In the 1960s, when the oldest of the 50 million members of Generation X were children, the credit card industry came close to collapse.

Fierce competition and interbank warfare had led to market saturation. Pre-approved cards were being mass-mailed to any lists banks could lay their hands on. Some of those underage Gen Xers, as well as welfare recipients and family pets, got cards. Losses skyrocketed, and fraud ran rampant.

What has grown into a trillion-dollar industry is again facing the challenges of an increasingly competitive market. At the same time, card profitability is reeling from high delinquency and chargeoff rates. Record bankruptcies and other credit quality factors have pushed credit card companies into a symbiotic relationship with the information service companies that help them gauge creditworthiness.

There are parallels here to catalogue retailing, which faced serious problems several years ago. Costs were rising, sales were leveling off, and profits were being squeezed in a saturated marketplace. List-segmentation techniques were not meeting expectations.

But the last few years have seen dramatic changes in the catalogue market, including the emergence of cooperative data base management services. In 1990, Westminster, Colo.-based Abacus Direct Corp. was founded, an alliance of national catalogue marketers that agreed to share their customer files. In exchange they received aggregate data to help them create mailing lists organized by purchase behavior.

Abacus now manages the richest single source of shared mail-order purchasing behavior in the country. The data base contains purchasing data from three-fourths of the largest consumer catalogue operations. Abacus was one of Business Week's top 10 "1997 hot growth companies."

The aggregate data that catalogue companies find so useful are the same type of information sought by credit card companies as they widen their data warehouses, according to Dan Snyder, president and chief operating officer of Abacus. People who buy merchandise through catalogues show "a willingness to spend through non-face-to-face interactions," he said. "And 95% of catalogue purchase transactions are made with credit cards."

The purchase data collected by Abacus allow credit card marketers to "create a broader and richer prospecting base," Mr. Snyder said. Though these data do not establish creditworthiness, they do reflect credit card purchase behavior, which is exactly what a credit card marketer should be seeking.

Many creditworthy, yet potentially unprofitable, credit card customers are regularly solicited through pre-approved offers. These customers typically use their cards only in emergencies or for occasional convenience purchases. They pay their monthly charges in full to avoid interest fees.

Mere creditworthiness at the time of solicitation is not a sufficient criterion upon which to base marketing programs. There are several demographic groups whose behavior proves this rule, such as retirees who are careful not to revolve their balances. Also, the 50 million Generation Xers, people born between 1965 and 1977, despite their heavy use of credit and $125 billion annual discretionary income, remain a constant challenge to debt collectors.

Without customers who revolve their balances and keep their accounts current, card issuers cannot make a profit.

Establishing a new card relationship through direct mail channels is expensive-some estimates place acquisition costs as high as $80 per customer. Multiple billions of dollars are spent on credit card print campaigns, television and radio commercials, event marketing, outdoor billboards, take-ones, telemarketing, and direct mail.

On top of the costs of new-customer acquisition, marketers must deal with the accelerating rate at which existing customers are defecting to competitors.

For these reasons and others, the credit industry is reassessing its marketing options. The ongoing decline in credit quality has caused some soul-searching, as have consumers who know they can negotiate better rates and terms and "card-hop" in search of low annual percentage rates and no annual fees.

The popularity of rebate programs on purchases of gasoline, lodging, car rentals, and long-distance phone calls-and the increasingly high cost of these programs-has forced many issuers to revise their customer acquisition strategies. Though reward programs are exceedingly popular with consumers, their profitability proved disappointing.

Meanwhile, declining response rates to direct mail offers-coupled with rising chargeoffs-has led to a rethinking of that mode of marketing. Banks are moving from the traditional mass mailings of the past to smarter, more targeted solicitations using micromarketing tactics.

Further, there is pressure from politicians, consumer advocacy organizations, and Wall Street. Some blame consumer credit woes directly on the card issuers' aggressive marketing. The response has been to move away from targeted direct mail to "invitation to apply" offers.

Pre-approved credit card mailings rely on lists from credit bureaus based on reported creditworthiness. The hitch is that an individual's circumstances can change dramatically in the months it may take from the initial list selection to the mailing and acceptance of an offer. The industry is beginning to feel the effects of "list fatigue," having oversolicited creditworthy households.

"Invitation to apply" solicitations have traditionally been sent to people on lists built from demographic data, including the income range of residents in a particular locale. As Abacus' Dan Snyder pointed out, "While the power of descriptive data is important, two individuals or households that look exactly alike demographically may not behave the same way. You don't want to ignore that data, but you do want to understand the differences."

A pattern of purchasing is a powerful predictor for behavioral modeling. Mail-order buyers consistently respond better to direct mail solicitations than individuals who do not purchase through catalogues. Repeated and consistent purchase behavior over time is by far the more reliable indicator of future inclinations.

The challenge facing credit card marketers is to identify, target and capture consumers who yield interest income on revolving balances while predictably increasing their purchase activity. A household's prior direct mail behavior, combined with credit criteria and demographic information, can help credit card marketers enhance their list performance by predicting who is most likely to respond and benefit from the card offer.

Bill Bak, president of First Data Infosource Donnelley Marketing, speaking of its cooperative work with Abacus, said, "For the first time, issuers will be able to access a new type of high-quality, high-value list source for 'invitation to apply' solicitations."

With purchasing-behavior data, card marketers can get a predictive view of future profit potential, rather than relying only on inferences or on available demographic information. Predictive modeling helps marketers improve on the results from merely dropping millions of pieces in the mail. Precise, laser-like marketing decisions can be made up front, using purchase behavior models.

Said Dan Snyder, "A single mailing to one million names may cost as much as $500,000. If the typical response rate is 2%, then 98% of that money is pure waste. Credit card issuers need the ability to send their offers to lists with the highest probability of response and future card use."

For necessary goals to be achieved, the right credit card customer must be solicited up front. And that right customer is an individual who is known to respond to direct mail solicitations and who will use his or her credit cards within the terms of issuance.

Mass marketing without segmentation is becoming a distant memory as marketers recognize that the way to profitability is to identify and capture the highest percentage of profitable customers from a broad spectrum of niche interests.

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