Telephone company credit cards, once the hottest commodity in cobranding, are growing scarce.
Eight years since the AT&T Universal Card galvanized the trend, leading all of the Baby Bell companies to jump on the bandwagon, most of the regional programs have run into some sort of static, and some were completely cut off.
The cards of Ameritech Corp. and the Pacific Telesis unit of SBC Communications Inc. were discontinued in recent months, and BellSouth is no longer taking applications. U S West is said to be seeking a new card- issuing bank, which would be the program's third.
SBC's Southwestern Bell Visa card met its demise in late 1996, and Nynex's program was considered to be on its last legs before the company merged with Bell Atlantic, which seems to be an island of stability.
It was not so many years ago that bankers saw in telephone-card cobranding a vanguard of new competition for financial and payment services. But partner banks ended up suffering along with the less than successful programs, and now even the AT&T portfolio has been sold to Citicorp.
The regional Bell offerings tended to attract people who used the cards occasionally, neither big spenders nor people who enriched lenders by revolving credit balances.
Some, like Southwestern Bell, offered such rich rewards that the issuing banks lost money even as consumers flocked in. Cardholders would accumulate massive rewards without yielding satisfactory profits.
"The programs initially were very successful because the telephone companies were pretty much the first to come out with this cobranded concept," said Michele Turkel, a credit card consultant who worked on the AT&T and GTE programs and, as a Chase Manhattan Bank executive, on the Nynex card.
As the companies entered new territory, they were working with profitability models that turned out to be faulty, industry experts said. Telephone companies, which wanted to sign up as many customers as possible and lock them in with loyalty rewards, found their goals clashing with the banks'.
"Everybody is still learning from" the Baby Bell cobrand deals, said Ms. Turkel, president of Spectrum International Consulting Corp., Scarsdale, N.Y. The experiences set the stage for the much more successful airline- card tie-ins, she said.
James Shanahan, partner in the Newark, Del., office of Business Dynamics Consulting Inc., said that in the early days "people would pay anything to get a deal" with a Bell company and "some of the programs were not set up so they could sustain themselves over time."
The fallout from some of the troubled business partnerships is still doing harm in the form of high chargeoff rates and delinquencies, Mr. Shanahan said. "A lot of these cards were introduced in the 1993-95 period when the whole industry got wacky," he said. "That's what drove all the losses up."
On March 31, Ameritech, the first Baby Bell to enter the cobranding fray, officially discontinued the card it had offered since 1991 with Household Credit Services of Salinas, Calif. Customers are being notified that their Complete cards will be replaced by generic Household cards.
"We realized that it would be best if we focused our resources back onto our core communications businesses," said William Pendergast, a spokesman for Chicago-based Ameritech.
The Complete Visa and MasterCard card served more than a million customers and combined calling card and credit functions. Its rebate program was discontinued a few months ago.
Mr. Pendergast said the demise of other Bell programs did not influence Ameritech's decision-high delinquency rates did. "A cursory read of the headlines would certainly indicate that it's an industry facing tremendous challenges," he said.
Last October, another Household card, the Pacific Bell MasterCard, suffered a similar fate. It had been introduced in July 1994 and survived the sale of the West Coast Bell company to SBC Communications of San Antonio.
The Pacific Bell program apparently could not get past a flap over the legality of sending 300,000 unsolicited credit cards to calling card customers. Consumer outrage made newspaper headlines and contributed to tensions between the telephone company and its bank issuer.
A Household spokesman, Craig Stream, said the company would not comment on the discontinuation of either of its programs nor on the possibility that U S West might withdraw from its alliance with the Household International unit.
U S West Communications of Phoenix moved its Visa and MasterCard program from the old U.S. Bancorp of Portland, Ore., to Household in 1995. U S West said it is committed to the card and would not comment on whether it plans to switch issuers.
For Household, the early momentum of Ameritech led to a cobranding plum: the General Motors MasterCard deal. Household has "used the brand names of these cobranded credit cards to break through the clutter of normal advertising and marketing efforts," said Thomas A. Landauer, a former Household executive who is now a consultant at Business Dynamics in Worthington, Ohio.
"They recognize that the (Bell cards) may not perform as well as some of the other targeted programs," Mr. Landauer said. "GM has been more profitable for them because of its sheer size. But Household is one who clearly believes in a partner-type relationship and knows that one needs to go after revolver-type cardholders."
The biggest cautionary tale has been the experience of SBC, formerly Southwestern Bell, which rolled out an expensive program with windfall rewards.
The no-fee Southwestern Bell Visa card put no ceiling on the rewards that could be earned. Cardholders could charge home telephone bills to the account and get a 5% discount.
When the issuer, Mercantile Bank of St. Louis, started losing money, it tried to slap a fee on the card and renegotiate the rebates, which miffed the telephone company, industry sources said.
When the program died in December 1996, Mercantile said it had lost $9.5 million despite signing up 500,000 accounts in 18 months. The bank's chairman and chief executive officer, W. Randolph Adams, said at the time, "Southwestern Bell wanted as many cardholders as possible, and we wanted to be profitable."
Experts say such mismatches were common and partner companies typically ended up blaming one another.
"Cobranded programs are a very good value proposition for both partners if they have congruent goals, and the problem is that most of them don't," said William F. Keenan, a former managing director of card services for U S West who is now president of the Convergence Group, a consulting firm in Hockessin, Del.
The telephone companies want to fend off competitive threats from cable television and other utilities, he said. "The rebates help provide value and an incentive to lock in the customers so that if they decide to switch to another buyer they're going to be leaving some rewards points on the table."
Loyalty is Bell Atlantic's chief goal in its card program, which First Omni Bank of Delaware sold to Chase Manhattan Corp. after the Bell Atlantic-Nynex merger.
The card is "primarily a way for us to deepen relationships with customers, to thank them for using Bell Atlantic, and to encourage them to use other Bell Atlantic products," said Marianne Berry, vice president of credit card and loyalty programs for the telephone company.
The Bell Atlantic Visa offers a 1% rebate on general purchases, 2% off residential Bell Atlantic services, and 3% off calling card calls. "We very deliberately made the choice to give people the rewards as they are earned so people don't have to wait until yearend or pile up a whole lot of points," Ms. Berry said. "Every time your equity reaches $20, you get a check."
Ms. Berry, a former Chase Manhattan card executive, said cobranding is "difficult to pull off" and "requires not only a very strong value proposition but also reasonable expectations on the part of both partners."
The BellSouth Visa card offers richer rewards, including 20% cash back on calling card calls and 2% on residential BellSouth telephone bills. An Internet advertisement for the product says, "There's no limit to your cash back earnings"-but it also says the product is not currently available.
Jeffrey White, product manager at BellSouth, said the rewards structure is being reevaluated. "We've been doing quite a bit of research over what our customers are looking for," he said. Discontinuing the program is "not an option," but he would not comment on whether BellSouth is considering changing banks.
The profitability of cobranding can be neatly categorized by industry, said James L. Accomando, president of Accomando Consulting Inc., Fairfield, Conn. Average annual spending on a cobranded card is $4,000, roughly double that of a regular product.
"Airlines are the ones that are driving it all," he said. Petroleum and telecommunications cards have the lowest charge volumes.
Industry analysts said consumers may fear that falling behind on Baby Bell credit card bills would jeopardize their telephone service, so they deliberately keep balances low and pay them off monthly.
Despite the casualties, some enthusiasm remains for the Baby Bells' potential.
"There is tremendous opportunity left for phone card programs," said Mr. Keenan of Convergence Group. Some programs failed "not because the demand isn't there but because the execution was flawed."
Adding features to the cards could make them more economical, Mr. Keenan said. "A lot more creativity has to be employed," he said, "largely by the banking sector."