Top executives from two of the largest credit card companies disagree about the impact of the Internet.

Richard W. Vague, chairman of the First USA division of Bank One Corp., predicts that the delivery of financial services will soon change "beyond recognition" and that the Internet will "play the biggest role" in the transformation.

Richard Fairbank, chairman and chief executive officer of Capital One Financial Corp., does not think the Internet will become the dominant channel for financial services.

"I believed in branchless banking and the checkless society," Mr. Fairbank said last week before the Bank and Financial Analysts Association in New York.

He said he has less faith in the Internet as a category killer for marketers, saying that direct mail, television, radio, and other channels would continue to play strong roles.

The diverging opinions reflect the two companies' Internet strategies.

First USA has signed marketing deals with six top Internet portals- including Yahoo, Excite, America Online, and Microsoft Network-and expects that 10% of its customer acquisitions will come through the Internet this year, Mr. Vague said.

"The Internet holds the promise of reducing costs in our industry dramatically" through on-line bill presentment and payment, he said. "It is one of our primary areas of focus."

While First USA's banner ads have become familiar to surfers at popular Web sites, Capital One has yet to launch a major initiative. Mr. Fairbank said some "undisclosed initiatives" are in the works. He credited the Internet with being "the ultimate medium for doing information-based marketing strategies."

He also gave a nod to First USA, saying it had "moved the most aggressively and successfully to date" in the on-line medium.

"I see your footprints everywhere, Dick," Mr. Fairbank said to Mr. Vague.

But Capital One will be "more interested in building businesses on the Internet than in getting into banner ad real estate," Mr. Fairbank said.

Capital One spent $446 million on marketing last year, twice as much as in 1997. It had 16.7 million accounts at yearend 1998, up 42%, and $17.4 billion in managed loans.

Mr. Fairbank said 30% of Capital One customers fall into the category of "superprime." He said they are a "notch above" prime customers with "blue- chip demographics," and represent the company's fastest-growing segment.

First USA, which Bank One bought in 1997, has $70 billion in card receivables, which places it in a dead heat with Citigroup as largest card issuer. First USA has 57 million cardholders and 1,500 marketing partners.

Mr. Vague said First USA's customer data base and dizzying array of customized cards have been keys to success. Data base marketing-which is also Capital One's stock in trade-is "a very difficult strategy to duplicate" and "provides very robust customer information over time," Mr. Vague said.

Not only does First USA maintain cobranding and affinity relationships with diverse groups-Southwest Airlines and Yale University, to name just two-it also creates products on its own for "small microsegments" of people with particular hobbies.

Mr. Vague cited a direct mail offer of a card for bicycling enthusiasts, saying the response was "65% better than if we had sent a generic platinum card (offer) to that group."

This approach translates well on the Internet, where the cycling card can be advertised on relevant Web sites, Mr. Vague said.

He cited other programs First USA and its partners have developed on- line. When people order on-line from Dell Computer Corp., for example, and need additional credit, "We can instantly approve them in 30 to 45 seconds, grant them a line of credit, and give them their account number on the fly," Mr. Vague said.

Future initiatives will be directed toward offering on-line statements that include all of a customer's Bank One accounts. "The Internet is the place where that is likely to happen," Mr. Vague said. "Everything can be combined seamlessly in front of the customer."

Bank One's consumer lending portfolio has been reorganized "to better apply First USA's marketing" expertise to it, Mr. Vague said. Mortgages, home equity, auto, education, and other types of loans housed in the new department will be endorsed by some of the credit card division's affinity groups, he said.

Mr. Vague said the market price of an affinity relationship has remained "absolutely stable" and that "nine times out of 10, there is only one other affinity bank competing for the relationship"-MBNA Corp.

Michael Auriemma, president of Auriemma Consulting Group of Westbury, N.Y., said there is still room for second-tier issuers to compete against the likes of Capital One and First USA.

Credit cards are "gateway products" that can "be sold at any point in the customer's life cycle," and too many small and midsize issuers have exited the business too quickly, Mr. Auriemma said.

"Abandoning the credit card business would be a big mistake, even for a small financial services company," he said in another address to the analysts. He cited some midsize issuers-including Wachovia Corp. and Nordstrom National Bank-that have succeeded by carving certain niches.

Mr. Auriemma recommended that regional banks with modest card portfolios forge "value-added alliances" with major card-issuing companies.

He described such alliances as "similar to agent banking, but a bit more robust." The regional bank would sell all or part of its portfolio to the big issuer and would be given incentives to play a major role in selling its brand of cards.

These arrangements add scale to the large card company and help the regional bank "take advantage of the power that credit cards bring in deepening relationships" with customers, Mr. Auriemma said.

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