Fertile Sales Turf: Fee-Based Card Services

Gary Johnson is the consummate salesman.

As chief executive officer of MemberWorks Inc., a Stamford, Conn., company that sells fee-based membership services to credit card customers, he has all the typical traits: confidence, charisma, and a penchant for talking numbers.

During a recent lunch in New York, the 42-year-old entrepreneur raced through the history of membership programs that date from the late 1960s.

He rattled off figures so fast it seemed as if he should be pounding calculator keys or scribbling furiously on a napkin.

Instead, it all came from memory. "There are potentially 12 marketing windows," he began. (In other words, card issuers can sell these fee-based programs once a month.)

"Multiply that by 300 million credit cards, a $25 annual fee, plus a renewal factor of 2.5 times the annual response rate-that gives you a $4 billion to $5 billion market in 1989," when Mr. Johnson's company entered the business.

Today, he said, the membership fee has risen to $50 and the card total to 900 million. So the market potential is $27 billion.

The bottom line is that MemberWorks and its key competitors-the Signature Group and CUC International - account for $2 billion of that market with existing programs, according to Mr. Johnson.

As the three add programs, he said, they could tap into $6 billion. Do the math as he does, and $21 billion remains for the taking.

Mr. Johnson and his counterparts Richard Gallagher, president of Schaumburg, Ill.-based Signature Group, and Anthony Menchaca, president of CUC's Comp U Card subsidiary in Stamford, say the market has room for all three and then some.

For nearly 30 years, since SafeCard Services Inc. first marketed credit card registration products to cardholders, membership programs have maintained a symbiotic relationship with card issuers.

As the card industry took off, so did the fee-based programs, which have evolved to a point at which they have far fewer direct ties to the cards. Consumers now are urged to buy shopping, travel, auto, insurance, health, dental, and legal services, among others.

When market factors caused issuers to remove annual fees and reduce interest rates in the 1990s, these add-on services became more attractive to the issuers, who got a cut of the fees consumers were paying.

"Credit card companies like us because we generate incremental revenue for them," said Mr. Menchaca of CUC.

"It's a numbers game," said Anne Morgan Moore, president of Synergistics Research Corp., Atlanta. "If you market to millions of people, you're going to get some hits. Obviously, it works, and it seems to be thriving."

MemberWorks, which went public in October, has 1.7 million members, versus 15.6 million for Signature Group and 66 million for CUC.

Mr. Johnson, who worked at CUC as vice president of product development from 1983 to 1987, co-founded Card Member Publishing in 1989, the predecessor to MemberWorks.

By the time he had made that move, the industry was ready for a new wave of change, which he initiated-moving from one super membership fee for a basket of services to a separate fee charged for each, such as shopping or travel.

The company has grown 40% a year, or 606% over five years, said Jim Duff, chief financial officer.

Steven L. Marotta, analyst for Auerbach, Pollak & Richardson Inc. in Stamford, initiated coverage of the company in February with an "accumulate" rating.

"As the overall market for membership services remains relatively immature and underserved," he said, "the company's opportunity to expand its distribution should not be an issue. MemberWorks' position within the market appears secure based on the relatively high barriers to entry."

In fact, it took seven years for Mr. Johnson and his company to land its biggest client, Citicorp.

The largest issuer of Visa and MasterCard last fall opened its entire portfolio to MemberWorks to market a financial membership program, Maximum Dividends. (MemberWorks markets the program to other issuers under the name MoneyMaster.)

All told, MemberWorks has deals with 13 of the top 20 issuers, including First Bank System, Household International, Banc One, First USA, Associates First Capital Corp., Capital One, Mellon Bank, Bank of New York, GE Consumer Card Co., and PNC. Two banks are in a pilot.

"It is really an industry of elephant hunting," said Mr. Johnson, who hopes to have tied down the rest of the top 20 within two years.

MemberWorks offers eight programs: MoneyMaster, Home PC Link, Health Trends, Countrywide Dental Program, Countrywide Dental and Health, Travel Arrangements, Official Sports Connection, and Connections-Your Source of Entertainment Values.

It is set to introduce a ninth program in June and a 10th a year thereafter, Mr. Johnson said.

Consumers who buy the products come from two groups, he said. Young families with children looking for benefits and savings and recent retirees on fixed incomes, trying to compensate for benefit cuts.

MemberWorks tells its customers that they will save more than 10 times the annual fee with benefits they get.

The tie to the card issuer creates a sales opening. "Basically, piggybacking through the credit card, you are at least assured the customer opens the envelope," said Synergistics' Ms. Moore.

For a lot of consumers, this approach "has a lot more credibility, it gives the company some legitimacy," she said. "The consumer probably perceives if something goes wrong they can always fall back to the bank or provider."

But this approach could backfire, said credit card consultant Frank Caruana. "There is the potential to disrupt customer service," which reflects poorly on the issuer, he said.

"When we deal with bank clients we don't want to cause them a customer service problem," said Mr. Gallagher of Signature Group. "Our customer service has to be superior." Indeed, his company, a subsidiary of Montgomery Ward & Co., won the 1996 International Customer Service Association Award of Excellence.

In a business that is "never easier than it was the year before," Mr. Menchaca of CUC said his company's challenge is to create and communicate the value of its products.

MemberWorks confronts the same challenge, Mr. Johnson said, as it aims "to continue to create innovative programs that can save consumers lots of dollars. As long as we do that we can sign them up and keep them happy. We have to keep the programs dynamic." u

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