Diners Club Quiet In its Old Age

  As the first universal payment card issuer, Diners Club in 1949 had to explain to consumers how the cards worked. "Your Diners' Club Card is a master credit card at these and one hundred other superb eating places in the metropolitan New York area, Chicago and other key cities," read a newspaper ad published early in the brand's existence. "Receive one monthly statement reflecting all charges."
  It is ironic that competitors in an industry Diners Club invented have so overshadowed the glamorous brand in the United States, first by expanding more widely to the proletariat then by mimicking many of the rewards programs that once made Diners Club unique.
  The card is popular in many countries, such as Japan and Croatia, which is part of the Diners Club Adriatic. In the first quarter that region boasted an increase in gross profits of 40% over the previous year in that region, for example. But estimates of the number of U.S. Diners Club cardholders range from infinitesimal to small by the few analysts who follow the brand. Cards&Payments estimates there were 7 million Diners Club cardholders worldwide at the end of 2005, down from 8 million a year earlier ("C&P's Exclusive Bank Card Profitability Study and Annual Report," May).
  "They didn't get small; it's just that the world got big around them," says Michael Auriemma, president of Westbury, N.Y.-based Auriemma Consulting Group Inc.
  Estimating Diners Club's growth or decline is difficult, as its U.S. franchise owner, Citigroup, does not disclose such data as the number of Diners cardholders, transactions or spend. Citigroup also declined C&P an interview to discuss Diners Club.
  In 1983, a contract to issue cards to federal employees boosted Diners' corporate card operations. When Diners lost the contract to American Express Co. in 1993, 900,000 employees charged $2.5 billion annually on travel and entertainment, according to the New York Times. The government account reportedly represented 29% of Diners Club's $8.6 billion in U.S. charge volume and 41% of its 2.2 million U.S. cardholders in 1992.
  But Diners has maintained top-notch customer service on its corporate and consumer cards, and the brand has devoted fans. These include jet-setting cardholders from the U.S. and abroad who appreciate such perks as exclusive airport lounges, primary insurance on rental cars and generous rewards points redeemable on most major airlines.
  As Visa and MasterCard touted increasing worldwide acceptance, Diners' limited acceptance by travel and entertainment merchants increasingly became its Achilles heel. Citi solved that problem in 2004 when it signed a processing and network deal with MasterCard International.
  Now, any merchant in the world that accepts MasterCard also must accept Diners Club cards issued in the U.S. and Canada that are cobranded with the Master-Card and Diners logos. As part of the agreement, Citigroup last year reissued cards in the U.S. to include MasterCard bank-identification numbers, or BINs.
  The move instantly expanded acceptance to that of the big card brands and infused new life into Diners. Some say the MasterCard deal saved Diners from extinction.
  "Going on the MasterCard network really saved the card," says Aaron McPherson, research director of payments at Financial Insights, a Framingham, Mass.-based consultancy. "It had just gotten so small relative to the other cards that it would have died out."
  While the MasterCard alliance was necessary, McPherson says, it made Diners just another rewards card in Citi's extensive collection. "What they gave up with [the alliance] was a certain measure of distinctiveness from having a closed network," he says. "It's a very high quality rewards program, but I don't see that they do anything unique anymore."
  In a 2005 report, McPherson predicted that Diners Club, which he estimated held a 0.1% share of U.S. consumer credit and debit card spending that year, would remain at 0.1% of that segment in 2009. He estimated Diners' share of commercial card spending in the U.S. was 2.3% in 2004 and will fall to 1.4% by 2009. McPherson also predicts spend on Diners consumer cards will increase from an estimated $2.15 billion in 2005 to $2.31 billion in 2009, and spend on Diners commercial cards will increase from $11.8 billion in 2005 to $13.4 billion in 2009.
  Auriemma believes Citigroup should have tried harder to expand Diners Club acceptance among merchants that matter to its niche instead of killing the network entirely. "Having a closed-loop system was a unique advantage, but they didn't capitalize on it," he says. "There's all kinds of unique information you can flow back to yourself and use for cross-selling."
  While Diners Club U.S. operates below the radar of most payments industry analysts, it is a hot topic in the frequent-flyer community. After all, Diners pioneered the idea of a payment card earning points toward free or upgraded flights in 1985, says Randy Petersen, publisher of InsideFlyer, a magazine about frequent-flyer and frequent-guest rewards.
  While Petersen does not have access to Diners performance data, he gets a sense of what the MasterCard alliance means to cardholders from reader surveys the publication conducts and entries those readers post on InsideFlyer's Web discussion forum.
  "It was a stroke of genius," Petersen says of Citi's decision to link Diners to MasterCard's network. "[Diners] no longer had to devote its resources to expanding merchant acceptance because it was already established by MasterCard. And, literally overnight, Diners saw its card spend just go through the ceiling."
  Petersen says Diners may have lost a few cardholders who consider Diners less prestigious with the MasterCard logo. But most cardholders stayed and report their charge volume increased 40% to 70% once they could charge Diners with MasterCard acceptance.
  AIRLINE PERKS
  InsideFlyer's readers still like the perks. This spring, Diners Club won the publication's Freddie Award for best credit card for the ninth straight year. "Those who remain with Diners Club still view it as the most valuable card in their wallet," Petersen says of the award, which is given based on subscriber vote totals. "That surprised a lot of people, including me."
  It is surprising because four major airlines this year stopped redeeming Diners Club rewards points for free flights and upgrades. Northwest, U.S. Air and Continen-tal airlines stopped accepting Diners points on Jan. 1, and United Airlines stopped in April.
  Some analysts speculate the banks that issue those airlines' co-branded rewards cards pressured them to stop redeeming Diners points when Diners began its alliance with MasterCard. With many airlines struggling to stay aloft, some having been bailed out by the banks that issue their reward cards, the airlines could ill afford to defy them, the thinking goes.
  So after 21 years of allowing airlines to partner with Diners on rewards, the bank card issuers saw the Diners cards as cobranded MasterCard products and, therefore, a bigger threat, Petersen says. "[Diners was] allowed to partner because it was grandfathered in," Petersen says. "This one little change with MasterCard all of a sudden changed everything that was the status quo."
  Neither the airlines nor their issuers would disclose why they stopped accepting Diners reward points. The issuers include U.S. Bancorp, which issues Northwest's WorldPerks Visa card; Bank of America Corp., which issues the U.S. Airways Dividend Miles Visa card; and JPMorgan Chase & Co., which issues the Continental OnePass MasterCard and United Mileage Plus Visa cards.
  Despite the losses, Diners maintains redemption programs with some 20 other airlines, including Virgin Atlantic Airways, American Airlines (whose AAdvantage rewards card also is issued by Citi) and Delta. And Diners' new Tailored Travel program compensates for the losses of the big four somewhat by allowing cardholders to use points earned instead of monetary value to pay for travel on any airline. The rate is 100 points per $1.25 in Diners card charge.
  Diners also is renewing its commitment to the corporate card market. In March, it introduced a new purchasing card system that claims improved expense tracking for managers, for example. "They're certainly making a play within the corporate card space," says Ali Raza, an analyst with Atlanta-based Speer & Associates Inc.
  Analysts agree that Diners Club U.S. at least seems to be holding its own. But many believe Diners has not lived up to its full potential under Citigroup.
  "Diners Club has always been something that could be more than it has become," Auriemma says. "The bulk of it is because Citibank hasn't focused on them."
  The big question is why? And Citi won't say.
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