A Change in Direction

  Credit card marketing budgets are thawing out after two rather chilly years. But consumers increasingly are throwing out card mail, and telemarketing now has a ball and chain. So where will the money go?
  According to card-industry executives and marketing consultants, major issuers are likely to continue brand-building efforts through television and print advertising. They may ease off a bit, but they won't abandon mail, because even a paltry 0.5% response rate to four billion solicitations still means 20 million new accounts.
  But card marketers' biggest new thrust will be in retaining existing customers with new services, and prospecting for new ones through partner channels. The card industry also can expect new spending in 2004 on richer rewards programs and cards with innovative new technology twists, with an emphasis on more sophisticated customer targeting.
  "Issuers will spend more on marketing ... but they are reallocating money into different channels," says Ruvan Cohen, senior vice president and managing director of MasterCard Advisors North America, the new consulting operation owned by MasterCard International. "Overall we are seeing a change in credit card marketing culture in response to a variety of challenges."
  Marketing budgets began to unlock in late 2003. American Express Corp. and Capital One Financial Corp. each significantly boosted marketing spending in the third quarter versus the same period a year earlier (chart). Other issuers also increased marketing spending across a variety of media, say industry insiders.
  A big part of the marketing story of 2004 involves what issuers can't do, and how they're trying to compensate. An array of new marketing land mines surrounding telemarketing, privacy and e-mail is forcing some changes in issuers' basic tactics.
  The use of telemarketing as a tool to acquire new customers will be sharply curtailed in response to the federal government's do-not-call registry of telephone numbers consumers don't want called by solicitors that went into effect in late 2003. In some cases, budgets previously earmarked for telemarketing will be shifted to direct mail or be eliminated altogether, say industry observers.
  New federal restrictions on the use of unsolicited e-mails are expected to go into effect this year, imposing steep penalties on violators. Issuers with an existing relationship with customers will still be allowed to market card products to those customers via e-mail, but all e-mail communications will be required to include legitimate offers, a valid e-mail return address, and the choice for consumers to opt out of receiving such offers (Card Watch, page 8).
  Meanwhile, some states have made noises about restricting direct mail, says Chris Selland, managing director of Cambridge, Mass.-based Reservoir Partners, a relationship-management strategy firm, although industry experts do not anticipate any such legislation actually passing in the near future.
  "However, we can expect to see more and more restrictions on marketing channels, and all of this legislation around telemarketing and e-mail spam marketing is only going to increase the cost of doing business," Selland says.
  Also on the outs in 2004 will be marketing aimed at the once-hot subprime sector that now is cooling off fast because of high chargeoffs and more federal scrutiny.
  Meanwhile, the aggressive marketing attitude that had accompanied outbound telemarketing calls to acquire new customers is gradually being replaced by a new "soft-sell" philosophy among issuers. Call centers will continue to be crucial to issuers, but agents are now being deployed to help retain customers through improved customer relations, and by providing new services and conveniences. In many cases, issuers have set new, more flexible criteria for managing credit limits and late and overlimit fees in order to retain valuable customers. Ever-increasing penalty fees and issuers' quickness in imposing them have earned the industry a black eye in recent years from consumer groups.
  "More attention is being paid by issuers to developing scenarios to 'save' customers rather than find new ones, including giving certain customers a break in some situations," says Bill Reike, director of product and industry marketing for Convergys, which handles inbound and outbound call-center duties for several of the nation's top credit card issuers. "As a retention strategy, it's a lot cheaper to keep a customer by waiving a $29 fee that maybe costs you $1, than to spend more than $100 finding a replacement."
  Issuers also are talking about investing more in speech-recognition systems to liberate customers from endless recorded voice-messaging menu options on inbound calls. Similarly, there is buzz about buying new, sophisticated software systems to sort inbound callers based on account history in order to tailor customer-service calls more precisely, says Reike.
  "The technology to fine-tune the way issuers handle inbound calls is there, but it hasn't been deployed much yet," he says.
  The new attitude among issuers is that "inbound calls represent a key opportunity to make customers happy, not so much to upsell or cross-sell them anything," says MasterCard's Cohen. "The growing restrictions on marketing, both on a national and state-by-state basis, mean that now more than ever, every permissible contact an issuer has with a customer is pure gold."
  Focus on Retention
  Cohen estimates that about five years ago, 90% of marketing budgets was spent on acquiring new customers. Now, 30% to 40% of budgets is spent on customer retention through various channels, he says.
  But telemarketing will not go away entirely, says Dave Swanson, vice president and general manager at Epsilon, a financial-services marketing firm owned by Earth City, Mo.-based Relizon Co., whose clients include banks and major credit card issuers.
  "Although consumers have a 97% disapproval rate of telemarketing, it has served a lot of purposes over the years, many of them positive," says Swanson. "Telemarketing and direct mail are still very powerful tools when used together, and there will still be opportunities to do that without violating any laws."
  The key is allowing consumers to opt in, and reinforcing positive consumer behavior through call centers and mailings, according to Selland of Reservoir Partners.
  Experts estimate that despite an overall rise in marketing expenditures, card issuers' direct-mail volume will remain flat this year, as response rates continue to languish at less than 1%.
  Mail Monitor, the direct-mail tracking service owned by Synovate, says issuers mailed fewer solicitations in the third quarter of 2003, the most recent period for which figures were available, compared to the same period a year earlier-975.7 million, down 20% from 1.22 billion in 2002's third quarter. Although the third quarter is historically a lighter direct-mail period, totals for the quarter are trending downward each year.
  The recent numbers were affected by the fact that "a couple of major issuers" cut back significantly on direct-mail programs, says Andrew Davidson, vice president of competitive tracking for Synovate's Tarrytown, N.Y.-based financial-service practice.
  Through the third quarter, general-purpose card issuers had mailed some 3.24 billion solicitations which, barring a huge fourth quarter, makes it unlikely that they'll match the 4.89 billion solicitations they mailed in 2002. And 2002's volume was down 2.4% from 5.01 billion solicitations in 2001.
  What's sparking the biggest new activity in credit card marketing are new products and enriched reward programs for cards that are promoted through specific retail and entertainment channels. Marketing through these channels can take many forms, including media advertising, mail, statement inserts, event marketing, and take-one applications.
  AmEx's Blue Cash card, launched last fall, is the most prominent example of the trend in which an existing product gets injected with richer benefits and relaunched with a major advertising and promotion campaign.
  Blue Cash is basically a line extension of AmEx's 4-year-old no-fee Blue card, which lured younger consumers with the novelty of a built-in computer chip whose sole function so far is added security for online shopping.
  The newest version of the product offers a cash-back reward for card usage, and it also exceeds the typical 1% rebate on most such cards by providing up to 5% cash back. Customers who use Blue Cash for everyday purchases at supermarkets and gas stations, and those who carry a balance each month, earn the highest level of rewards.
  To get the attention of even the most indifferent young adults, AmEx launched an urban, grass-roots marketing assault on downtown areas of major cities, including New York and Chicago. The campaign, created by media agency Mindshare, New York, included a free concert by music star Sting in Chicago in September that was attended by more than 40,000.
  Elsewhere, AmEx blanketed downtown areas with posters on buses, taxis, trains, transit centers, bridges, street poles, floors and ceilings. Replicas of the clear plastic card, called "street furniture," were deployed on major pedestrian thoroughfares. AmEx also promoted the new Blue in shopping malls, health clubs, online and with post cards.
  AmEx will not release results from the campaign, but a spokesperson says the company is "very pleased" so far.
  Morgan Stanley's Discover Financial Services unit also upped the ante on the longtime 1% "Cashback Bonus" for its basic no-fee card by offering customers as much as a 10% rebate on its Discover Cashback Bonus Plus Card, introduced last November. The first of a series of new products planned for this year rewards customers with a 5% rebate on gasoline purchases, which could be converted to 10% by exchanging those rewards at Discover's Cashback Bonus partners.
  At the same time, many new card products have added security features that provide grist for the marketing department. Citigroup Inc. and Bank One Corp. have been using their respective anti-fraud and identity-theft prevention systems in both public relations and advertising campaigns for more than a year. More issuers are likely to follow their lead this year in promoting security as an added benefit, says Art Clark, a card consultant with Nyack, N.Y.-based Business Dynamics. Issuers also are promoting point-of-sale technology and related systems that get consumers through the line quicker.
  'Receptive'
  "Consumers have been very receptive so far to credit cards that have new technologies built in, and I think we're going to see a lot of action this year with cards touting faster transactions through proximity through fast-food and gasoline channels," says Clark. "Security will continue to be a marketing angle for a number of issuers, as well."
  Meanwhile, high-profile marketing with partners is proving to be one of the most productive channels for recruiting new customers. The partnership between Bank One, Starbucks Coffee Co. and Visa USA to launch the Starbucks Duetto stored-value and credit card last fall is the most successful recent example.
  Promoted online through Starbucks' Web site, inside its 6,600 stores nationwide and in national print ads in The New York Times and other publications, the card reportedly racked up more than 25,000 applications in its first week. Neither Starbucks nor Bank One will confirm the numbers, but both companies express satisfaction with the launch. Starbucks continues to support the card with applications prominently displayed in its stores.
  Bank One also recently persuaded a key co-marketing partner, United Airlines, to promote its United Mileage Plus Card to travelers on airplanes even though United is still in bankruptcy. And Walt Disney Co. is expanding distribution of applications on its properties for Bank One's Disney Card.
  In another example of the growth of point-of-sale card promotion, new-car buyers at Volkswagen of America dealerships are being offered instant credit of up to $2,000 when they are approved for Bank One's Volkswagen Platinum Visa Card with Rewards.
  With the slowdown in direct mail and telemarketing, credit card marketers are jazzing up their bill-payment communications, both in regularly mailed statements and online.
  "Billing statements are still a major communications channel for credit card marketers, and many are not maximizing it," says Selland.
  Another tactic is the use of merchandise such as jewelry, dolls and collectibles as a lure to reactivate dormant credit card accounts, or boost usage from existing customers.
  Major issuers, including MBNA Corp., J.P. Morgan Chase & Co. and Capital One are returning to this merchandising practice that issuers have used on and off in the past. The latest examples include offers for cubic zirconia rings or dolls and collectible items, promoted prominently on the outside of an envelope from a card issuer to a new prospect or inactive cardholder.
  "The first item is usually about $4.95, which is an easy decision for the customer to make, and it puts activity going on the card," says Victor Benson, president and chief executive officer of Holsted Marketing, New York, which provides such merchandise and marketing services to issuers.
  Until about two years ago, Holsted's clients were mostly retailers and gas companies that had credit card programs, but recently the company's biggest category of growth is from major general-purpose card issuers, according to Benson.
  "We discovered in research that these offers, which were previously targeted to low- and middle-income customers, were getting results from upscale households as well," Benson says. He adds that most of the offers target women between 35 and 60 years old, and issuers like Chase have enhanced offers to include mini-catalogs of various jewelry items plus free "surprise" offers with each order.
  MasterCard Advisors' Cohen says that overall, issuers are paying more attention to designing cards to appeal to more specific audiences, rather than taking the shotgun, high-volume marketing approach of the past.
  "We're seeing a lot of examples of issuers trying to identify which offers are going to have the most impact on specific groups of customers, and this year we're likely to see a lot more interesting new products and offers evolve that way."