Banking has entered the "age of the side dish."

As customers have become increasingly sated with commoditized banking- product offerings, the profitability of these offerings has begun to erode, creating the need for product refurbishment and supplementation.

Many wholesale bankers, for example, could not stay in business if they did not supplement loan offerings with risk- and cash-management services.

In retail, the situation is not quite as bad. Nonetheless, in the credit card business, for example, ancillary products-20 to 30, mostly offered by the third-party partners of card issuers-can greatly fatten returns, potentially boosting profitability per customer by as much as 50%, a circumstance which will of course provide quite a fillip to a company's stock price.

Indeed, the contribution of third-party products to overall card returns can grow large enough to stimulate some lively debates between the issuer and its partners over the division of spoils.

In the typical situation, however, the parceling out of profits seems relatively straightforward. The card issuer gives its partners (purveyors of services such as insurance, or club participations, or actual merchandise like computers) a list of prospects and receives in return a flat percentage of the revenue earned by each third-party vendor.

In effect, the vendor is paying for the right to piggyback on the brand name of the card issuer, without which it could not hope to generate comparable sales. Since the card issuer does not incur any incremental costs to speak of, profits almost equal revenues-that is, the activity constitutes pure gravy. In these circumstances, both the issuer and the third-party vendor should be satisfied with the current compensation structure.

A bone of contention arises when the card issuer gets smart. And some have become exceedingly so.

The best of the card companies have put in place considerable customer targeting expertise, which in some cases far exceeds that of their vendor partners. This capability can be used to greatly improve the productivity of the sales effort-the response level per dollar of marketing expense.

But when an issuer is able to serve up a well-targeted list of customer prospects, it wants to be paid more than the usual flat fee. In fact, one can argue that payment of a flat fee penalizes the card issuer for its expertise. That's because untargeted lists are by definition bigger than targeted lists, and bigger lists mean larger absolute customer response levels and larger gross revenues.

The advantage of employing a targeted approach is that, while it rakes in a lower gross, it can greatly increase the campaign net profit by paring the unit cost of generating customer responses. But since the card issuer gets a fixed percentage of revenue rather than of net profit, it does not share in the economic efficiencies its targeting expertise bestows on its partner. So skilled suppliers of lists fare worse than unskilled ones.

The knowledgeable card issuer has a choice: Don't target, and earn the customary flat fee; or target, and earn potentially a great deal more but only if a different method of compensation can be worked out with the third-party vendor.

A few issuers have risen to the challenge, either negotiating, or considering negotiating, a sliding scale of third-party vendor payments based on differential customer response rates-say, a 15% payment for a 2% response rate but a 20% payment for a 3% rate, etc. These types of arrangement, which reward card companies for their value added, are a first in the industry.

Clearly warming to the opportunity to earn more adequately for their know-how, the card issuers in question have redoubled their efforts to refine that know-how. They are now better positioned than most to meet the two key objectives in the third-party solicitation business:

Avoid "wearing out" the customer file-that is, stanch the flow of unwanted solicitations that irritate the customer and encourage him/her not only to reject the offers but also to sever the basic relationship.

Move from the still widespread practice of offering the customer a random sequence of third-party products to an approach that employs customer-specific information to identify, via the use of appropriate scoring and routing algorithms, the most profitable product that each individual is likely to buy next.

Otherwise put, these issuers are earning their spurs as superior "mass customizers."

The growing skill level of these companies has enabled them to expand the number of their marketable leads, improve net response rates, and, in consequence, raise customer profitability by something close to the figure mentioned at the outset of this article.

Armed with such successes, these issuers can achieve yet another. They are now able to choose their third-party partners more effectively than in the past, making agreements only with those whose recognition of their expertise translates into a willingness to offer an even more generous sliding scale of payments than is currently being obtained or requested.

In a sense, these card companies have been able to initiate the classic "virtuous circle." Customer targeting expertise leads to improved negotiating leverage that begets higher profitability and greater customer satisfaction which in turn provides the wherewithal to further refine targeting skills.

Given the kind of gains that can result from this virtuous circle, those 20 to 30 credit card side dishes (and perhaps others that may soon join them) could yield satisfactions comparable to that provided by the main course, the basic credit card lending relationship.

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