Out of the ashes of the 1991 recession, with its trail of insolvent loans, high chargeoff rates, and low consumer confidence, has come a period of double-digit growth for consumer credit and 25% yearly leaps in credit card receivables.

Industry experts attribute much of the growth to the explosion of credit card cobranding, set off by the launch of the AT&T Universal card in 1990.

As growth continues, a debate resonates. Cobranding is either the best thing that ever happened to bank credit cards or it is contributing to a decline in banks' control over customer relationships while passing more profits to nonbank companies.

The jury is still out.

"The best cobranding relationship is one where the bank ends up with a new customer or a more solid relationship with an existing customer," said Mark K. Tonneson, president, Banc One credit card services. "The worst is when the customer is owned by the cobranding partner, if not legally, then from every other standpoint."

Ultimately, Mr. Tonneson said, the banking industry could be forced into the secondary roles of credit collections and customer service. Banks would be then hostage to their popular partners, who are free to renegotiate card-issuing deals and take the customers elsewhere.

Banc One Corp. had a bad experience with Northwest Airlines, which pulled out of their partnership in last February. Banc One responded by issuing TravelPlus, an in-house frequent-flier card, to the 100,000 WorldPerks cardholders.

But Banc One has also benefited from cobranding's good side, an example being a successful venture with BP Oil.

Banks are "generally disadvantaged in putting together deals, because consultants understand how to play banks against each other," said Mr. Tonneson. "Winners include consumers and cobranding partners. Ultimately, the banks don't come out as well as they may."

Other observers disagree. Anita Boomstein, a partner with the New York law firm of Hughes, Hubbard & Reed, said, "You may hear complaints from banks about losing control over their portfolios, but how many banks on their own would be able to get programs with a million accounts?"

Plain vanilla cards have lost their appeal, said Ms. Boomstein, who has participated in bank cobranding agreements. "Banks would have continued spinning their wheels and getting 1% (direct marketing) response rates if it hadn't been for cobranding."

Robert B. McKinley, president of RAM Research Corp., a card-tracking firm in Frederick, Md., said cobranding has been "a boon for the whole industry. That's why we're seeing 25% yearly increases in volume."

Consumers' rush to rack up rebates and usage points translates into higher credit balances. Receivables grew 15.8% in 1993 and were up 12.4% through the third quarter of 1994, he said. Mr. McKinley predicts full-year returns will show 18% to 20% growth in receivables.

By December, MasterCard was classifying nearly 40% of its 128 million U.S. cards as cobranded or affinity. Also, 20% of all Visa cards were cobranded or affinity, making the total for both brands close to 90 million.

It's a giant leap from 1980, when there was only one true example of cobranding - the Merrill Lynch Cash Management Account Visa card, issued by a Banc One subsidiary.

Mr. Tonneson said that while cobranding has significantly increased the industry's transaction volume, and while airline-affiliated programs have taken travel and entertainment business away from American Express, it hasn't expanded the total market.

"A particular issuer can grow its portfolio, but that business is at the expense of another issuer," Mr. Tonneson said.

"The reality is that it's stealing market share from other players that aren't as sophisticated," said Paul G. Kahn, chairman of SafeCard Services Inc., a provider of credit card protection and marketing support services. "We're in a mature market - that's exactly what happens."

Mr. Kahn, whose company just introduced the Professional Golfers Association Tour Partners MasterCard with a SunTrust Banks Inc. unit, was the first chief executive of AT&T Universal Card services, which has issued 22 million MasterCards since its inception.

Mr. Kahn believes credit cards should be viewed as consumer products rather than traditional loan vehicles, and seeing them in this light - as similar to breakfast cereals and other packaged goods - can widen their market appeal.

"Clearly, (cobranding) is a strategy that is working because of the power of the brands, most of which are far stronger than the power of the banks," Mr. Kahn said. "You have to think like a consumer brand, not like a bank with a monopolistic territory or franchise" to remain a viable player.

Mr. Tonneson said banks require strong billing on the cards, applications, and statement stuffers to remain in consumers' consciousness.

While some bankers say profits are hurt by sharing income with a partner and by offering expensive rebates, Kristine K. Crow, senior vice president of member relations at MasterCard International, said spending volume on cobranded cards is at least 15% higher than on traditional plastic.

She also said it accelerates growth. "The value provided to the consumer encourages them to use the card at places they didn't before," such as grocery stores, doctors' offices, and for college tuition. Ms. Crow said she doesn't see any slackening in member interest.

Household Bank has made its mark in cobranding, initiating several widely accepted products including the 8.5 million-account General Motors MasterCard.

"The basic issue behind cobranding is doing more for the consumer," said Warren Wilcox, executive vice president of Household Credit Services. "The most successful programs tend to be simple, powerful, and add real value."

On the issue of customer ownership, he said Household is using General Motors' customer-base to cross-sell Household insurance products. "Our relationship (with GM) is cooperative - there's a tremendous amount of business value for both of us."

Francine Schall, executive vice president of member relations for Visa U.S.A., supports partnerships, but added that cobranding is "not the only game in the marketplace." Ms. Schall said banks compete on variety of bases including pricing and in-house enhancements like interest rebate programs or cross-selling bank products to cardholders at a discount.

She pointed out that some banks are more satisfied with their programs than others: "Everyone I've talked to would like to be more successful on the bank side, preferring not to share as much with their partners."

Mr. Wilcox dismissed the "naysayers" who bemoan the splitting of profits. "If you do something powerful and relevant for customers, they will reward you with their behavior," he said.

Cobranded programs tend to have higher credit quality and lower chargeoff ratios, as consumers keep current with their payments to remain eligible for rebates.

Mr. Kahn, of SafeCard, pointed out that there are 6,000 issuers of MasterCard and Visa cards competing with each other in the United States.

He said the low-rate issuers are clearly undermining profits more than cobranders. "Historically banks have driven their own prices down," he said. "That's the only way to differentiate themselves."

Alan Welch, senior vice president, Wachovia Bank Card Services, a fast- growing low-rate issuer, said that while cobranding involves some type of revenue sharing with a partner, low-rate issuers share revenue with the consumer.

"The credit card business has been profitable for some time - it's not unreasonable to expect margins to decline," he said.

Moshe A. Orenbuch, senior research analyst with Sanford C. Bernstein & Co., said low-rate issuers have a sounder strategy, which is aligned with the consumers' interests.

When cobranded rebate incentives are based on charge volume, banks are trying to get consumers to do something that's only marginally profitable. In contrast, low-rate strategy focuses on borrowers who accumulate balances.

"Cobranders know they are charging high interest and hope you charge so much that you can't pay it off," said Mr. Orenbuch. "The interests of the cardholder and issuer are not as aligned as with low-rate issuers."

While most industry analysts view cobranding as positive for issuers, Mr. McKinley warned that the honeymoon may be over soon. As interest rates rise, these programs will become more expensive for consumers, who may reevaluate their programs and turn to low rate cards.

He said, "The challenge is: can partnerships respond to the changing marketplace and weather that storm?"

Mr. Orenbuch added that when interest rates go up, profits for the banks tend to shrink - because funding costs rise but convenience users don't pay interest.

Mr. McKinley also said banks that entered cobranding early have had the most success, but as the field gets more crowded and consumers are overwhelmed with offers, card companies will have to turn cartwheels to stand out. "A can-you-top-this atmosphere raises the stakes for any new programs that come along," the analyst said.

Mr. Tonneson said Banc One, while continuing to support its cobranding deals, is looking for ways to lure customers without partners.

"Cobranding will continue to have its place," he said, "but I am a fan of MasterValues and Visa Rewards, which create value associated with bank card brands, delivered by the bank."

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