Europe's Cobranding Boom

  Cobranded credit cards are the fastest-growing sector of the European market at present-and they may drive the acceptance of revolving credit in countries where it historically has been weak.
  Cobranded cards have been a feature of the credit card market in the United States since 1986, when Continental Airlines and Marine Midland Bank launched the first program. In mass-market terms, cobranding really began in 1990 with AT&T Co.'s AT&T Universal Card program, which issued over five million no-fee credit cards in its first nine months. Its success spurred General Motors Corp. and a host of other companies to launch cobranded programs.
  Cobranding began in Europe in 1994, when GM and Household International Inc.'s HFC unit and the Ford Motor Co.'s Barclaycard from Barclays Bank hit the road in the United Kingdom. Since then, rollout of cobrands has tended to go in waves in the U.K. and has been patchy in most of mainland Europe.
  In the U.S. there are currently about 75 million cobranded and affinity cards-nearly 12% of the total 650 million MasterCard/Visa cards, but accounting for 25% of all charge volume on bank credit cards, according to a bank card industry source. Average monthly spending on U.S. cobranded cards is $452 against $239 on standard cards.
  The comparative figures for Europe are about 10% of the 155 million MasterCard/Visa credit cards in issue. Europe's proportion of cobranded cards is not far behind the U.S., but credit card penetration overall, including the U.K., is only about a quarter of U.S. levels across Europe-and much less across most of the mainland. Also, there is no generally agreed definition of a bank-issued credit card in mainland Europe, and very few are revolving credit cards in the American and British sense.
  But European activity has developed rapidly over the last 12 to 18 months, with MasterCard International approving 347 new programs in 2001-an increase of 36% over 2000-and expecting 250 when the final count is in for 2002. "Our sector is outperforming the market as a whole," says Carol Stanton, cobranding manager at MasterCard Europe.
  Both in the U.S. and Europe, the main driver of recent growth has been private-label conversion, by which retailers rebrand their in-house programs with MasterCard or Visa ("Santa Claus Comes to Retail Cobranding," December, 2002.)
  A surge of cobranding activity in Germany follows the repeal in 2001 of the so-called Rabattgesetz discount law, which "precluded linkage of bonus points to credit provision," says Stanton.
  "Germany is going loyalty-mad since the law was changed," agrees Caroline Birchinall, product manager at Visa International's Visa European Union region.
  Two private-label conversions in 2002 demonstrate the market's unexploited potential. Germany's Landesbank Baden-W?rttemberg and program operator Loyalty Partner launched the Payback Visa card last February on behalf of a number of retailers, including Europcar and Kaufhof. Payback Visa is a bonus card with payment and revolving credit functionality.
  Payback launched as a loyalty scheme only in March 2000, but now claims 19 million cards in total, so the potential is enormous. By last Aug. 31, LBBW had issued over 100,000 Payback Visa cards and the program is on target to reach 200,000 by its first anniversary.
  Meanwhile, the KarstadtQuelle mail-order and department-store group began rebranding some of its 6.5 million Klub-Karstadt retail cards with MasterCard. The issuer is the retailer's wholly owned subsidiary, KarstadtQuelle Bank. The processor is the big German payments processor, GZS.
  Out of the 6.5 million Klub-Karstadt cards, 5.8 million were for bonus points only, with no payment function, and 720,000 had payment capability only in Karstadt group stores.
  "We basically selected about two million cards which are creditworthy from the data we have, and sent them personalized applications," says Matthias Fachinger, a member of KarstadtQuelle Bank's management board. By mid-August, 670,000 had converted and "our conservative estimate is at least 1.1 million will be MasterCard by the end of the fourth quarter," he adds.
  KarstadtQuelle is already by far the biggest MasterCard program in Germany, exceeding those of big banks that have been issuing Eurocard/MasterCard for 20 years.
  Conversions
  France-based Cetelem, the biggest European consumer credit company, is stepping up conversion of its private-label programs outside of France. Three years ago, the subsidiary of BNP Paribas SA, France's largest bank, added MasterCard and Visa branding to its Aurore cards in Italy, creating the first so-called dual-network cards. Cetelem has since extended the policy to Spain. Now 2.5 million cards out of Cetelem's total of 22 million are dual-networked.
  The reason, says Cetelem International Chief Executive Francois Julien-Labruy?re, is that by 1999, the group had a significant card base and revolving credit expertise, but "insufficient growth in card activity and less competitiveness with our customers and partners (without) cobranding."
  From the beginning, Aurore cards have been fee-free to Cetelem's merchant partners, which typically sell big-ticket items to consumers on an installment-credit basis. Retaining the fee-free basis was a key consideration within the dual network.
  "Discussing this with MasterCard, we realized it was perfectly compatible with an international brand," says Julien-Labruy?re. "We use the on-us transaction within the global MasterCard network. A transaction by one of our credit-issuing retailers goes directly into our system-outside this, it's a normal MasterCard transaction."
  With cardholders now able to access MasterCard- and Visa-branded automated teller machines and point-of-sale terminals worldwide, usage of the dual-network Aurore cards has "exploded-it's up by three times," says Julien-Labruy?re. The addition of association brands has therefore refreshed Cetelem's private-label program and created valuable new revenue streams.
  Last July, Cetelem signed agreements with MasterCard and Visa to extend dual networking. "We decided that where it's possible to convert our portfolio-and often there are reasons why we can't-we will do it," says Julien-Labruy?re. "We are very oriented to develop our business with MasterCard in Czech Republic, Hungary and Poland."
  The biggest example globally of private-label conversion is Sears, Roebuck and Co. in the U.S. Like Cetelem, Sears found that its proprietary Sears card program had lost momentum-between 1998 and 2002, receivables on these cards fell from $28 billion to $20 billion and active accounts from 24 million to 18 million.
  "Cardholder activation rates were falling-it was a sign we weren't listening to our customers," says Mark Sczesnak, vice president of card products at Sears.
  Sears, through its Sears National Bank, launched its Gold MasterCard in June 2000 with the issue of 6 million cards to inactive or infrequent store card holders-"people who we knew from our database were using other payment cards in our stores," says Sczesnak. After six months, the six million cardholders had charged $2 billion in volume, including $515 million at Sears outlets.
  Further conversions followed, lifting the Sears MasterCard portfolio to 22 million cards-by far the biggest cobrand in the world, ahead of AT&T/Citibank (11 million) and GM/HFC (6 million), according to the bank card industry source.
  Sears would not confirm card numbers, but Sczesnak says "after 27 months, we've been able to reverse the decline in receivables. The growth is largely coming from the MasterCard," which accounted for $9.5 billion in receivables in the third quarter.
  Sears' card program brings in more than 60% of company profits. For the third quarter of 2002, however, uncollectible debts rose by 50%, hitting earnings and leading Chief Executive Alan Lacy to fire card chief Kevin Keleghan and the head of risk management ("Sears' Startling News," December, 2002.)
  Avoiding Problems
  Partnering with a bank is an obvious way for retailers to avoid risk-management problems. Tesco Personal Finance (TPF), a joint venture between Tesco, the U.K.'s biggest supermarket chain, and Royal Bank of Scotland, combines "Tesco brand strength and physical presence (with) RBS expertise in financial services and its systems and processes," according to David McCreadie, TPF's head of lending products.
  Though Tesco's Clubcard loyalty card has 10 million holders, conversion of Clubcards into payment cards has been cautious. Launched in July 1997, the Tesco credit card has built up to 1.1 million Visa and MasterCard holders, with 75% of transactions and 80% of card expenditure taking place outside Tesco stores.
  Promoted as "A Clubcard That Offers Higher Rewards," the Tesco credit cards have relatively high activity rates and balances outstanding. A combination of in-store promotions and high response rates to direct mail reduces the cost of acquisition of new cardholders to 20% of those of other direct issuers, Tesco claims.
  The Tesco credit card, McCreadie concludes, "strengthens loyalty to the Tesco business-even in a maturing market, there is room for branded cards that offer unique value propositions."
  There remains substantial room for further growth in private-label conversions in Europe. In Germany, over and above the potential of the Payback and KarstadtQuelle programs, there are many other loyalty programs to which payment functionality can be issued.
  Pushing the Limits
  In the U.K., retailer Marks & Spencer is testing a MasterCard credit card. And the Nectar loyalty program, which launched in September and currently involves Barclaycard, oil giant BP, Debenhams and J Sainsbury, has obvious potential to expand the cobranded market. In Spain, El Corte Ingl?s runs a substantial private-label program.
  The French market is the biggest negative for cobranding around Europe. Under rules of the Groupement des Cartes Bancaires umbrella card association, cobranded bank cards are simply banned. "There is no cobranding, because there is no demand," Cr?dit Agricole chief Jean-Pierre Ledru says.
  Still, some French banks continue to push at the limits of what is permissible, as Soci?t? G?n?rale's partnership with American Express Co. suggests.
  Soci?t? des Paiements Pass, the bank controlled by Carrefour, issued a Visa card in 2002. Carrefour has cobranding partnerships in Greece and Turkey (chart, page 18) and it is difficult to believe that it would not seize the opportunity in its home market if allowed to do so. Likewise, Cetelem's 12 million French Aurore cards are banned from dual networking with MasterCard or Visa.
  "It will come in France, don't ask me when," says Julien-Labruy?re of Cetelem. Adds Visa's Birchinall: "There's constant lobbying going on, but it's not going to change in the near future."
  Even allowing for the activity in Germany and the U.K., the most vibrant cobranding market in Europe, perhaps in the world, is Turkey-which is also the second-biggest revolving credit market in the region, after the U.K.
  Big Participation
  A high percentage of Turkey's 15 million credit cards are cobranded, says Stanton. "You'd be hard pushed to launch a credit card there without a loyalty partner."
  During 2002, Turkey became MasterCard's biggest cobranded card market in the region, driven by two substantial programs-Garanti Bank's Bonus and Akbank's Axxess. The Bonus program has been running for three years and now claims 1.6 million cards-the biggest cobrand in Europe. But catching up fast is Axxess, which launched only in October 2001.
  "It reached 1,018,897 cards eight months after its launch and became the fastest-growing MasterCard program in Europe in the last two quarters," says a proud Mine Galip, Axxess program manager at Akbank. In the process, it has lifted Akbank's total credit card portfolio by over 50% and its market share by 45% to 12% of the Turkish market.
  Both Bonus and Axxess cards are chip-enabled, deploying the technology to offer cardholders real-time rewards, cash rebates and loyalty points redemption. The impact of the cards is maximized by the large number of retailers participating in the programs.
  In the Axxess scheme, retailers rebate a percentage of the sale to the chip each time the card is used in one of their outlets, with the percentage varying according to the retailer. Outside the network, Akbank rebates 0.5%.
  Galip notes that "43% of spending is at gasoline (outlets) and supermarkets, so we invited the two biggest in their sector (BP and Migros) to participate," creating a "snowball effect."
  Given a solid base, an advantage of multiple loyalty programs, Stanton adds, "is that they can involve everything from a chain which develops photos-and isn't a candidate to issue cards-to jewelers, which are aspirational but don't have a lot of transactions."
  Cobranding programs are shaking up and rejuvenating large sections of the global credit card market, but there remain limits on their potential impact. While banks like MBNA Corp. (which issues a card for U.K.-based Virgin Group), specialize in affinity and cobranded cards, some other well-known issuers largely avoid them.
  Successful cobrands like GM/HFC are balanced by a number of failures (chart). The rewards are substantial for a successful program, but the risks of failure are correspondingly higher.
  Nor are cobrands appropriate for all consumer categories. Cardholders who habitually revolve balances will probably opt for a low-annual-percentage-rate card. Cobrands tend to have high interest rates, to help pay for loyalty rewards. They attract convenience users with above-average charge volume, but lower propensity to revolve.
  Moreover, any reductions in interchange might hurt cobranding. It is no accident that the most attractive programs are in Turkey, which has the highest and most flexible interchange rates in the region, and that France, with low interchange, has no bank cobrands.
  But in the medium-term, cobranding has built up real momentum in Europe and is likely to help spread the revolving credit habit more widely in markets where it is underdeveloped.