Retail's New Face
From the November 2002 Issue of CardTrak
      T he two fastest growing issuers of bank credit cards are not traditional banks . . . they're retailers! Sears, which owns Sears National Bank, and Target, which owns Retailers National Bank, are issuing VISA and MasterCards at an astonishing rate. Over the past twelve months Target has issued about eight million new "smart VISA" cards, while Sears, over the same period, has issued more than ten million new "Gold MasterCards." Sears has signed up nearly 30 million cardholders since it began offering MasterCards in 2000. Target introduced its VISA card in September 2001. Both issuers are now among the top 20 issuers in the business and are unquestionably, the fastest growing issuers, based on any measurement.

What is their secret to this strong growth in a weak economy?

Believe it or not, it has nothing to do with the card's interest rates, other pricing terms, or perks. As a matter of fact, both cards are not competitively priced.

The secret is a captive audience.

Both Sears and Target had a very large portfolio of loyal store credit card users. However both retailers have since migrated, or upgraded, a major portion of their most creditworthy store cardholders to VISA or MasterCards. The migration is beginning to show signs of slowing but nonetheless, both have emerged as formidable players in the card business.

No Hassle Strategy
Boston-based Compete Inc. says a new study shows that Capital One's strategy of offering a "No-Hassle" card at an APR of 4 to 5 percentage points below competitors' rates attracted applicants away from MBNA and Citibank. Compete says both MBNA and Citibank rely primarily on affinity and reward programs to attract new cardholders. The new Compete data showed that Capital One dominated competitors in attracting new credit card applicants, averaging over seven times the applicant volume of Citibank and MBNA. On average, 22% of MBNA's applicants also considered Capital One, and one-third applied for a Capital One card. Similarly, 17% of Citibank's applicants also considered Capital One, and one-fourth applied for a Capital One card. An average of 15% of MBNA's and 24% of Citibank's credit application abandoners (consumers who started but did not submit an application) evaluated Capital One, and one-eighth of abandoners from both companies ultimately applied for a Capital One card. Compete believes that the credit quality of applicants at Capital One was similar to those at Citibank and MBNA, since the demographic profiles of the defectors to Capital One from Citibank and MBNA were similar to the overall applicant pools for all three companies. In addition, the applicants' behavioral profiles and use of other financial service products, such as brokerage and banking accounts, did not differ among the issuers.

Late Payers
A survey of more than 1,000 consumers found that one-fourth of Americans pay at least one bill late each month and that households with children are 75% more likely to miss a payment than those without. The study, conducted by Opinion Research Corporation and the Western Union "SwiftPay" service, revealed nearly 75% of men report that they pay all of their bills on time. On the other hand, only 69% of women report paying their bills on time. People in the West typically pay bills late most often, while those in the Northeast are the least likely. The bill most likely to be paid late is the utility bill.

Online Bills
Jupiter Research predicts that by 2006, more than 50 million households will view bills online and 52 million households will pay at least one bill online. This represents a compound annual growth rate of 23% over 2001's figure of 18 million U.S. households who viewed at least one bill online. Jupiter Research reports that while direct biller sites today account for 83% of bills viewed online, this will fall to 60% by 2006, with 40% of bills viewed at consolidators' sites in 2006. Consumers who are interested in viewing and paying their bills in a single venue say they would prefer to do so at their primary banking provider's site. This tendency increases among more experienced online users: 32% of users who have five or more years of online experience prefer a bank site compared with 23% of users who have been online for a year or less.

Business Cards
A new survey of 5,000 small businesses has found that more than half say payment cards have become a more important to their businesses over the past year. The survey, conducted by MasterCard and Thomas Regional Directories, also found that 65% of small industrial businesses say accepting payment cards simplifies collections. About 56% say it eliminates the need for credit checks for new customers and 35% say customers buy more when they use a payment card. Four out of ten agreed that payment cards improves relationships with customers. Forty-five percent of those selling online say customers buy more when using a payment card.

Smart Cards
A new study projects that more than 21 million smart payment cards will be in circulation by the first quarter of 2003 in the USA. More than one third of the cards will be issued by Target. Other smart issuers include American Express, Citibank, Providian, Bank One, and FleetBoston. The Smart Card Alliance says its "Smart Cards and the Retail Payments Infrastructure: Status, Drivers, and Directions" study shows that 300,000 smart card-ready payment terminals were shipped last year.

Phone Cards
Another study, released this month, on the U.S. prepaid calling card industry found the industry grew at a compound annual growth rate of 25.4% from 1995 to 2002, reaching $3.7 billion in 2002. The growth from 2002 to 2008 is expected to be just 9.7%, with revenues in 2008 expected to reach $6.4 billion. Reduced rates and smaller margins are contributing to this slowdown in growth. The study by ATLANTIC-ACM also found that 74% of prepaid calling card providers expect to add point-of-sale activation features and 69% expect to include foreign language options on their prepaid card offerings by 2005.

FTC Crackdowns
The Federal Trade Commission has charged a Toronto-based company with eight telemarketing boiler rooms with operating a fraudulent advance-fee credit card business. The telemarketers allegedly told consumers that they would receive pre-approved MasterCard or Visa credit cards with low interest rates, credit limits of $2,000 or $2,500, and no annual fees. Consumers paid the defendants by agreeing to have their bank accounts debited for the advance fee of $189 to $219. The complaint names 1492828 Ontario, Inc., doing business as First Capital Consumers Group, US Guardian United Consumers, Trans America United Benefits Group, Transglobal National Consumers Group, and First Guardian National Benefits, and its principals, David Dalglish, Leslie Anderson, Lloyd Prudenza, and Mark Lennox.

FTC Settlements
The Federal Trade Commission has reached a settlement with CA-based Salyon, Inc., d/b/a First Liberty Financial, Salyon National Credit, Shop Salyon, Quicklinks.com, in regard to the marketing of bogus "Gold" cards. The FTC alleged that the defendants targeted consumers who had negative credit histories while deceptively claiming that they offered a MasterCard, VISA or equivalent credit card; that they offered a second MasterCard that featured a lifetime zero percent interest rate; and that they would report consumers' favorable credit histories to the three major credit reporting agencies. Instead, the complaint alleged that the defendants' "merchant card" only allowed users to purchase items from the defendants' Web sites or catalogs. The complaint also alleged that the defendants' failure to disclose that consumers only could use the card to purchase items from their Web sites or catalogs, and the failure to disclose that consumers could not use the card to pay the entire purchase price.

Online Ads
Online financial services advertising is slowly but surely returning after a major pullback last year. During the third quarter online financial services advertising increased 19% to 51.4 billion impressions. Nielsen//NetRatings says the highest growth industry is online travel advertising which surged 39% during the third quarter to 15.9 billion impressions. One year ago, online credit card advertising declined sharply with the collapse of NextCard and the stumble of Providian. Both card issuers were consistently among the top 10 overall online advertisers. Capital One, formerly among the top 25 online advertisers, also pulled back on its online advertising one year ago. Cap One recently confirmed a reduction in its overall marketing budget. During the third quarter, Cap One's marketing expense was $185.8 million, down 42% from $320.4 million in the second quarter. Among card issuers that remain active with online advertising: Discover, Chase, American Express, 5Star/AFBA, Fleet, Bank One, Bank of America, and U.S. Bank.