increase loyalty of customers, decrease costs, looking for an additional revenue stream (i.e. money)?
ii) What are the strengths and threats to your business in the next five years?
iii) What is your current marketing strategy?
- How many? How many new ones per month? Where?
- Split between business/consumer?
- How do you tell them apart?
- Demographics: Age, Income etc.
- Product/Merchant Brand split, if any, among your customers?
v) Have you run a sample file of your customers to determine credit worthiness of customers?
vi) How big do you envision the program in year 1, year 3, year 5?
vii) Are you offering a loyalty program today? IF so, how engaged/loyal are they with you?
viii) Are you prepared to fund loyalty and other aspects of the program?
ix) What types of special promotions would you be willing to offer?
x) Have you talked to any banks?
xi) What percent of current customers pay by credit
xii) Are there any regulatory issues concerning this type of deal?
Based on your answers to the above, the consultant will work with you to determine the basis on which you will pick a bank.
Being aligned with your bank partner is critical. In today’s economy, retailers are desperate to stimulate sales. As such, they have a renewed focus on private label and major credit card programs to do so. But banks are preserving capital these days with limited interest in acquiring new customers. Disconnected interests exist as financial institutions are raising their credit criteria for new customers and retailers are finding it harder to get new and existing customers underwritten. Will this be good for a retailer’s brand reputation if a disproportionate number of its customers get turned down? Unlikely. As such, retailers and co-brand partners will have to be very careful how they align with their bank partners and how they promote their credit products as long as the 2009 economic environment persists.
When consumers apply for credit - whether for a credit card, a car loan, or a mortgage - lenders want to know what risk they're taking by loaning money to them. FICO scores are the credit scores most lenders use to determine credit risk. FICO's lie somewhere on a line between 300 and 850+ -- 723 is the median FICO score in the U.S. The graph below gives you a sense of the national distribution of FICO scores:
Given that only 66% of the population is considered "Prime" (definitions of "Prime" vary) i.e. qualifies for competitive interest rates, the operative question becomes: 'How many of my customers will the bank give credit to?' As mentioned earlier, too often, this question goes unasked and unintended consequences ensue. The second critical question then becomes: 'What type of credit limits will the bank give my customers by FICO and/or income?'
Typically, a FICO of 720 or higher will secure an individual the best interest rate and/or highest credit limit available. A score of 680 - 720 usually will be less attractive. Those between 620 - 680 will have no flexibility (lender is likely to do everything by the book).
You may end up with an bank that may underwrite your entire customer base, but offer very modest credit limits (consumers tend to adopt as the credit card of choice, the one with the higher credit limit and best value proposition). Or on the flip side, you may have an bank that offers very liberal credit limits, but will only underwrite a very small percentage of your member population. As such, make sure you ask the questions (as the consultants surely won't), so there are no surprises later on.
1) From the bank's perspective, FICO alone does not necessarily determine whether a loan is prime, near-prime or subprime. Other factors such as debt-to-income ratio and loan-to-value ratio also factor in e.g. in the mortgage industry, a FICO of 660 with a <80% loan-to-value ratio may be considered a prime loan, whereas the same FICO but with a 80-90% loan-to-value ratio could be considered near-prime and >90% loan-to-value ratio, subprime. Further, depending on the lending environment, the definitions of prime, near-prime and subprime will vary by bank.
2) Don't confuse FICO with affluence. Just because a customer has a high FICO score does not mean that the customer is affluent. You can have someone who makes $20,000 a year in income with a FICO of 800. Vice-versa, if someone is extremely wealthy, has an incredible income; that doesn't necessarily translate into a high FICO score. Some of the richest folks on earth have some very questionable payment histories - and thus damaged FICO scores. The corollary to that is that just because someone has a high FICO score, does not mean that they are a high spender. Thus, credit underwriting best practices will take into consideration income along with FICO and not rely disproportionately upon one over the other.
Make sure you understand how a prospective bank partner underwrites prior to signing any deals.
We periodically receive in our e-mail box questions such as: "Which was the first co-brand credit card in market?" or "Which was the first affinity credit card program in market?" While the AAA Visa credit card, launched in 1978, was arguably the first affinity, bank-issued credit card ever launched (smaller affinities likely preceded but AAA certainly was the first major affinity program launched); Continental, arguably, was the first co-branded rewards credit card - launched in 1986 in association with Visa.
Another often asked question we receive is "Why are credit card companies based in Delaware?" The answer to that one is an interesting one. In the early 1980s, banks were experiencing incredible losses as the rate of inflation exceeded the amount of interest banks were allowed to charge its credit card customers under state usury laws. That was until a little noticed December 1978 Supreme Court ruling was realized that permitted national banks to export interest rates on consumer loans from the state where credit decisions were made to borrowers nationwide - hence why credit card operations moved to such places as North Dakota and Delaware vs. New York in the early 1980s.
Fair Isaac's consumer facing Web site
Federal law requires the three major credit bureaus to provide consumers with one free copy of their report each year. The official Web site for the free reports is www.annualcreditreport.com
Comprehensive list of credit-card offers in market today - for those of you who came to this site mistakenly looking for a credit card.
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