Sticking with R&D, Even in a Downturn

Most large card issuers have spent the past year playing defense, but U.S. Bancorp has continued to press its specialty form of offense: product innovation.

The Minneapolis company has been affected by the same mounting losses, regulatory restrictions and macroeconomic conditions buffeting many of its competitors. But its credit card chargeoffs are among the lowest for large issuers, and unlike many competitors that have focused the bulk of their time and money on risk-prevention, loss-mitigation and shedding assets, U.S. Bancorp has continued to sign deals, buy portfolios and unveil new offerings.

Top U.S. Bancorp executives, including Richard Davis, its chairman and chief executive, and Pamela Joseph, its vice chairman of payment services, attribute part of the company's performance in the past year to its continued willingness to try new things.

"It's important if you're in the payments segment to try to be out in front and test a lot of these things," Joseph said in an interview last month. "It's also important to customers we sign, to know that we're doing a lot of these activities and looking at different solutions to help them."

Not long ago, that might have sounded obvious. But industry members say U.S. Bancorp stands out for its continued adherence to the strategy during the past year.

This summer alone, Joseph's unit unveiled tests of an instant-issuance, contactless debit card service and a multiple-account card, which has both magnetic-stripe and contactless payment features, and can act as an identification card and an access-control card to unlock doors.

"They're really at the forefront, while their rivals are a little bit distracted," said Scott Strumello, an associate at Auriemma Consulting Group Inc. "Like everybody in the industry, they're all facing rising chargeoffs, but they've probably not been as severely impacted as some of their peers have been. … That enables them to pursue new opportunities and perhaps take advantage of … the slowdown for the industry as a whole."

Strumello pointed specifically to U.S. Bancorp's relatively quick rollout of an instant-issuance test, less than a year after Visa Inc. relaxed its standards and allowed its bank customers to issue unembossed cards directly at the branch. "Most banks had an established process, and to make a change is a big undertaking," he said. That U.S. Bancorp could roll out a test so quickly, "I think that does show that they're moving while their rivals are distracted with other issues." (Other issuers have continued to innovate during the downturn, including Barclays PLC's U.S. cards unit and JPMorgan Chase & Co., which revamped its rewards program this summer, Strumello said. But between losses and the continuing effects of the new credit card law, interest in trying new products is "a mixed bag" at most large issuers, he said.)

Davis agreed that his company's success depends on "our ability to invest and innovate. … Pam's been working on a lot of things we haven't even delivered yet because we've just continued to stay focused on the long view."

U.S. Bancorp executives acknowledged that the recession has taken a toll on their innovation efforts.

"We absolutely are right in the midst of the economic issues," said Dominic Venturo, one of Joseph's deputies and the chief innovation officer for the company's retail payments solutions division. "Have we been careful about what we're doing? Yes. We have been picky, if you will, but we've continued to move things forward."

U.S. Bancorp cites the use of focus groups and pilot tests — as well as its ability to control almost every part of the payments process, from issuing the card to signing up the merchant to processing the transaction — as helping its efforts to stay nimble and control costs.

"We can pilot things across both ends of the spectrum. We can issue and acquire in kind of a small pilot environment" without overspending or overextending the company's resources, Joseph said. "Because we pilot everything, we're able to watch our costs and our expenditures, and really we'll only take something to market when we know that it's going to be received favorably and by a good number of our customers."

For the past three years, the payments unit has used focus groups — year-long panels of 15 consumers and small-business owners, not all of whom are U.S. Bank customers — to hammer out new ideas before bringing products to market in local pilot programs at venues like college campuses or stadiums. Focus group members meet once a month and are paid for their time.

"We really try to home in on college campuses" because students are "pretty willing to embrace things. When we do things like start sending text messages, we like to start in that environment," Joseph said. "We've done a lot of testing in stadium environments, in sports venues, because we find, again, there's an entertainment value, and so we can do some things in a fairly large pilot environment, across all age groups. And usually stadiums, as long as you do things at no cost to them, they're interested in participating."

Joseph said the focus groups have also sparked product ideas. "We found that people carry a lot of different pieces of paper — receipts, loyalty cards, serial numbers that they might need" in their wallets, she said. "We came up with four different ideas on how to help them, and one of those has advanced pretty far along and is something that we're going to at least put out in pilot form" in the first quarter.

She also credited the panel-and-pilot process with helping U.S. Bancorp establish itself in the growing prepaid industry. She would not disclose numbers but said prepaid is now "a material piece of business for us." (U.S. Bank is Visa's largest gift card customer, issuing its 30 millionth such card in April.)

Not every experiment has brought such success. In 2008, U.S. Bancorp spent months testing mobile payments with Nokia and MasterCard Inc. in Spokane. It was "not the right time" for the near field communication technology, Venturo said. "It was a very compelling idea, but there are not enough places to actually use the idea," he said. On the other hand, "that actually led to another pilot" of a contactless sticker "that was sort of a bridging technology."

Indeed, for someone who has championed so much consistent experimentation at her company, Joseph can sound like a skeptic. "When you go through a lot of years in payments, you have a lot of innovation … early on in your career that you wrap your arms around and then nothing can happen," she said. "In 1996, we thought everything would be mobile by 2000, and clearly that hasn't happened. … With experience you get a little bit more, perhaps, cynical about how quickly things are going to take off."