Why the upward surge in cobranded credit cards? Here's my summary in a nutshell: The industry has shifted from "Let's make any deal" to "Let's make the right deal."
Early on, cobranded credit card programs looked like innovative profit opportunities, and few people realized the risks involved. Having learned from growing pains, today's industry knows how to structure long-term, successful partnerships.
Though intense competition has become the norm, veteran issuers and partners view their relationships as ongoing ways to build profits, increase customer loyalty, and build market share.
Time has not only validated these business alliances, it has also supplied us with new analytic methods to make the most of cobranding. In- depth research is developed before we pose the ultimate challenge: In this partnership will the whole be greater than the sum of the parts?
There are several other questions for bankers to ask. Will the potential cobranding partner's strengths, resources, and vision match ours? Can he perform as promised, bringing virtues that guarantee success and profits? Does the proposed partner know how credit issuers work? Is his team fully committed?
Is the proposed partner a leader in an attractive industry, with strong financials and high-margin products that lend financial stability and support rewards innovation? Does the partner offer a loyal customer base? Finally, is the prospective industry already saturated with cobrands?
Clearly, we see a recent upsurge in issuers asking for critical evaluations of would-be partners. Why should this business marriage-one that may span years and be terribly inconvenient to end-not draw full attention? It pays to raise the tough, specific questions early and save grief later on.
When it comes to partners, leave no stone unturned.
Consumers want simple, relevant, meaningful, and attainable rewards-not tricks or gimmicks but products and rewards aligned with their lifestyles. And yet people also bring in aspiration, desire, and gamesmanship that complicate the question.
The world offers a choice of deals to potential cobranding partners. From the opening handshake, both sides must be realistic. They must know what would fulfill their objectives and what reserves are ready when things misfire. Planning, analysis of data, and openness are clearly part of "Let's make the right deal."
Advances in technology, computational analytics, and data mining have added greatly to skills in customer profiling, targeting, pricing, acquisition and retention programs.
Early on, hype caused players to focus on deal-making, which made them overly optimistic and, worse still, overly generous: Many issuers simply gave away too much to the partner. The initial enthusiasm drove an "urge- to-merge" period that produced uneven results and required considerable rewriting of agreements. Though most of the early deals are still working, many have been restructured and renegotiated.
There are of course out-and-out failures. The M&T-Giant Food deal was a financial disaster for M&T. Southwest Bell's cobranding effort with Mercantile Bank did not fulfill either partner's expectations. Though renegotiation has been the name of the game, some cobranding partnerships have been sold off. Some have had to revise their rewards structures, as do airlines periodically.
One of the first hot areas was the airline industry. Issuers' desire to link up with the top airline names caused a frenzy of activity. From the outset, frequent-flier cobranding worked well for the airlines-which saw their base of frequent-fliers eagerly adopt the programs-and for consumers, who were thrilled to accumulate air miles. But many issuers discovered they were paying a premium well above the actual cost of the miles to the airlines.
Issuers were happy to help fill seats but only if they made money at it. What issuers misread was credit card customers' behavior: Though the airlines' programs captured very high spending levels, upscale travelers had little or no interest because they did not revolve balances.
Overall, frequent-flier programs brought enormous attention to cobranding, achieved great demographic profiles, and even secured annual fees-one of the few cobranding areas to pull off this feat. But issuers were squeezed, and as a result most of the original airline cobranding programs have either changed hands or renegotiated terms.
In a partnership, both sides must prosper. Had airlines not been flexible about their partners' needs, who knows whether these programs would have become the best in cobranding? Success has made frequent-flier miles the second-most-sought-after currency in the nation.
However difficult, renegotiation is much more appealing than divorce. Disruptions and changes in any cobranding relationship can be catastrophic. Even putting whole marketing campaigns on hold can be disastrous. Starting all over with a new partner creates logistical and public relations nightmares.
To appreciate what we can learn from in-depth research on customer behavior, let's look to the supermarket cobranding experience. Supermarkets have very low margins. While using Visa and MasterCard produces higher transaction totals, the upshot may not be profitable if the partner is unwilling to contribute its share of consumer rewards and benefits.
What supermarket cobranding programs show is that just capturing spending may be less important than scoping out your partner's profit margin. In this way, you can predict whether he brings to your table a compelling value proposition for your preferred consumers. What does he add aside from loyal customers?
The supermarket card consumer has an unusual profile. Though eager to charge food, these consumers tend not to use the supermarket card on a fancy date or when they want to impress business associates. Image matters. They may not charge beyond the obvious field. So it is critical to ask whether your partner adds to the primary charge category.
What research also demonstrates is consumer resistance to revolving balances on food and basics. These consumers view interest payments on food charges with horror, the beginning of a slippery slope to financial ruin. Consumers draw the line at paying interest on the meat and potatoes they serve themselves, while exhibiting none of the same resistance to revolving restaurant tabs. The issue is perception: Restaurant tabs are viewed as part of the good life.
On one level, consumers view cobranding as a giveaway; on another, it's a game that challenges ingenuity. Thus, when one issuer offered savings bonds as a reward-charge a certain amount, and get a bond-but forgot to exclude cash advances, the gamers went to town. In effect, the shrewd ones became junior arbitragers, taking full advantage of this lapse. One busy fellow amassed 45 savings bonds in a week.
If issuers are not equally shrewd, cobranding programs can turn into unpleasant interludes.
After all, any partners can make a deal. The more informed a company is, the more likely it is to make the right deal.