Several major credit card issuers reported higher fourth-quarter charge-offs, and more economists are starting to call the economic slump a recession. So it is no wonder that many card issuers have decreased dramatically their solicitations to potential new cardholders, analysts say.
Even so, efforts to acquire safe, profitable cardholders continue through a variety of channels, including online and in-person pitches in branches. "It's not a green field any more," says Bruce Cundiff, research director at Pleasanton, Calif.-based Javelin Strategy & Research. "Issuers are more focused on risk than on acquisition at any cost."
Direct mail, still the dominant channel for credit card solicitations in the United States, often serves as an indicator of issuer optimism about the prospects for profitability from future cardholders. Recent estimates of the number of direct-mail solicitations sent by major U.S. issuers suggest growing caution in acquiring new cardholders.
U.S. consumers received 1.29 billion direct-mail solicitations in the last three months of 2007, down 14% from the fourth quarter of 2006, according to Synovate Mail Monitor, a marketing-research publication of London-based Aegis Research Group plc.
"The issuers we saw cutting back the most were those who focused on subprime or were more hurt by the mortgage crisis," says Andrew Davidson, vice president of competitive tracking services for Synovate's financial services group.
Washington Mutual Inc. showed the most-dramatic direct-mail decrease among eight of the largest U.S. issuers Synovate tracks, with 73% fewer solicitations in the fourth quarter than during the same period in 2006.
Citibank had the second-highest decrease year-to-year, with 52% fewer solicitations, according to Synovate.
Synovate estimates Discover Card sent 50% fewer solicitations and HSBC USA Inc. sent 34% fewer in the fourth quarter compared with the same period in 2006.
While a number of factors, such as shifting solicitation methods, could account for the drop in direct mail, the decrease corresponds with bad news on banking balance sheets and general economic uncertainty.
Citigroup Inc., for example, reported a $9.83 billion net loss in the fourth quarter. Subprime mortgages and investments related to them caused the most damage. Citi's U.S. Card division generated net income of $398 million for the quarter, but that was down 60% from $1 billion in the fourth quarter of 2006. At least income from international card operations more than doubled, to $678 million from $231 million.
During a conference call with analysts, Gary Crittenden, Citi's chief financial officer, said Citi had "tightened the underwriting criteria" and "raised minimum score requirements" in response to worsening consumer credit.
Cundiff contends Citi's reduction in direct-mail solicitations reflects that shift. "Citi is running a tight ship to the point where they're dialing down existing credit lines and foregoing opportunities for new cardholder acquisitions," he says. Citi would not provide an executive to comment further on its policy shift.
Discover representatives declined a telephone interview, but Anas Osman, Discover Card vice president of acquisition, agreed to answer some questions via e-mail.
Osman would not disclose how many pieces of direct-mail solicitations Discover has sent in recent quarters, but he says estimates by Chicago-based Mintel Comperemedia are more accurate than Synovate's.
Comperemedia says Discover sent 33% fewer direct-mail solicitations in the fourth quarter compared with the same period in 2006. Discover executives told analysts in March that Discover reduced balance-transfer volumes by 43% during the first fiscal quarter ended Feb. 29, suggesting a reduction in mailed transfer offers.
Osman would not say why Discover sent fewer direct-mail solicitations. However, he said, "Direct mail remains an important acquisition channel for us. That said, we are constantly looking for ways to spread our acquisition investment across a variety of channels as we look to maintain marketing efficiency and ensure we are making relevant offers in relevant places."
Some issuers Synovate tracks increased direct-mail solicitations during the fourth quarter compared with the same quarter in 2006. JPMorgan Chase & Co. sent 62% more direct-mail solicitations, and American Express Co. sent 27% more.
Those issuers with no or fewer subprime burdens seem to be taking advantage of other issuers pulling back, Davidson says.
AmEx, for example, is acquiring new cardholders to make up for existing cardholders who are spending less with their cards, Davidson theorizes. And Chase, which has been the top mail solicitor for the past couple of years, appears to be taking advantage of decreased solicitations by other issuers to try to gain new turf, he says.
"You would expect Chase to benefit quite significantly in this situation," he says. "It's an aggressive strategy to get into people's wallets."
Chase declined to comment for this article, and AmEx did not respond to requests for interviews by Cards&Payments' deadline.
Direct mail had experienced declining response rates in the U.S. even before the current economic malaise. And mailed solicitations are even less well-received elsewhere in the world, according to a comparison of response rates in the U.S. and United Kingdom by Auriemma Consulting Group.
"I don't think lenders are sending out fewer letters because of the subprime crisis," says Megan Bramlette, an Auriemma analyst based in London. "They're sending out fewer letters because they're not that effective."
Even so, when asked which of several solicitation channels had led them to apply for their most-recently acquired credit cards, 42% of 400 Americans surveyed told Auriemma in January 2007 that they had responded to a preapproved direct-mail offer, while only 15% of 505 British respondents had responded to such mailings.
Conversely, 26% of British respondents told Auriemma they applied for their most-recently acquired credit card with a "take-one" application from a bank branch or event, but only 17% of Americans applied that way.
Twenty-six percent of British respondents said they had sought out a credit card application instead of responding to a solicitation they had received, while only 17% of Americans pursued their own card issuer instead of responding to a solicitation, according to Auriemma.
"Americans tend to want the ability to make their own decisions on their own time," Bramlette says. "They like to gather data, gather different offers they receive."
Brits, however, "value that in-person relationship more than Americans do," she says. "They're much more likely than Americans to go and seek out applications, whether that means going to a bank branch and taking an application or going on their own to a Web site to educate themselves."
U.S. banks also should make their branches and online-banking sites work harder to cross-sell credit cards and other financial products, regardless of whether existing customers bank in person or online, according to Cundiff. "When a consumer comes into your bank, selling new products is a way to turn that cost center into an income channel," he says.
Indeed, like most businesses during economic hard times, bankers look for ways to cut costs and increase productivity, and card-acquisition activities are no exception. Margot Vaughan, head of the acquisition practice at MasterCard Advisors, estimates that direct-mail solicitations can cost as much as $125 per acquisition, depending on how efficiently issuers target potential new cardholders.
Internet solicitations, meanwhile, cost between $50 and $65 per account acquired, she says. Only 5% of Americans and 5% of British consumers told Auriemma they had applied for their most-recently acquired credit cards in response to e-mail solicitations, and only 5% of Americans and 9% of Brits had applied based on Internet advertisements.
But findings from a recent Javelin survey indicate the Internet is a more-popular solicitation and application tool among younger and lower-income consumers than among older and higher-income individuals.
The Javelin survey of nearly 2,200 American adults conducted last October found lower-income and, correspondingly, younger respondents were more likely to apply for credit cards online than in bank branches or in response to mailed paper solicitations See chart.
Among survey respondents earning less than $15,000 per year, 42% said they applied for credit cards online, 24% applied through the mail in response to mailed solicitations, and 20% applied in bank branches.
Among consumers earning $15,000 to $24,000 per year, 32% applied for credit cards online, 28% applied through the mail and 20% applied within bank branches.
Forty-one percent of cardholders in both the 18-to-24 and 25-to-34 age segments said they applied for their cards online. The mean for all respondents was 26% applying online, and only 7% of respondents ages 65 or older had applied online.
Discover is increasing its investment in Internet advertising, along with magazine ads and newspaper insertions, according to Osman. Discover's direct-mail solicitations, which still include longer, multipage applications, also tout nonpaper applications.
"Our solicitations encourage prospects to apply via the Internet or over the phone," Osman writes. "Over the past few years, we have seen continued growth in both online-sourced applications and in online response to our mailed applications, reflecting the Internet's growing influence."
Osman would not speculate about how Discover's solicitation methods might evolve in the future, but he says Discover will continue to test a variety of new channels and methods for reaching cardholders.
Analysts agree that issuers will and should continue to use multiple channels to reach prospective cardholders. But they also agree that issuers should keep close tabs on changing response rates and adapt their solicitation campaigns accordingly. CP