It's clear that this has been a very good year for the bank card industry and for Visa as well. The controversial wisdom would be to conclude on this happy note and ask for questions.

But it's critical that we look beyond today to the challenges that will be facing us tomorrow.

The forces for change are gathering. Our industry's current position of strength is ideal to plan for change, so that we can anticipate and manage the process. As the old Chinese proverb goes, the time to start digging the well is before you're thirsty.

In the past few months, we took a comprehensive look at the changing consumer to help predict credit demand and spending patterns. The results were compiled in two studies called Consumer 2000 and Marketplace 2000.

No. 3 in Performance

Marketplace 2000 estimates that credit card outstandings will increase to more than $600 billion by the year 2000. The study forecasts that only two forms of credit will perform above the current 7.3% compound annual growth rate: bank credit cards at 13.6% and home equity loans at 15.1%.

Merchant categories projected to grow the fastest are health care at 9.1% per year, miscellaneous services at 7.3%, recreation and entertainment at 7.1%, and travel and transportation at 6.9%.

By demographic group, the baby boomers -- those born between 1946 and 1964 -- will contribute a healthy 38% of the outstandings. But the so-called baby busters -- the "Generation X," born since 1965 -- will also be significant, at 30% of the total.

Consumer 2000 indicated that the acquisition and use of credit cards is increasingly driven by multiple factors.

|Card Specific' Factors

The ease of obtaining cards and an individual's personal financial management practices are two general factors. Four additional, "card specific" factors are the economics of a particular product, its image, the level of service associated with the product, and value.

In addition, today's consumers are less willing to accommodate new technologies that in the past. They need to be convinced that there is utility and value associated with new technology.

The major driver of the Consumer 2000 study is change. As change increases its velocity, consumers will continue to change as well -- requiring us to listen to them more closely and more regularly, and respond to those changing needs more quickly.

Given this glimpse of the future, what factors are going to be important in building the success stories for tomorrow, and the day after? What does all this mean for you, and for Visa?

You want to give consumers quality products, with the value and the service they want. Visa's role is to maintain and enhance the value of the brand around which you build your products, to develop new products to meet the needs of the marketplace, and to choose state-of-the art technology for you to deliver your products and services in order to maximize your organization's profitability

In the future, customer control will drive the relationship, and ironically, complete automation and integration of information will give customers true personal service for the first time. Our industry must look beyond the short term and make the necessary investments in the systems and software to make this a reality, because if we don't, there are a world of new competitors out there who will.

Strength of Visa Name

Let's look at a few examples of how Visa is ensuring your profits by managing the changing marketplace of today.

We start with the strength of the Via brand, one of the foundations of our success.

When the cardholder tracking study was initiated in 1985, Visa was rated the best overall card by 40% of consumer respondents. The most recent study, completed in April, shows our rating as the best overall card has increased to a dominant 58%.

This leads to a much higher response rate to your consumer solicitations. And this Visa brand dominance has been confirmed year after year by the findings of the annual American Banker survey.

In another annual study of brand quality published in March of this year, Brand Week magazine also rated Visa first among all cards brands in terms of perceived quality. Against all products, Visa ranked 31st, and the nearest competitor was MasterCard, which ranked 63d.

Different Groups Agree

Visa's top-of-mind rating reached 32% in the June 1993 consumer surveys by Gallup and Bank Advertising News, and that dominance is consistent through all age and income groups.

The Visa brand strength is constantly supported by our ongoing advertising under the consistent theme "It's everywhere you want to be."

Our strategy for the decade includes increased advertising dollars, targeted merchant promotions, and sponsorship of high-visibility events such as the 1994 Winter Olympic Games in Lillehammer and the 1996 Summer Games in Atlanta. All these efforts support your investment in the Visa brand and help build your individual card business.

Debit Program

Our product efforts in the past two years focused on developing an integrated card strategy. Our first effort was in the debit card market, and Visa introduced a two-tiered debit program to optimized member profitability.

You embraced the strategy by issuing 13 million Visa Check cards that generate the highest return in the debit arena, and 21 million Interlink cards. This gives us a nine-to-one advantage as we penetrate the $2.3 trillion cash and check market.

Further, your commitment represents 70% of the U.S. deposit base, and let me remind you, this is a nondual decision.

By 1995, you will have issued an estimated 100 million Visa Check cards. And within four years, consumers will be using their debit cards 10 times per month, compared with four to six times today.

Strategic Alliances

To support you, we have created some strategic alliances to facilitate this tremendous surge in debit card business. For example, our ventures with Total System and First Data Resources create marketing partnerships designed to accelerate issuance and use of Visa Check cards.

From the debit area, we moved our strategic planning to the lucrative commercial market. Rather than trying to stretch one product to fit all needs, we created a three-product commercial payments strategy to target profitable segments.

These include a purchasing card that will cost-effectively replace current practices for small-dollar, business-to-business purchases; a corporate card to manage travel and entertainment expenses, providing clients with enhanced flexible billing, reporting, and authorization controls; and a repositioned Visa Business card, already in use by more than 350,000 small businesses.

In the cobranding area, let me confirm that Visa is definitely in the cobranding business. What does that mean? We will work with both members and corporate partners to understand the needs of each, then create value-added programs that are structured to provide a profitable relationship for you. Visa's brand strength is proving to be a compelling reason why so many cobranding partners like Ford, Nordstrom, and Ameritech are choosing Visa. And there are more to come.

[In remote financial services,] our strategy is to give you economical access to the array of tools available in the marketplace while strengthening your ability to differentiate yourselves from one another.

This strategy differs in a number of ways from what was announced by MasterCard.

It means helping you to retain control of remote financial services, instead of relinquishing control to nonbanks. It means making use of the available tools in the marketplace while insulating you from repeated resource investments. It means creating new paradigms for providing remote financial services, instead of replicating old, inefficient, or unprofitable ways of doing business.

It means allowing you to structure your own unique service, instead of asking you to fit into a packaged solution. And it means allowing your own identity to dominate the service, instead of a third party's or association's brand.

We've teamed up with Intuit, our first of several alliance partners, as a first step in enabling you to provide your customers access to your bank any time, anywhere, in any way that they want. In short, we are committed to help all of you get into the fast lane of the electronic superhighway -- utilizing technology to make it easier for your customers to do business with you.

Payment Service

Like our long-range approach to product development, we are designing our systems to handle your needs tomorrow, and the day after.

In April we introduced Payment Service 2000, the next-generation delivery system, which represents significant improvements in the validation of transaction data, chargeback reduction, and risk control.

In any project of such magnitude, there is always a steep learning curve, and we appreciate your patience and support. We hope you're finding that all the hard work was worth it.

The value is increased interchange income to Visa issuers was more than $48 million from April to August. Today more than 60% of transactions qualify for PS 2000. And in August, the PS 2000 chargeback rate was one-fourteenth the rate of chargeback for non-PS 2000 transactions.

You've told us that you are better able to manage your customer's open-to-buy. In combination with more accurate data, this has resulted in a reduction of customer service costs.

The clearing time for PS 2000 transactions has been reduced from three to two days, saving you more than $25 million annually in float costs. Further, enhancements implemented in August will save you and your merchants additional money through lower processing costs, further reduction of chargebacks, and reduced retrieval requests.

When fully implemented, we expect PS 2000 to result in tangible savings to members of at least $30 million per month, not to mention the efficiencies to be gained in customer service.

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