Mail Mania

  No one loves the U.S. Postal Service more than credit card issuers, who are likely to mail a record 5.4 billion solicitations in 2004. CCM looks at what's behind the numbers as well as what's in the envelope.
  Somewhere on the Postmaster General's wall there must be a plaque that says something to the effect, "Thanks From Your Best Customer, the Credit Card Industry."
  After taking a breather in 2002 and 2003, card issuers this year are on track to break 2001's record of 5.02 billion direct-mail solicitations.
  U.S. households received a record 1.4 billion offers during the second quarter, the latest period for which data are available, up 30% from the same period a year earlier, according to Chicago-based Synovate's Mail Monitor survey of card mailings. Each household received an average of six offers per month during the period, up from 4.6 offers a year earlier.
  Mail volume fell after 2001 in part because of the post-Sept. 11 terrorism-induced economic slowdown, a tepid job recovery, and banking regulators' crackdown on subprime lending, one of the card industry's strongest growth sectors in the 1990s. But in 2004, issuers are capitalizing on a modestly improving economy and consumers' appetite for new credit accounts while interest rates are still low despite three rate increases by the Federal Reserve since June, according to Andrew Davidson, Tarrytown, N.Y.-based vice president of competitive tracking for Synovate's Financial Services Practice. The rising tide of mail also reflects the ongoing intense competition among issuers for profitable cardholders as well as mail's proven track record as the most effective way of booking new accounts.
  "It's picked up again significantly," Davidson says.
  The top 10 credit issuers mailed about 90% of the offers. Although not all of the issuers substantially increased mailings in 2004, several "put their foot on the gas again," says Davidson.
  Response rates to the flood of offers, however, dropped during the second quarter to 0.3% from 0.6% for the same period in 2003, part of a continuing trend in declining responses. To help counter that, issuers are ramping up their promotions for rewards cards. Offers dangling rewards and rebates increased 53% during the second quarter compared to a year earlier, and Davidson says that trend is driving up competition across the board.
  Issuers have already tried nearly every trick in the book to get consumers' attention with direct mail, but 2004 brought a few novel approaches.
  One was a recent effort by Citigroup Inc.'s Citibank to get users to reactivate dormant card accounts by sending them a thick envelope masquerading as a billing statement. The two-page statement showing activity on an inactive account might have triggered alarms by cardholders, but it instead revealed a $20 credit on the account, usable within the month for any purchase, no strings attached. An accompanying statement stuffer read: "It pays to use your Citi card. $20 to be exact."
  Citibank did not offer a comment about the tactic, but one observer questions its long-term effectiveness.
  "Free money given on a credit statement has been tried before, but it doesn't win over users in the long run," says Tom Truedson, a partner with Elmhurst, Ill.-based The Core Organization, which provides advice and services to credit card direct mailers. "People like free money, but it's an expensive offer to make, and it doesn't guarantee anyone will keep using the card after they take the freebie."
  McLean, Va.-based Capital One Financial Corp., well-known for its long-running "No Hassle" television commercials promoting its various credit cards, even showed a direct-mail piece in one of its TV spots late this year to highlight its "Capital One No Hassle Island Giveaway." To promote its sweepstakes to win a private island and a pile of cash prizes, Capital One is sending an estimated 200 million-plus direct-mail solicitations whose envelopes include an Island Giveaway logo in colorful ink ("Capital One's Island Makes Marketing Waves," Card Watch, November). In TV commercials supporting the sweepstakes, Capital One urges viewers to "watch their mail," and is showing a sample of one of its direct-mail envelopes.
  "This year, we initiated the No Hassle Island Giveaway sweepstakes to give our envelope a way to stand out in people's mailboxes," says a Cap One spokesperson.
  MBNA Corp. and American Express Co. also opened a new theater in the credit card solicitation wars by touting their new partnership that will result in MBNA-issued AmEx cards (Card Watch, page 11). A line on the envelope for an early offer for such a card reads: "By invitation only prior to public announcement." Now that the courts have ruled that Visa and MasterCard rules banning U.S. banks from issuing American Express and Discover cards are no longer valid, other such partnerships between banks on the one hand and AmEx or Discover on the other hand are expected to drive even more direct-mail traffic in 2005.
  Meanwhile, J.P. Morgan Chase & Co.'s Chase Card Services has upped the ante in customer-retention tactics with its year-old cobranded Starbucks Card Duetto, a combination Visa credit and stored-value card. Throughout the year, Chase shipped a steady stream of "thank you" gifts to Duetto cardholders, including bags of coffee and other store merchandise sent to homes by UPS delivery, and also coupons good for Starbucks merchandise and drinks. The card has been hailed as one of the fastest-growing new cobranded programs of the past few years ("Retailers Retool Their Card Strategies," page 26).
  Other new mail trends include a no-frills approach on most envelopes and a high number of faux plastic or paper "credit cards" glued onto the cover letter to snare consumers' attention. One company using a faux credit card in direct mailings is First National Bank of Omaha, touting its One of a Card that allows users to customize their Visa credit cards with a photo of anything from their pets to their cars.
  "Being first to market with this product was important, and we used direct marketing to help make a big splash," says Susan Tieger, vice president of consumer marketing for First National.
  But bulkier solicitations are costly-$2 or more per piece compared with an overall average of 50 cents-and with the mandate to keep up with competitors by cranking up mail volume, "most issuers are looking for ways to reduce costs," says Jim Paton, a principal at Barrington, Ill.-based Excel Direct, which has worked with several issuers.
  "The trend is toward fewer colors, uniform envelope sizes, less inserts, and printing with no more than two colors on white stock. With volume being so high, issuers have to watch their bottom lines, and they have shifted their priorities," he says.
  A few years ago, card issuers spent one third of their direct-marketing budgets on the creative, a third on the targeting effort, and a third on the offer itself, Paton says.
  "Today issuers are spending 90% of their budget on targeting, 10% on the offer and there's not much left over for creative," he says.
  Some direct-mail agencies believe the federal government's do-not-call registry of telephone numbers off-limits to telemarketers that was introduced in late 2003 caused the uptick in credit card solicitations in 2004, but no agency offered direct proof, and most issuers will not confirm a connection.
  Ruvan Cohen, senior vice president of global marketing solutions for MasterCard International's MasterCard Advisors unit, says the registry boosted credit card direct marketing "only slightly."
  "Telemarketing was used only on a very limited basis for soliciting new customers; it was primarily aimed at cross-selling and retention of existing customers," he says.
  Also, it not correct to assume that response rates are dropping because the overall solicitation volume is higher than ever, says Cohen.
  "A variety of factors influence volume, but mainly issuers are simply trying to keep up with their own growth," he says.
  For instance, normal attrition typically costs big issuers about 15% of their cardholders a year, he says. That means an issuer with five million accounts would need to book 750,000 new ones a year just to stay even, and that doesn't include customers lost due to poor credit. Plus, major issuers must continue to grow to attain their profit goals.
  Ironically-and despite chronically low response rates-direct mail's role as an advertising vehicle seems to be growing while other forms of media, including television and radio, lose market share.
  The U.S. Postal Service recently reported that direct mail's share of the overall $250 billion U.S. advertising pie is growing faster than any other media channel. In 2003, direct-mail expenditures increased by 6.5% versus 2002, while overall advertising spending grew just 5.2%. Direct mail represents nearly 20% of all advertising media.
  In its most recent annual Household Diary Study of Mail Use and Attitudes, released in October, the USPS reported that about one-third of survey participants find some form of their direct mail "interesting," which is about equal to attitudes about TV commercials. The survey, conducted from September 2002 to September 2003, found that 42% of participants read their direct mail, 38% scan it and 18% do not read it at all.
  In 1987, when the annual study began, just 9% of respondents said they did not read their mail. Marketing experts attribute part of that decline to the vast increase in direct-mail volume since the late 1980s.
  As issuers' costs increase from grinding out more solicitations than ever, they also are losing millions of dollars due to bad data, say experts. Errors lurk in the names and addresses of most issuers' databases of prospective cardholders, wasting marketing dollars through redundant and undelivered mailings.
  Data Ages Fast
  The Data Warehousing Institute, a Chatsworth, Calif.-based trade organization, says that about 2% of all customer records become obsolete each month due to errors in original information. In addition, an estimated 43 million Americans move each year. Those factors, plus the error rate in most databases, cost U.S. corporations an estimated $600 billion or more annually.
  "If you do the math, about 24% of any direct marketer's customer prospect list is going to be obsolete over a year's time," says Jack Schember, marketing manager of Rancho Santa Margarita, Calif.-based Melissa Data Corp., which sells software systems for marketers.
  Melissa Data's Address Object program, available for $3,000 to $9,000 depending on the user's scale, is designed to instantly catch and correct data errors by matching the addresses entered by applicants online with actual, verified addresses.
  The USPS also offers its National Change of Address Service, which is inexpensive and licensed to many third parties such as Melissa Data, to make sure direct marketers' prospect lists are up to date with consumers' relocations. However, "the number of direct marketers that fail to use this service is unbelievable," says Schember.
  The total cost of sending to an incorrect address-plus correcting it-can go as high as $10 per customer file, according to Schember.
  NCR Corp., best known for its automated teller machines, offers data-warehousing services to credit card issuers centralizing their customer data to avoid duplication of mailings.
  "Customer information on legacy (computer) systems is often isolated in different files according to different product lines or history," says Jeff Stillwagon, senior industry consultant for Dayton, Ohio-based Teradata, an NCR division.
  As a result, a typical bank could have several different product divisions sending uncoordinated streams of direct mail to a single household, wasting effort and diluting impact.
  Discover Financial Services recently began migrating its legacy data warehouse services to NCR's Teradata platform as part of an industry-wide movement to centralize data, speed up the customer analysis process and eliminate redundant customer contacts. (Like Capital One earlier, Discover recently negotiated special first-class postage rates from the USPS if it meets volume thresholds and takes measures to automate the processing of undeliverable mail. Other big mailers are expected to follow suit.)
  In addition to improving the quality of customer data, new customer targeting technologies promise to help credit card issuers improve their direct-mail effectiveness by getting the right offer into the right hands.
  "With massive search engines available today, we can drill down to find out a great deal about consumers' spending habits, and with on-demand printing, we can customize mailings for specific lists of customers more easily than ever," says Jim Roberts, product manager for direct mail at High Cotton Direct Marketing, a Birmingham, Ala.-based marketer of software programs for customized mailings. "Direct mail is close to reaching its finest hour, and our targeting ability is now the difference between a shotgun and a laser-guided missile."
  But few credit card issuers so far are utilizing such specialized targeting approaches, because the cost is usually prohibitive for mass mailings, say executives with direct-marketing agencies.
  "There's a disconnect for credit card issuers between what the high-tech solutions promise and what's feasible," says Greg Sultan, vice president of financial services for direct-marketing agency Customer Communications Group, Denver. "If it were that easy to press a button to customize our mailings down to each household's preferences, we'd have an incredible response rate to mailings, and that's not happening."
  Still Effective
  There are less costly software programs, however, that can help issuers identify "surfers"-customers who sign up for one 0% offer after another without becoming long-term or profitable customers, says William Murphy, senior vice president of marketing and product development for Experian Marketing Services, Schaumburg, Ill.
  "By analyzing prospects from a lifetime perspective, rather than just short-term goals, issuers can make their direct mailings more effective," he says.
  Despite rising costs and declining response rates, credit card issuers and their agencies show no signs of backing off on direct mail for the foreseeable future.
  "Our research shows that credit card solicitations are 2.5 times more effective in acquiring new customers than any other method," says Lisa Bell, president of the Charlotte, N.C.-based direct-response agency Tivoli Partners. "We are finding better ways to target customers through technology, but reaching credit card customers through the mailbox will be the dominant channel for years to come."