Beating the competition has become the burden of new cobranded programs, as each deal comes to market with greater rewards and lower interest rates.
St. Louis-based SBC Communications Inc., which has released details about its previously announced cobranded Visa card, is following that trend.
Ray Einsel, president of Mercantile Card Services Inc., the issuing bank, said, "It's been our experience that the better the offer you make to the consumer, the more they use the product, the better your chances of being profitable."
SBC, formerly Southwestern Bell Corp., serves over 8.5 million residential customers in Missouri, Texas, Oklahoma, Kansas, and Arkansas. Its card SBC offers 5% cash back on all monthly phone bill charges automatically charged to the card, no fee, and a 7.9% fixed introductory annual percentage rate.
After November the rate jumps to prime plus 6%, which would be 15% - considered low for a reward-based card.
To generate the greatest number of applicants, the card offers a prime plus 9.4% version, as well as a secured card, complete with rebates, for customers with poor credit histories.
The reward is applied to all services, such as call waiting, three-way calling, and speed dialing, as well as all local and long distance charges appearing on the phone bill, including AT&T, MCI, and Sprint. The idea, say the issuers, is to make it easy for consumers to profit from using the card without changing their spending behavior.
Customers also earn a 1% rebate on all other card purchases and a 1% credit for transferring balances.
Robert McKinley, president of RAM Research, a credit card tracking firm, called the card "a darn good offer. No fee, a competitive interest rate and a rebate - that's pretty strong."
In comparison, the Pacific Bell Visa, released in October of 1994, offers 10% back for local calls and 1% for long-distance calls charged to the calling card portion of the cobranded card, plus 1% for general purchases with prime plus 8.9% interest.
Critics have pointed out that Pacific Bell's rebate structure is most applicable to customers who use a calling card regularly, who tend to be business travelers.
"Although calling cards are an important part of our business, we want to cast a wide net," said Edward M. Cholerton, associate director of strategic marketing at SBC. "Everyone has a phone bill; not everyone uses a calling card."
Mr. Cholerton said the offer is lucrative in comparison to other Baby Bell cards. The company's calculations show the 5% reward comes to $36 for the average phone bill of $60 a month on an annual basis. Coupled with 1% back on an average $2,200 in spending for general purchases would total nearly $60 back for the year. The rebate is issued by check annually, with the customer choosing where to spend it.
With the changing regulatory environment of the telecommunications industry, Mr. Cholerton said SBC is under intense competitive pressures.
"As long distance providers and others continue to eat away at our market, we're out there with one hand trying to fight them off," he said.
He believes issuing a credit card will encourage consumers to maintain their relationship with SBC. "If they look at the Southwestern Bell card and say 'Hey, good deal here,' they'll associate that with the company - it's a good look for our brand."
Although customers who revolve may get stuck paying interest on their phone bill, Mr. Cholerton said the company offers "true grace," which means that even with a balance, the phone bill portion won't be included in interest payments for 25 days.
Michael Auriemma, president of Auriemma Consulting Group, a firm that worked with the parties structuring the deal, thinks the card could attract up to a million cardholders.
Although the card offers generous rewards, Mr. Auriemma is confident that it will generate income for the issuers. "We think that the rebates are going to incent people to spend more than they typically spend and the low APR will incent them to keep balances," he said.
But Mr. McKinley said latecomers in cobranding have to settle for slim margins to make their cards attractive."Charging prime plus 10%, that's not going to ring anyone's bell," he said.
SBC will pay the costs of marketing the card through direct mail, television, and phone bill statement inserts, but Mercantile will cover the rebates.
Mercantile's Mr. Einsel said the card is designed to increase consumer loyalty for SBC, but it also provides a significant business opportunity for the bank. "Someone else may think we're giving up too much, but our analysis tells us we're correct. We feel very comfortable" with the offer.
The program will be tested in Topeka, Kan., and Tulsa, Okla., through March and will be rolled out to the rest of the calling region by April.