With the cobranding craze sweeping the credit card industry, partnerships are proliferating as banks and brands unite to deliver added value to consumers.
Although there are high hopes for profits, the outcome of a cobranded deal is not predictable. Some ventures explode on the marketplace, like the General Motors or Shell MasterCards, while others have less luck.
As evidenced by the Banc One/Northwest Airlines divorce, cobranding relationships can lead to custody battles- who gets the accounts.
Speaking at a recent AIC "Strategies For Implementing Cobranded Credit Cards" conference in Manhattan, attorney Anita Boomstein warned that a good exit strategy should be negotiated when entering a deal, just in case it doesn't turn out as planned for both parties.
A partner in the New York firm Hughes, Hubbard and Reed, Ms. Boomstein has spent 20 years working as an attorney for the credit card industry, at companies such as American Express and Chase Manhattan.
She was employed by Sears, Roebuck and Co. for five years, developing the Discover card and then moved to AT&T, where she worked on the development of the AT&T Universal MasterCard.
Subsequently, she aided in the development of Synovus Financial Corp.'s H&R Block ValueCard and the Western Union MasterCard, issued by the Associates National Bank.
Q.: At the conference, you mentioned that with the flurry of cobranding activity, some deals may not meet the positive expectations of both parties. You suggest negotiating an exit strategy before signing the deal. How does that work?
BOOMSTEIN: When the parties start negotiating the contract, they have gone through a long process of choosing each other and they usually feel very positive about the relationship. As the lawyer, I'm the one that has to tell them that if it doesn't work out they're better off trying to negotiate an arrangement to figure out what will happen to that portfolio now, before there's any negative feeling on either side.
Q.: Does that cause difficulties in the negotiating process?
BOOMSTEIN: It's a very difficult negotiation. Both sides rightfully feel that they're the ones that have contributed the bulk of the value. The corporate partner gives over its name, image, and reputation -- which sells the card.
The corporate partner also supplies its customers, and so it has a very strong interest in what happens to those people -- they want to retain them as customers.
The banks, are aggressive in bidding for these partners, and in doing so they have made them much more expensive programs to operate.
As a result of that, some of the banks are willing to sustain lower profits in the first several years and expect to earn that back after the program has been running for several years. If the program terminates before the bank has had a chance to earn back the bulk of those profits, it's really at a disadvantage.
Q.: What would cause the types of problems that would lead to termination?
BOOMSTEIN: It's really a combination of factors --- what did the parties anticipate at the beginning, and are their expectations being fulfilled. It's a question of. compatibility of the overall goals of the bank and the partner.
The bank's credit policies may be viewed by the partner as being extremely restrictive, which results in too many of the corporate partner's customers being turned down.
The corporate partner may think that the bank's customer service is not up to par, or the corporate partner feels that the bank has lost its commitment to the portfolio.
The bank could also be dissatisfied. The profitability could be much lower than the bank has forecasted. Either the customer base that they've solicited turned out to be less creditworthy than expected, or the people aren't using the card enough.
The corporate partner may not want to put any more money into, marketing to generate new accounts, and the bank may feel that it's tying up capital on a program that is not going to prove profitable.
Q.: When negotiating a deal, do clients resist planning for its possible demise?
BOOMSTEIN: I think that most people feel that they've got to protect themselves by thinking about it. The negotiations are often very unpleasant and I've had banks that have gotten up and walked out because they refused to give away the equity in the portfolio.
It has just been recently that the banks have been willing to concede that the cobranded partner is entitled to some share of that equity.
Q.: How do you calm the parties?
BOOMSTEIN: I don't have any magical wisdom. It's a product of negotiation and sometimes it's a reflection of what parties have given up in other aspects of negotiations.
The prominence of the corporate partner and how many people are bidding for its business will dictate how demanding it can be.
From the bank's perspective, if it's very large and has ability to do other programs, the bank can afford to be independent and not give away as much as the partner expects.
Q.: What are some examples of exit strategy?
BOOMSTEIN: Either party can keep the accounts, the portfolio can be sold to a third party, or the corporate partner can form its own bank and become the issuer of its own card, if it's a large enough entity to do that.
The other option for the corporate partner is converting the accounts into proprietary cards, in which case they could be a nonbank lender, like department stores and petroleum companies.
With proprietary programs, if the contract ends the portfolio can be transferred right back to the original owner. The question is what was the value of the portfolio when the bank acquired it, and what's the value of it at the end of the contract when the corporate partner wants to take it back.
There's some negotiation that reflects those two values and what happens to [the program] over the life of the contract.
Q.: What about companies that had no prior credit program?
BOOMSTEIN: I think in those cases, the likely outcome, if the contract ends, is that the partner would have to go out and find another bank that would be willing to step into the shoes of the original bank.
Q.: There haven't been many examples of crashing cobrands so far, although early signs have been seen with the airline companies. Do you think this will become more of an issue as these portfolios mature?
BOOMSTEIN: The AT&T program is only four years old, and it was one of the first true cobranded products with value added enhancements.
These programs haven't been around for long enough for the termination or renewal date for the contracts, most of which are at least five years for the initial term. When you hit that point, then the parties have to make a decision. You'll start to see movement as contracts expire.
Q.: Will consumers become confused?
BOOMSTEIN: I think not. The marketing messages are so closely aligned with the corporate partner that if that's the side of the deal that's moving the accounts the consumer probably won't realize it. They'll get a change in terms, but I suspect the parties will downplay any changes.
Q.: This sounds more like the partner side. What if the bank keeps the accounts?
BOOMSTEIN: I think from the bank's perspective their ability to replace a cobranded card that has a lot of enhancements and that the customer took because of his affinity with the name on the card, will make it very difficult for the bank to do that.
It will be incumbent on the bank to refocus the card, the enhancements, and the pricing, to encourage customers to use it as much as they previously did.
A good example is Banc One and the way it handled the loss of the Northwest program. Banc One, simultaneous to the exiting of Northwest, rolled out their own travel program, not tied to any particular airline. lt was in effect a broader program. They took a potentially negative situation and turned it into something positive.
Q.: With all the cobranding going on in the marketplace today, do you think there's room for more?
BOOMSTEIN: I don't think the market is saturated. Consumers are excited about these programs. For the first time something is being given back to the consumer.
We already know people carry multiple cards. People are willing to take new cards and shift their spending patterns when they think they're getting something in return.
Q.: But some programs are obviously catering to very specialized markets, like the Quaker State card for motor oil or the State Line Tack card for equestrian, supplies.
BOOMSTEIN: Some of the programs we're starting to see will appeal to small groups of people, but that doesn't mean that they won't be profitable for the issuer and the cobranded partner. There are many banks that don't need a million-card program to be successful.
Q.: As competition mounts, will all retailers have to cobrand to retain their customer base, stem attrition, and engender consumer loyalty?
BOOMSTEIN: I think that the trend in the marketplace is for proprietary card transaction volume to decline, whereas bank card volume is going up. By virtue of that alone, I think cobranding makes a lot of sense for retailers, and you will see more and more of them doing it.
Q.: So what are they key issues in exit strategy that negotiators look for.?
BOOMSTEIN: I think both parties need to be realistic about what they've brought to the table and what they're entitled to get if the contract ends. This issue can be extremely emotional, and maintaining a perspective on it is important
The key is focusing on making the program work, while building things into the contract that will help facilitate the management of the program, such as ways of trying to renegotiate aspects that aren't working, doing things jointly to make sure both parties are satisfied, and not letting disputes fester, but rather, continuously talking them out internally so you don't get to a point where there's a termination.