As the bank card industry goes through decelerating growth and rapid consolidation, strategies for attracting and retaining profitable cardholders will be fundamental to success.
At one end of the spectrum, issuers have used prospect information and data to push highly customized products to consumers through analytically based segmentation.
At the other end, cobranding and affinity relationships have utilized affiliation-based segmentation.
Although cobranded programs have attracted enough consumers to command a meaningful share of the market, financial viability has not always followed from the standpoint of the cobranding partners.
The varied performance cobranding programs underscores the importance of structuring them to provide economically attractive solutions for each constituent - issuing bank, cobranding partner, cardholder - throughout the life of relationship.
The likelihood of success is enhanced by choosing a complementary partner and creating an equitable and flexible cobranding arrangement.
In selecting a partner, each party should anticipate the counterparty's strategy for target market, growth, product offering, customer service philosophy, profitability, loyalty, and retention. The objective is a partner with similar strategy and goals.
Examples of poor alignment include little or no overlap of geographic or demographic footprint and dissimilar emphasis on loyalty versus profitability-for example, when one partner wants to keep all customers but the other wants to jettison the unprofitable.
In addition to reasonably close alignment, the ideal cobranding partner:
Is knowledgeable about cobranding economics and committed to overall program success.
Is a leader in an industry without major cobranding competition.
Has a cost structure that can be leveraged so that business generated through the cobranding program provides enough returns to comfortably support it.
The ideal issuing bank partner:
Has long-term viability and will likely survive industry consolidation.
Has strategically targeted cobranding as more than just a mode of growth.
Can profitably offer an attractive product set for most if not all of the cobranding partner's customers.
To safeguard against restructuring or termination, those renegotiating or entering into new cobranding agreements should carefully structure them to ensure economic success to each partner.
In preparing to negotiate, each party should:
Understand the target cardholder market and develop attractive product strategies that will not result in adverse selection-that is, selection of only the riskiest cardholders most in need of credit.
Anticipate the behavior of cardholders in the program, particularly if a rewards structure is used, since cardholders have increasingly become economically rational.
Develop a conservative base-case program forecast and understand the economics not only from its own perspective, but also from that of the prospective partner.
In negotiations, each party should seek to:
Align interests as much as possible by structuring the program so that both parties share, at least in part, in upside or downside of program results.
Get a great deal, but ensure that the program's core economics are sound for both partners.
Develop end-game provisions acceptable to each party across a wide spectrum of potential outcomes.
Cobranding programs do introduce an added layer of intricacy into the already complex bank card product spectrum, but they have the ability to work well.
Participants owe much to the lessons provided by cobranding programs such as Ford/Citibank, which did not attract enough new cardholders to fund the rebates paid out to existing cardholders; BJ's Wholesale Club/Beneficial, in which convenience usage was too high; and many others.
Success will come from choosing a partner with similar strategies, goals, and program expectations; realistically anticipating program performance from each party's perspective; and developing flexible and mutually advantageous program-sharing relationships.