No one was deceiving anybody when Richard J. Srednicki accepted AT&T's challenge to restore some glory to its languishing credit card subsidiary.
Neither he nor company president John R. Walter, who last Dec. 16 excitedly announced Mr. Srednicki's recruitment from Citicorp, had an inkling of what 1997 had in store for them both.
Mr. Walter resigned in July, just eight months after he came from R.R. Donnelley & Sons. It was one in a series of top-level shakeups that culminated Oct. 20 in the replacement of chairman Robert E. Allen and, shareholders hoped, a new lease on life for the ailing telecommunications giant.
Oct. 20 was also the day, exactly 10 months since Mr. Srednicki officially started as president and chief executive officer of AT&T Universal Card Services Corp. in Jacksonville, Fla., that the parent put the credit card company up for sale.
Mr. Srednicki, 50, said he would not have come aboard if he knew he would be presiding over a divestiture. But that thought did not linger. In an interview last week, he said he was busy keeping the company and its 4,000 employees on the turnaround path they embarked on in January.
Phrases like "business as usual," "finishing what we started," and "doing the right thing" peppered conversations with Mr. Srednicki and others in his management team. And Mr. Srednicki did not let any discussion veer too far from the idea of teamwork, which was Universal Card religion even before he arrived.
"The senior team was new, and we set some stretch targets," Mr. Srednicki said. "But this was a complete employee effort. We couldn't have accomplished what we did without everyone completely engaged, and the focus should be on them."
The fact is they have a turnaround story to tell. That may be the very reason AT&T Universal Card Services, its renowned customer service facility in Jacksonville, its 18 million cards (mostly MasterCards), and $14 billion of managed receivables are up for grabs. Turning back to its basics, AT&T is conducting the biggest such selloff in credit card history. A year ago it would have been more of a fire sale.
The unit reduced its loss rate to 5.3% in the third quarter from 6.5% a year earlier. (At one point it was above 7%.) Receivables were growing again, by about 8% year-to-year. They are now back to where they were at yearend 1995.
"We may be one of the few to end this year with both receivables rising and credit losses down," said Kenneth A. Vecchione, a former First Data Corp. executive who joined last April as executive vice president and chief financial officer. "Now we are one of the better capitalized banks and are very well reserved. ... Now we are back to asking "How do we grow?" instead of "How do we fix?"
Mr. Vecchione, who worked at Citicorp from 1976 to 1994, is one of several ex-Citibankers brought in by Mr. Srednicki, who spent 13 years there. A card-marketing expert, Mr. Srednicki most recently headed Citi's German consumer bank. He said his AT&T experience has reaffirmed for him what a "fun business" credit cards is.
The AT&T annual report for 1996 included a sober assessment of what the new management was up against. Between 1995 and 1996, what was once AT&T Corp.'s brightest star suffered a revenue decline of 26%, to $1.7 billion. Operating income slid to $64 million from $294 million "due to the continued decline in portfolio credit performance and increased selling, general, and administrative expenses."
It was the saddest phase of a short but full life in a business that AT&T changed by its presence.
The saga began in May 1989, five years after the unshackling of telecommunications regulation, when AT&T hired Paul G. Kahn to build the credit card company. Learning from earlier stints at Wells Fargo Bank, Mellon Bank, and First National Bank of Chicago, Mr. Kahn would shake the bank card industry to its foundations by taking the notion of cobranding- combining the power of AT&T and MasterCard or Visa on the cards-to lengths almost no one had anticipated or contemplated.
He struck a deal with Synovus Financial Corp. of Columbus, Ga., and its Total System Services processing subsidiary to make AT&T "legal" under card association rules. (That did not deter several major banks from asking the Federal Communications Commission to disallow AT&T's entry into the credit card business. AT&T's and other nonbanks' initiatives also led Visa U.S.A. to put a moratorium on cobranding that Visa later regretted because it steered all such business to MasterCard.)
Besides combining general-purpose credit and calling-card features, AT&T Universal promised early applicants that they would never be charged an annual fee, against common practice at the time.
Mr. Kahn, whose personal flamboyance came to rival that of his marketing strategy, timed the product launch so that the first television commercials would air during the Academy Awards show in March 1990. One of the biggest television audiences of the year got the message that AT&T was "changing the face of the credit card forever."
Then came a record response: a million accounts in 78 days, three million in six months, and eight million in two years, enough to rank No. 3 by that measure.
Mr. Kahn's attention to customer service details helped AT&T Universal win a 1992 Malcolm Baldrige National Quality Award and the considerable attendant publicity.
Mr. Kahn left in May 1993. The cards were generating $1.2 billion of annual revenue, about half of a financial services total that then also included the captive AT&T Capital finance company. But profitability was constrained by the lack of annual fees and by the relatively low cardholder credit balances that limited interest income.
Forbidden by his superiors from diversifying AT&T Universal into banking and other lines, Mr. Kahn went on to become chairman of SafeCard Services Inc., later renamed Ideon. He eventually departed under a cloud of suspicion about his management approach.
Mr. Kahn was succeeded at AT&T by David K. Hunt, formerly of Signet Banking Corp. in Richmond, Va., which would spin off one of the venerable bank card programs to become Capital One Financial Corp. Mr. Hunt attacked the low-balance problem with "Something Extra," a rebate and incentive program that rewarded revolvers.
Brittain Associates, an Atlanta-based firm that continually surveys thousands of cardholders, said in June 1994 that 34% of AT&T customers were revolving their monthly balances, below the 50% to 60% industry average but up from 14% in 1991. By 1996, Brittain said AT&T's revolvers reached 40%, but the research also indicated that the portfolio had stopped growing.
Mr. Hunt resigned in September 1996 and became chief executive officer of Global Payment Systems, a merchant processing company formed by National Data Corp. and MasterCard International.
Despite the volatility and short executive tenures, Mr. Srednicki said he arrived to find internal communications and customer service procedures "pretty good." It was also a good sign that AT&T's securitized portfolios maintained their quality. In affirming a AAA 1996 Master Trust rating, Fitch Investors Service said strong revenues were offsetting chargeoffs and variable pricing insulated the issuer from rate swings.
Today AT&T is contributing to a stabilizing of credit-quality indicators that may be behind the recent upturn in portfolios for sale, Fitch said this week.
Mr. Srednicki said the enterprise had "lost sight of priorities" as losses mounted. Morale sank as word spread that AT&T Universal was losing money and jobs might be endangered.
"We asked our people to refocus on quality, and every manager became responsible for reducing costs," Mr. Srednicki said. Expenses were cut across the board and funds reallocated to marketing "because we weren't spending enough there to grow the business."
Customer Value Added, an AT&T quality benchmark that had fallen into average range, is rising again. Mr. Srednicki said employee satisfaction scores that had been "in the tank" are "world-class again."
New products are in the pipeline including platinum, secured, and business cards, and mail solicitations continue to be "measured and well paced," said executive vice president of marketing Daniel R. DeMeo.
"It is a crowded and competitive field, and one has to participate in the consolidation game to continue to play," said Mr. DeMeo, a veteran of Citibank and GE Capital Consumer Credit Card Co. AT&T Universal has prepared for its future, he said, by restoring profitability, tightening marketing linkages with AT&T Corp., and expanding the product line.
The impending ownership change makes these steps no less crucial. "The future is very bright" and will include a "partnership" with AT&T, said Mr. DeMeo. "The sale could work out better for us. It could make more financial resources available" for development projects like the Mondex smart card. (See next page.)
Mr. Srednicki said employees should be comforted by the likelihood that "there is going to be an ongoing business, a cobranding relationship with AT&T," and an acquirer that "may even allow us to do more than we did with AT&T.
"To grow, even by acquiring distressed portfolios, requires capital," he added. "AT&T wasn't willing to supply it to what was not a core business. A new owner probably will."
