Highly publicized stories of cobranded programs gone awry have cast gloom over the whole concept.
Blockbuster Video, Ford Motor Co., and Southwestern Bell are well-known names associated with defunct cobranded programs that did not work for one or both partners.
According to news reports, they ran into problems for a variety of reasons, but the implication is that troubled programs may be more the rule than the exception. Readers get the sense that many industry observers have concluded that cobranding is no longer-and may never have been-a good idea.
Let us look at some of the available numbers. Visa U.S.A. reports a total of 70 million cobranded and affinity cards-23% of all Visa cards.
Even more revealing is the purchase volume on these cards. Cobranded and affinity cards generate 43% of all Visa U.S.A. volume.
Clearly, cobranded and affinity cards are in the wallets of many Americans, and they are more than pulling their weight as a form of payment preferred by consumers.
This observation is further supported by figures derived from monthly consumer surveys that Auriemma Consulting does for its Cardbeat tracking study. We combine cobranded, reward, and affinity cards under the term "special-value cards." Of the 40 consumer segments tracked this year, special-value cardholders were ranked fourth in terms of monthly transaction volume. Their $644 of average monthly volume was significantly more than the overall average of $452.
When we asked, "How many times a month do you typically use your most frequently used card?" special-value cardholders reported an average of 9.3 times, also fourth on the list (convenience users are the highest), and nearly 30% above the overall average.
Though these are consumer-reported figures, they do indicate people's perceptions about the cards they hold. These perceptions are germane to the subject of special-value cards. The figures tell us that special-value cardholders perceive that they use those cards more often and are spending more with them than are other types of people-including gold and platinum cardholders. Further, the findings coincide with evidence gleaned from our work with clients.
So special-value cards have an enormous base, one with higher-than- average spending and frequency of use. But have these cards reached their peak? Are they growing or dying?
Visa's figures indicate that these types of programs are growing-from 3,000 in 1994 to 4,600 last year. Cardbeat has also found a strong upward trend-54% of respondents now indicate they hold a special-value card, the biggest share since we began asking this question in 1995. Even more telling is the proportion of respondents who hold more than one such card. It jumped from 19% in the fourth quarter of 1997 to 24% in the second quarter of this year.
Our interpretation is that the appeal of special-value cards continues to grow and that these cards are found in more and more wallets. What all this tells us is that special-value cards, with some exceptions, are doing what they were designed to do, which is to open doors to new customers and to give incentives for them to spend more.
The question is whether that increased spending translates itself into higher balances and profits. We believe that, in general, it does. The special-value card, when executed properly, is a sound concept, and the vast majority of these programs are working. In the thousands of programs, the distribution of results is as expected: Most are acceptable in terms of performance, some are superior, and a few are faltering.
The caution flag may be up for the industry, but that is only because a few programs have failed-usually due to flawed initial design or poor management. The troubled programs are few but are noteworthy because the industry had a high regard for the concept and did not expect such failure.
Those in the industry who are now designing special-value programs need to examine the troubled ones in order to avoid their mistakes. Here are some observations on why programs have failed:
A "magic bullet" mentality. Some issuers viewed cobranding as a no-lose proposition. They saw competitors using it to great advantage and felt compelled to jump on the bandwagon. In the heat of competition to line up partners, irrational bidding led to offers too rich to be viable over the long term. The lesson: It is possible for cobranding to be a losing proposition. Therefore, financial assumptions must be realistic and include a worst-case analysis.
Misaligned goals. Sometimes, the two partners had very different objectives, and what made one happy would be disastrous for the other. For example, instead of viewing cobranding as a way to increase consumer loyalty and encourage sales, some retail partners looked at the programs as nothing more than a way to decrease transaction costs. The lesson: There must be common goals with agreement on how to measure success.
Lack of commitment by senior management of the nonbank partner. Managers of certain companies took on a cobranded program not because they thought it was a good idea but to maintain parity with a competitor that had a program.
While the issuer was managing the program, the partner had a hands-off attitude, committing few, if any, full-time resources. The lesson: Any program that is not getting senior management's attention will fail. There must be constant productive feedback and communication between partners to assure the program meets its goals.
No long-term outlook. Once the program was adopted, some issuers felt their job was done and did not adequately support and maintain it through testing and revision. Customer relationships were not managed to assure the right mix of sales and balances, use rates, delinquency performance, and so on.
The lesson: Putting an alliance together is the easy part, but these programs do not run on autopilot. They must be steadily fine-tuned to meet objectives and stay fresh in the eyes of cardholders. It is not enough to get consumers into the program-you must track their behavior and make regular adjustments.
In the first half of this decade, cobranding was believed to be one of the more significant payment-card innovations. We believe it remains one of the most viable strategies for expanding a profitable card portfolio. Programs that have avoided mistakes like those outlined above have succeeded. The average cobranded program will do better than the average non-cobranded one in terms of new accounts, account performance, and customer retention.
Further, we are convinced that despite the proliferation of cobranded programs, growth potential remains. Consumers are increasingly looking for added value, and cobranding is an excellent way to deliver it.