As the U.S. credit card industry begins to crawl out of a recession under the burden of stiff new industry regulations, issuers are facing the difficult task of trying to win back consumers.

Credit card marketing all but disappeared last year as issuers coping with record losses likely alienated core customers by closing millions of overextended accounts and slashing the credit lines of millions more to offset further risks.

Those events, combined with tighter overall credit, have fueled a new consumer wariness of debt and credit. And as quarterly debit card transaction volume continues to surpass that of credit cards, a trend that began in 2008, getting consumers back into the habit of paying on credit could be a challenge.

But credit card issuers recently began to restart their marketing engines, indicating they believe a significant portion of consumers whose use of credit tailed off last year are ready to be wooed again. Working within the limitations of new regulations, major issuers see opportunities to win back business and keep it, using a newly crafted combination of precision pricing, forecast-based risk management, tweaking of rewards programs and improved relationship marketing.

“In a relatively short period of time, the credit card industry has shifted from volume to value,” Edmund Tribue, senior vice president and global practice leader at MasterCard Advisors, tells PaymentsSource. “The recession and the new card-industry rules are forcing issuers away from the old mass-acquisition approach that was all about short-term results and high turnover. The future will be about structuring card products based on targeting specific customers for long-term relationships.”

Letting go of the addiction to short-term marketing may not be easy for issuers, Tribue warns. Indeed, broadly aimed direct-mail efforts–card issuers’ trustiest tool for the past two decades–began to surge again early this year after hitting historic lows last year (see sidebar below).

But, Tribue points out, the Credit Card Accountability, Responsibility and Disclosure Act of 2009 largely prohibits most of the practices that made such heavily promotional direct-marketing efforts profitable. And though such offers may persist, at least initially, the savviest marketers ultimately are moving to more-sophisticated, customized marketing strategies using automated customer analytics and refined risk-management tools to pair appropriate offers with promising prospective customers.

“Direct mail is still an important tool, but it’s expensive and very inefficient,” says Campbell Edland, president of EMI Strategic Marketing Inc., a Boston-based credit card consulting firm. “Smarter marketers in the new era are kick-starting marketing with an emphasis on qualifying customers for cards through branches, websites and call centers.”

Hitting on the right profitability formula under the new rules may require some experimentation, observers say.

Under the new rules, introductory or promotional interest rates must endure for at least six months before switching to a previously disclosed “go-to” rate. This factor limits issuers’ opportunities to score profits with shorter-term offers, says Srini Venkateswaran, a partner with consulting firm A.T. Kearney. Issuers also cannot raise borrowers’ interest rates unless customers are more than two months late with a payment, and they must restore the previous interest rate after the customer makes on-time payments for six months.

The Federal Reserve Board in June issued final rules that will cap credit card late and other penalty fees at $25, somewhat lower than the $39 industry average. The rules, which take effect Aug. 22, could drive down fee income, cutting further into card profits.

The new rules are forcing issuers to design card products and terms around steady interest rates geared to individual borrowers’ risk profiles and to establish account fees that, combined with transaction fees that include interchange, will prove profitable over a period of years, Venkateswaran says.

Therefore, interest-rate pricing is the single, most-important variable in the new profitability equation, and issuers this year are likely to experiment to see which offers appeal to consumers. “Credit card pricing dynamics have been severely limited by the CARD Act, and as issuers search for the break-even or profitable [annual percentage rate], they will be watching one another closely,” Venkateswaran says.

Issuers are gradually overhauling their underwriting strategies, along with card pricing. Richard Fairbank, chairman and CEO of Capital One Financial Corp., in April told analysts when discussing Cap One’s first-quarter earnings that during the previous decade the card industry had slipped into “a rather weak underwriting habit of originating [credit card loans] at a low rate and letting repricing take care of it on the other end.”

Cap One’s new approach is moving “away from back-end pricing” and toward setting appropriate rates and fees “upfront,” Fairbank said, adding that “in some cases” Cap One will add annual fees to card products. He also warned analysts that consumer demand for credit cards remains uncertain, but he expects in the long run the U.S. card industry will “still be the most-attractive consumer-lending business in banking” and deliver strong returns.

Cap One is watching “like a hawk” to see what competitors do in setting “go-to” interest rates, which will go a long way toward determining issuers’ profits, Fairbank said. “We are watching it in every single statement, every single subsegment,” he said.


Variable Rates

In anticipation of the Credit CARD Act, most issuers last year switched the majority of their agreements to variable-rate cards, whose interest rates are tied to an index, such as the prime rate. In June, the U.S. national average credit card interest rate rose 152 basis points, to 14.23% from 12.71% in December, according to, which measures rates on all types of cards from 95 of the nation’s top issuers.

Although the Credit CARD Act does not restrict how high interest rates may go, competition likely will keep rates within manageable levels because the industry has such an addiction to promotional pricing to steal share from one another, observers say.

And while large institutions may continue to dominate card issuing, small issuers may play a key role in stirring card-pricing competition, Tribue says. “Small and midsize card issuers, including independent banks and credit unions, often have an opportunity to undercut competitors’ credit card prices because they typically have more-expansive relationships with customers who have more than one type of loan with them,” he says.

Besides laser-like card-pricing management, issuers are eyeing new card products and are reshaping rewards.

Total System Services Inc. in February announced a potentially revolutionary product that combines the functions of credit and debit in a single card, which might help issuers increase overall credit transactions. The TSYS Hybrid card would enable customers to link up to five savings and checking accounts from various institutions and choose which transactions would be paid immediately or treated as credit.


Hybrid Option

Though no banks were offering the product as of PaymentsSource deadline, the processor says “several” are testing it as a way to drive up their overall credit card transactions and cement customer loyalty. Banks testing the product plan to add their own features and brand names to it, says Sarah Hartman, TSYS senior director of payment solutions.

Some issuers also have begun adding annual fees to rewards cards.

Chicago-based Amalgamated Bank, for example, earlier this year instituted a $15 annual fee for the AmalgaMiles travel-rewards program offered on its MasterCard and Discover Card programs. The issuer waives the annual fee when customers use their card to make four purchases within a calendar year through its merchant-funded rewards program that includes 80 merchants, including most of the nation’s largest retailers.

Customers generally have reacted favorably to the change, says Jonathan Telzrow, Amalgamated senior vice president of consumer and commercial cards. “The goal is to push more transactions through cardholders’ credit cards, and we are pleased,” he says.

Target Corp. also plans a major change in its credit card rewards. The issuer in May announced that beginning this fall it will replace its points-based rewards program with a 5% discount on all purchases at its stores and through its website for customers using its Target-branded credit cards, including private-label and cobranded Visa cards. Under the existing program, cardholders earn points with each purchase usable toward a 10% discount on a single day of shopping.

But a test the retailer began last October in Kansas City, Mo., found that customers visit the store more often and spend more overall when receiving a point-of-sale credit card discount, Target says.

“Card issuers are doing a variety of things to reinvent the playbook this year, and one of them is experimenting with rewards programs,” says Megan Bramlette, managing associate with Auriemma Consulting. “We’re likely to see more U.S. issuers altering annual fees for rewards programs and testing merchant-funded programs, which is also taking place in parts of Europe.”

Astute lenders are trying to expand credit cards’ role as part of a broader customer relationship, not as a standalone profit center, says Ken Patrick, senior vice president of revenue-enhancement solutions at credit card technology provider Fiserv Inc.

“Under the new rules, credit cards will likely be most profitable to institutions as part of a broader offering, where cards are linked to other bank products with rewards programs and everything is tied together to enhance customer loyalty,” Patrick says. “We are going to see some real innovation this year in terms of new rewards programs that bring value together in combination with other products.” He did not provide any specific issuer examples.

Besides pricing, issuers are retooling their risk-management models.

Issuers tightened their credit card underwriting requirements during the recession, and now many are taking a closer look at the data within their portfolios to spot long-term opportunities to expand customers’ credit lines and to cross-sell them new card products, says Vinnie Calo, Fiserv general manager of credit processing.

“More card issuers are starting to put more emphasis on evaluating a customer’s long-term risk and value within a credit card portfolio,” he says. “The data has been there all along, but issuers are starting to deploy it differently now.”

Blending the disciplines of profitability analysis, risk management and marketing strategies may be the best way for issuers looking to develop credit card products and offers with the new focus on longer-term relationships, EMI’s Edland says.

“Issuers want to identify pools of good prospects, target specific potential customers using new market-analysis and risk-management software, and then deliver an appealing card offer to the customer based on specific needs and forecasts. And they need quick-turnaround results,” Edland says.

Toward that end, EMI this year joined forces with Bozeman, Mont.-based credit-decisioning technology firm Zoot Enterprises Inc. and Atlanta-based customer-analytics firm Insight Inc. to market zOptimize, a cross-discipline product the three companies say is designed to help address gaps in issuers’ card-development process.

Several issuers are using or are testing zOptimize, says Tom Johnson, Zoot vice president of product development, declining to disclose their names.


Financial Modeling

One factor differentiating zOptimize from past efforts is its emphasis on combining risk management with new tools designed to forecast the type of card that would be the most appropriate for a prospective cardholder and the most profitable for the issuer, says Andy Callan, Insight managing director.

“Using new financial-modeling tools, we can try to predict what a customer’s short- and long-term spending needs are, whether they are in the market for a new car, if they have a home-equity loan or they are looking to refinance their mortgage,” Callan says. “These measures provide a lot of insight into whether a prospect is likely to pay off their credit card balance each month or revolve a balance. That, in turn, helps issuers decide which type of card product and terms are best to entice the customer and also turn a profit.”

Applying EMI’s broad marketing lens to zOptimize may illuminate card cross-marketing opportunities, particularly within an institution that offers diverse products, Edland says.

“Over the past decade, credit cards typically existed within a bank in their own silo, with their own marketing campaigns disconnected from other areas of the bank,” she says. “The CARD Act is forcing banks to recognize the value in looking at how credit cards tie in with other products, including debit cards and mobile and online banking, creating an opportunity to cross-market cards more effectively to customers with those products.”

Zoot offers zOptimize to issuers as a software service combined with marketing consulting, which is crucial in “breaking down the walls of the silos” that tend to exist between card issuers’ risk-management and product-development departments, Zoot’s Johnson says.

“When we talk to issuers in the post-CARD Act era, the most-significant change we see is the beginning of an emphasis on customers, and not exclusively on products,” he says. “Different institutions are starting to realize the value of combining existing products to meet the needs of consumers, with credit cards as a central element of the relationship.”

Many consumers understandably turned their backs on credit cards during the economic downturn and the resulting credit crunch. But issuers may win back their business by combining artful pricing and compelling rewards with effective customer analytics, risk management and marketing strategies.




Most Popular Types Of Direct-Mail Card Offers


Credit card direct-mail solicitations from major issuers surged during the first three months of this year, driven by a flurry of promotions for rewards cards and balance-transfer offers, according to data Mintel Comperemedia released in May.

Issuers mailed 838 million card solicitations during the quarter ended March 31, up 83% from 458 million during the same period last year, as card issuers resumed marketing efforts following the implementation of the Credit Card Accountability, Responsibility and Disclosure Act of 2009, the Chicago-based direct mail tracking firm says.

Though the first-quarter surge of solicitations suggests issuers are getting more aggressive in their marketing, the number of offers mailed to consumers so far this year is significantly lower than the levels seen before the recession, Andrew Davidson, Mintel senior vice president, tells PaymentsSource.

“Even though the first-quarter mailings showed significant growth, it’s still much lower than what we’ve seen in the past,” Davidson says, noting that from 2004 through 2007 issuers sent about 7 billion to 8 billion solicitations per year. “We expect to see a total of between 3 billion and 4 billion solicitations mailed this year.”

Issuers mailed 575 million card solicitations during last year’s fourth quarter, up 47.1% from 391 million the previous quarter, Mintel says. During all of last year, issuers mailed 1.8 billion card solicitations, down 66.7% from 5.4 billion in 2008.

A noteworthy increase in mailings for fee-based premium cards occurred during the first quarter, including for cobranded travel rewards cards, Davidson says. And many large card issuers are restarting their marketing of promotional 0% interest rates on balance-transfer offers, with balance-transfer fees averaging about 4% to 5% instead of 3% before the recession.

Offers for no-annual-fee cards tied to rewards programs comprised more than half of all direct-mail solicitations during the first quarter, while issuer offers for “plain vanilla” cards with no annual fees and no rewards ties plunged.

One possible reason plain-vanilla card solicitations declined is that issuers previously targeted such products to subprime customers. “Subprime cards carrying all types of fees, beyond the annual fee, were hardest hit by the CARD Act rules, and that is the area where it is most difficult to make money,” Davidson says.


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