Juniper Bank, UBS Wealth Management Create a Clever Marketing Tool

UBS Wealth Management US last week launched a new payments-card package for its brokerage customers that among other things cleverly turns an ordinary American Express card into what amounts to a debit card. The program was created for UBS by Barclay’s PLC’s Juniper Bank unit.

The whole idea is to bind its customers to the U.S. brokerage unit of Zurich-based UBS by giving them a payments-card package that the firm hopes will be their primary spending vehicle, says Peter Stanton, executive director of the UBS unit’s Banking Strategy Group. It’s not an effort to enter the very tight U.S. credit card business

“It’s definitely not our intention to be another credit card provider,” he says. “This is a consolidation strategy; it’s all connected to our role as their primary wealth-management advisor, and ties them closer to us because of the services we provide.”

On the surface, the package is an ordinary Visa credit card and an ordinary American Express charge card, bundled with a very extravagant rewards program that offers cardholders enticements like jet fighter rides or a sleepover at FAO Schwartz. Rewards run from one point to 1.5 points per dollar spent, depending on whether the customer chooses the basic “Select” Visa card or one of the more elite Visa cards that carry annual membership fees of up to $1,500. UBS says it has about 15,000 such accounts.

By offering its brokerage customers such payment packages, UBS joins a widening club of brokerage companies trying to retain customers whose loyalty is mercurial at best. “With acquisition costs so high, and turnover very high also, the emphasis has been to keep the customers they already paid for, happy,” says Ariana-Michele Moore, a senior analyst with Celent Communications.

The Amex card allowed UBS and Juniper to create a vehicle that functions like a debit card from the user’s perspective—UBS calls the card a “delayed debit card,” though Amex insists that the cards are ordinary Amex cards—while earning the issuer the much higher American Express interchange fees.

It does this by an interesting sleight of hand that seems to be built around the fact that none of the parties to the deal care what the card is called, as long as they get what they want from it. Cardholders use the Amex card like an ordinary debit card, including being able to use it to withdraw surcharge-free cash at ATMs that accept Amex cards. At the end of the month, their central brokerage account, or RMA (resource management account), is automatically debited, and no bill is sent to the customer. Purchases are limited to the funds available.

This way, UBS gets what amounts to a debit card for its customers, while Amex and Juniper get full price for an Amex card. And as an added bonus, Juniper gets a piece of the debit card market, which is quickly overtaking credit cards as the payment vehicle of choice in the United States.

How the parties came up with this deal is unknown. UBS’ Stanton says his shop approached Juniper around August of 2004 as part of a typical RFP process, and went to contract last April. Juniper refused any comment on the matter, referring all questions to UBS.

“It has in-between functionality,” says Stanton. “It functions as a debit in the sense that it accesses your available funds; it functions as a charge card because the charges accrue, and instead of having to make some sort of payment, the payment is automatic.” The idea, he adds, was to allow purchases to be made without interfering with a client’s trading accounts.

All in all, it’s a smart deal, says Celent's Moore—among other things, because people with brokerage accounts are typically wealthier, and travel overseas, so that the package gives UBS clients a secure spending vehicle.

“It’s all about providing flexibility to their brokerage customers, but it could also be enticement for people considering opening a UBS account—it could be the thing that tips the scale,” she says. (Contact: UBS Wealth Management US, 212-882-5698; Celent Communications, Ariana-Michele Moore, 503-617-6112)

Contactless Payments Systems are the Future

Contactless payments systems in their various stripes are the future of retail point-of-sale systems, and banks still own the networks. But unless they stop trying to control the process, they could lose the system to merchants with their own private-label card programs, thinks Bruce Cundiff, a research analyst with Javelin Strategy and Research.

There’s really nothing to stop such merchants from outmaneuvering the banks, if they want to, he says. “The possibility exists among those merchants considering contactless, and really have a robust card issuance card network to begin with. They’re well-versed in credit, debit, and closed-loop card operations—and they see their private label brand as a lower cost channel.”

The merchants have plenty of good reasons for moving away from bank-owned cards. Doing so would not just give merchants more money from each transaction, it would also reinforce customer loyalty—making for more repeat business—and enrich marketing programs by giving merchants better access to the customer data in the payments stream.

Merchants increasingly view private-label, contactless payments as their best bet for driving revenue. According to Cundiff’s research, 20 percent of merchants considering enhancements to point-of-sale payments consider the technique among the most productive choices they can make. Only signature debit (31 percent) and ACH payments (33 percent) scored higher among merchants as possible new payments options.

Even worse news for banks: Cundiff’s survey of 900 retailers included all sorts of merchants, from large chains to the iconic Mom-and-Pop store. “We reached out to all types of merchants, even to those with only one location,” he says.

The irony here is that banks started this phenomenon in the first place.

“Contactless payments are the wave of the future because issuers like (JPMorgan) Chase got into the game,” he says. It was Morgan Chase’s decision to jump into contactless payments with both feet that solved the chicken-and-egg question surrounding contactless payments, because it was a signal to cell phone manufacturers that there would be a market for RFID (radio frequency identification) chip-enabled cell phones that can facilitate payments. “Prior to that, merchants were saying ‘It’s not broke, and I’m not going to fix it. They didn’t think people were going to come in and ask ‘Where’s your contactless terminal?’”

But that historical fact is irrelevant to the future, because with the genie out of the bottle, the challenge for issuers is to do everything they can to enable the technology now, before merchants do it for them. And since, as Cundiff’s research indicates, those merchants are a substantial fraction of the overall universe, the prospect that banks could be disintermediated by these merchants is a very strong possibility.

The fact that banks will have laid the foundation for this turn of events by educating merchants about the benefits of the technology is merely one of life’s injustices; the most disturbing element in this scenario is that bank disintermediation is entirely avoidable, if institutions will just make it in the merchants’ interest to work with the banks—even if that won’t be so easy. “If I’m Macy’s, and I’ve invested millions of dollars in contactless, I’m going to make sure that as many transactions that flow over that system are going to be Macy’s cards,” says Cundiff.

That prospect will be made easier by the widespread availability of cell phones that can make payments, he adds. The logic is perfectly clear, if brutal: With so many people carrying payments-enabled cell phones, he says, it makes perfect sense for stores to offer to download their own card onto a customer’s cell phone at the point of sale. Then, unless the banks have already beaten the merchant to it, more and more payments volume will go to merchant cards—edging out the bank and cutting into the fastest-growing segment of payments-fee revenues.

How to avoid this? “They (banks) need to consider the fact that they need to work with the merchants in a more integrated fashion—especially a large merchant that has a high profile and has plenty of locations and payments volume,” he says. A promising tactic to make sure the banks are still involved is to approach the merchant and offer to issue a co-branded, contactless card.

But to do this, banks have to recognize that contactless payments are the key to the future at the point of sale, and that they either turn the lock, or don’t. And if they do, they either continue to insist that everything be done their way, or they can start working with their customers to integrate themselves into that next generation of payments.

Luckily, the best banks already get this, says Cundiff. When Morgan Chase went to market last year with their Blink contactless cards, for instance, “they were talking about how they had to approach merchants and not only build acceptance, but build affinity for the product with both cardholders and merchants—that meant co-marketing agreements and signage,” he says.

But what this also means is an apparent shift in the balance of power between issuers and merchants. While some will argue that issuers have always valued their customers and tried to accommodate them, that posture is undermined some by the ongoing interchange war: After all, if the issuers had always been so accommodating, the years of complaints from merchants that interchange was too high would have resulted in adjustments—not lawsuits.

At this point—as many observers have argued—the better part of valor for issuers may be collaboration with merchants instead of battle, lest contactless, private-label cards prove to be yet another army rising on the issuers’ flanks. (Contact: Javelin Strategy and Research, Bruce Cundiff, 925-225-9100)

Internet Sales Now Migrating to Debit Cards

By 2007, debit cards will edge out credit cards as the Internet payment vehicle of choice, says Ed Kountz, senior analyst at Jupiterresearch.

According to Kountz’ research, online credit card payments accounted for 42 percent of all online purchase volumes, compared with 39 percent of payment volumes for debit. But by next year, those numbers will reverse—39 percent for credit and 42 percent for debit. And by 2010, says Kountz, credit cards will account for 35 percent of online purchase volumes, compared with 46 percent for debit. That translates to an 8 percent annual compounded growth rate for credit between now and 2010, compared with 14 percent for debit.

“The conventional wisdom you’ll hear from the associations is that there’s really no overlap (between credit and debit),” says Kountz. “And from a value perspective, credit will continue to predominate. I don’t think you’ll see debit wipe up the floor or eliminate credit—that’s much too simplistic to say. But issuers need to be prepared for that shift as it comes down the pike; the short-term impact on credit will be moderate, but longer term, it does clearly pose a challenge for what has traditionally been a credit-dominated world.”

Credit’s predicament is only compounded, according to Kountz’ research, by the rise of non-card payment alternatives available online, such as stored-value cards and peer-to-peer payments. Such alternatives won’t be taking over the space anytime soon, but the growth rates will be strong: 21 percent for stored-value cards and 12 percent for peer-to-peer payments. And even though they’ll be coming off a very low base (4 percent of online payments in 2010), and be restricted to items like wireless content, market share for those payment vehicles will more likely be cut from credit’s hide than debit’s.

This can’t be good news for the credit card business. Even though some analysts like to spin the shift in consumer preference from credit to debit spending as no big deal, since the issuers collect their fees from whichever card a buyer uses, the fact is that the credit apparatus is deeply entrenched in issuers’ establishments. This means that at a minimum, the increased use of debit will create internal shifts at those companies as credit revenues and transaction volumes decline. Since e-commerce sales is the fastest-growing segment of card payments, Kountz’ research is at best unlikely to give credit establishments much comfort looking forward.

This is especially true because, as Kountz points out, paying online with a debit card means low-fee, PIN debit transactions, since no signature can be given to authenticate the transaction. Today, no adequate online PIN-entry mechanism is widely deployed, but so-called screen-based floating PIN entry is one possible solution. That innovation involves an on-screen PIN pad into which the buyer makes PIN entries by mouse click, instead of using numbers on their keyboard, thus maximizing security by making it impossible for a keylogger virus to steal the PIN. ATM Direct is currently conducting a pilot program for this system.

”The alternative is some sort of token that’s not necessarily a hardware plug-in,” says Kountz. “I’m still skeptical of the whole token approach. You can lose them or not have them with you when you need them, and for a consumer, it’s just one more thing they have to manage. But assuming (floating PIN entry) can be done securely and effectively from a consumer perspective, it’s a much more intuitive approach than adding hardware.”

The implications of Kountz’ observations for issuing banks can’t be encouraging. Although he declined to speculate on how the phenomenon he describes would affect them, the fact is that revenues from credit card operations are a significant fraction of the largest American banks’ earnings. Some 60 percent of credit card earnings are debt, and PIN debit interchange is significantly lower than signature debit and credit card interchange.

To the extent that online transactions migrate from credit cards to PIN debit, then, it’s a small step to conclude that the fastest-growing payments sector today is set to yield lower per-transaction revenues than the rest of the cards sector, in turn minimizing the revenues growth curve for those banks’ overall card operations. This hardly means that credit cards are disappearing, but combined with the likely future minimization of interchange fees, either through regulation or litigation, it does mean issuing banks are going to have to start running faster, just to stay in place, and much faster to get anywhere.

“Certainly, credit profitability, and credit overall, has been moderating growth-wise, and I expect that trend to continue,” says Kountz. “Resting on the laurels of the past is no longer enough.” (Contact: Jupiterresearch, Ed Kountz, 617 423 4372)

Capital One Buys North Fork Bank

Capital One Financial Corp. will be one of the nation’s 10 biggest banks based on deposits and managed loans when it buys Long Island’s $57.6 billion North Fork Bancorporation for $14.6 billion in cash and stock.

That Capital One has turned itself into a national depository institution with branches and checking accounts is yet another indication, if one is needed, that credit cards are no longer a stand-alone business.

The deal gives Capital One a toehold in the lucrative New York market, and apparent expansion prospects there. It also builds on last year’s $5.3 billion acquisition of Hibernia Bank, which closed in mid-November. According to Capital One’s 10-K, Hibernia experienced what it called substantial growth in deposits after Hurricane Katrina.

Unremarked by media coverage was the irony that a business that’s still very profitable apparently feels it needs a cheap source of funds, and customers to sell to, in order to weather the many challenges now threatening its core competency.

Unremarked by the media, perhaps, but not by the stock market, which didn’t respond well to the news: Capital One stock, which closed on Friday, March 10, at about $90, closed on Monday March 13, the day of the announcement, at $83.10, and at $82 the next day. Morgan Stanley’s Kenneth Posner estimated in an investment advisory that the deal was neutral to Capital One earnings, and allowed Capital One modest synergies from the deal, worth $400 million in strategic value at best. He recommended buying on Monday if shares fell.

Standard & Poor’s said in a note that it felt the deal was priced fairly at about 15 times their 2006 earnings estimate for North Fork of $2.08 per share, and a price/book ratio of 1.6 times earnings. “We thought the recent weakness (in North Fork stock, prompted by concerns about its deep exposure to residential mortgages) presented investors with an attractive entry point. Apparently, Capital One arrived at the same conclusion,” wrote the note’s authors, Jason Seo and Mark Hebeka.

At least Capital One was acting out of relative strength: Its 2005 net income was $18 billion, up from $15.4 billion in 2004. But the company clearly felt it was wise, at a minimum, to continue diversifying away from credit cards. Capital One’s year-end credit card balances were $19.7 billion, compared with $20.5 billion in 2004, and average loan balances fell in 2005 to $12.07 billion, compared with 2004’s $12.24 billion. Interchange revenues grew to $514 million, compared with 2004’s $475 million. On a managed basis, Capital One reported $105.5 billion in outstanding loans, compared with $79.8 billion in 2004. Hibernia’s results were not included in Capital One’s 2005 results.

The company was clearly acting defensively, and recognizing that future growth in the credit card sector will be nothing like what it was only a few years ago—even for a company as well managed as Capital One—and that it won’t be again, anytime soon.

“(The deal) says a lot about their future as an entity,” says Michael Auriemma, president of Auriemma Consulting. “I’m not sure I’d have predicted they’d be buying banks, but there’s a strong realization that credit cards belong in an institution with retail customers—the amount of information- and data-sharing synergies by having both is phenomenal, and credit cards are challenged in terms of growth of new acquisitions these days.”

Capital One apparently has no bone to pick on that score. In its recent 10-K, it said that “The competitive environment is currently intense for credit card products. Industry mail volume has increased substantially in recent years, resulting in declines in response rates to the Company’s new customer solicitations over time. Additionally, the increase in other consumer loan products, such as home equity loans, puts pressure on growth throughout the credit card industry. These competitive pressures remain significant as a result of, among other things, increasing consolidation within the industry.”

Auriemma thinks, though, that Capital One can continue to be highly successful in the future. “There’s a lot of room to make a lot of money, and to grow your credit card business without growing new accounts,” he says. This, he says, includes building bigger balances, increasing consumer spending, and using the data from the payments stream to cross-sell other products to credit card customers. “This (deal) is less about new customer acquisition and more about managing existing customers, looking for a funding source, and diversifying revenues.”

By remaining on the offensive, Capital One apparently also hopes to keep Wall Street happy, and itself independent. Aside from Advanta Bank Corp., which reported 2005 net income from continuing operations of $116.7 million, America’s other monoline banks, once wildly profitable businesses, are gone with the wind. And Capital One itself isn’t entirely safe from acquisition; its float is only $25 billion, so it could clearly be bought by a large bank. Last year, Bank of America bought MBNA for about $35 billion in cash and stock, and other large banks—Wachovia Corp., for one—have said they’re interested in getting back into the credit card business.

North Fork reported 2005 net income of $948 million on revenues of $3.48 billion, and more than doubled its asset base after two 2004 acquisitions—Greenpoint Financial and The Trust Company of New Jersey. It has 360 branches in the New York area, including in northern New Jersey, and, according to Standard & Poor’s, it has about 4.8 percent of the area’s deposits. When the deal, subject to regulatory and shareholder approvals, closes in the fourth quarter, its top executives stand to get a payout of about $288 million, including chief executive John Kanas, who could receive as much as $185 million. Kanas joined the bank in 1971 and became president and chief executive in 1977. (Contact: Auriemma Consulting Inc., Michael Auriemma, 516-333-4800; Capital One Bank, 804-284-5800; North Fork Bank, 631-531-2058)

Cash and Cards Are Both Endangered Species

Right around the corner is a world with neither cash nor payment cards. Contactless payments mechanisms—built into cell phones or even jewelry—are helping create this world, and the result will help change banking, thinks Theodore Iacobuzio, managing director of Tower Group’s executive research office.

The reality is that companies that once fed the banks’  payment networks—merchants, for instance—will be future competitors. But banks shouldn’t panic about this, any more than when, not so long ago, the Internet was supposed to be extinguishing banks. And banks won’t be disappearing now, either, thinks Iacobuzio: the anxiety over banking’s future, so prevalent in boardrooms around the country, is overdone.

Continue reading “Cash and Cards Are Both Endangered Species”

Credit Card Portfolios: More Pressure, Less Profitability.

Graph_debit_credit_heqPeople have grown wary of credit cards. They’re paying them off faster; generally, debit cards are edging them out as payment vehicles. And at least for now, home equity loans are increasingly more popular than credit cards among consumers (click on inset for more details and see tables below).

The result? Credit card portfolios are losing profitability, even though net losses and delinquencies are down, and serious questions about the industry’s future are surfacing. So are questions about how wise banks were when they snapped up most of the monoline credit card operations last year. The business model needs an overhaul, says observers, but so far, issuers are just changing the oil. And there may be no way out.

Continue reading “Credit Card Portfolios: More Pressure, Less Profitability.”

Mobile Payments: Japan Leads the Pack

The potential of cellphone-based mobile payments to eventually squeeze banks out of their central role in payments can already be seen in East Asia, says Andrei Hagiu, a principal at Market Platform Dynamics, and by ignoring it, American banks have nothing to lose but their business.

Octopus_cardHong Kong’s Octopus prepaid debit card (see inset) is one example: Issued by Hong Kong’s subway system and several other transportation companies—with no bank involved—Octopus cards drive about $2.2 billion in annual payments volume.

Continue reading “Mobile Payments: Japan Leads the Pack”

Interchange Front Shifts to Germany

Germany’s federal monopolies body, the Bundeskartellamt, received a legal complaint from the German Retail Association, alleging that interchange fee charged MasterCard and VISA, which average 150 basis points, prevents widespread credit card acceptance in Germany.

In a statement, the Association, a lobbying group, said that credit card payment account for only 5 per cent of all retail sales in Germany. The complaint calls on the Bundeskartellamt to cut interchange fees and to increase payment card transparency. It claims these steps will improve competition in the credit card sector. Spain, says the group, has ordered a step-by-step reduction of interchange to between 0.54 per cent and 1.10 per cent by 2008.

Ten Lessons From The Card Marketers

Without expansive brick-and-mortar operations to generate
business, card companies typically devote far more resources to direct
marketing and cardholder retention than retail banks. You can learn a lot by
watching what the card companies do online.


Develop a Killer App

Profitable online originations involve good marketing and a great
application. It must be short and sweet and loaded with imbedded help for
every term, otherwise only the desperate or dishonest will submit it. Most
major credit card applications today are a model of simplicity. For example,
Juniper’s online application (below) consists of a single screen
posing just seven questions beyond standard identification information
(name, address, phone number, etc.).



Screen Out Improper Applications Before Submission

One of the main problems with non-preapproved credit card applications is
all the worthless applications received. Not only has time been wasted
researching the applicant’s credit report, but also your company must
carefully follow regulatory requirements for communicating denials, lest you
become a target of class-action litigators. Financial institutions,
especially credit card issuers, now start the application process with two
or three screener questions to reduce the number of applicants applying for
products for which they are completely unqualified. This is a win-win,
saving the bank application-processing costs, and helping applicants prevent
lowering of credit scores due to application denial. Juniper uses a popup to
deliver the screener questions (below).




Segment Your Base with Regular, Gold, Platinum, and So


We believe that premium channels will be the next big thing in online
banking. That’s why we selected Money HQ from Online Resources
as our top innovation of 2003. A review of the credit card industry provides
clues as to how online banking may play out. American Express was a
segmentation pioneer, rolling out a Gold Card in 1966, only eight
years after the introduction of its standard charge card. After the huge
success of the Gold strategy, widely copied by bankcards in the late 80s,
the company further segmented its card base with the Platinum in 1984—again,
widely copied by bankcards in the mid-to-late 90s. Now American Express
operates a half-dozen card lines: Green, Gold, Platinum, Optima, Delta
SkyMiles, and Blue, with plenty of sub-segments of each.

We expect to see the same thing happen with online banking. Now that
leaders such as BofA, Wells, and Citibank have offered online banking for 15
years or more, and with penetration closing in on 50% of their checking
account bases, the companies will begin offering different versions of their
online programs. Expect to see differentiation around payment capabilities,
credit access, account aggregation, service levels, human attention, and
account alerts (see Table 9, below).

Table 9
Premium Online Banking Offerings

possible features and benefits


Source: Online Banking Report, 2/04



Use Real-time Payments to Drive Users Online

According to Gartner’s latest research,* in the United States, biller
direct payment is used by six million more adults than online bill payment
through a bank, 18 million vs. 12 million. However, according to Gartner,
respondents prefer bank sites for payment by almost two-to-one, 19 million
vs. 10 million, although both options trail preauthorized debit, preferred
by 26 million, and snail mail preferred by 116 million.

Banks can tap into the growing popularity of electronic payments by
offering simpler bill-payment sites that allow users to make one-time
payments or setup preauthorized debits, without a lengthy signup process.

Banks can also win more user by offering more choices, such as paying via
credit card.

Table 10
Bill Payment According to Gartner

millions of U.S. adults paying bills online


Source: EBPP Future Blends Direct Bank Aggregation Models,
Jan 13, 2004, by Avivah LItan, Gartner,
data from survey fielded May 2003
AutoPay =  preauthorized electronic debit
*Can choose more than one option, so the sum is higher than 100%
**Total the still wants to receive bills via snail mail




Credit card issuers have long been far more aggressive than banks
pitching ancillary services, such as credit card registration, credit report
monitoring, and credit insurance. They are beginning to take that approach
to online marketing. For example, last year, Chase’s credit card
group sent me more than 40 sales/service email messages. Issuers have also
found profits selling all types of unrelated products and services from
flashlights to magazine subscriptions. While, we don’t think banks should
start pitching knife sets online, they could be more aggressive in selling
related products, especially credit report monitoring, insurance, and value




Use Email for Retention


Credit card issuers are much further along in providing email messages to
users. Card companies are using email to remind users of payment due dates,
confirming charges and payments, marketing messages, balance transfer
offers, line increase notifications, credit card check offers, e-statements,
credit report and other ancillary product sales, holiday messages, and other
relation-enhancing messages: even early collection efforts have gone
electronic. Chase is one of the most prolific emailers. During 2003,
we received  at least 70 email messages from the bank about our active
credit card account, 46 of the messages (at least the ones we saved), were
marketing/service oriented (see example left) and the other 24 had to do
with scheduling and confirming payment of the bill (see OBR website for more



Provide Compelling Online Account Management

Card issuers provide an online experience on par with similarly sized
banks; however, some are becoming more creative with their
account-management websites. For example, American Express offers its
Small Business Dashboard to manage charge card (see screenshot left).
One of its distinguishing features is a credit-status bar that graphically
shows whether the charge account is approaching its limits (e.g., green
means in good standing, yellow means charging privileges at risk,
and red is account suspended).

Card issuers are also making online statements interactive with the
ability to click through to get more information or dispute a charge,
contact the merchant, or re-sort transactions.



Make Transfers Simple

For several years, companies such as Bank of America  have
provided simple online balance-transfer solutions for cardholders. Banks too
should make it simple for users to consolidate deposit and loan balances in
a similar manner using account aggregation technology and interbank-funds
transfers. Citibank’s new A2A service and Money HQ from
Online Resources
are on the right track.


Integrate with Direct Marketing

The latest trend is to provide special URLs and/or application numbers
in preapproved snail-mail solicitations so recipients can respond quickly
online. For example, Fleet’s
 This is a win-win, giving the customer faster direct access to the special
offer and providing an interactive environment for the card issuer to
encourage balance transfers or other upsells. This integrated technique will
quickly become a standard practice for financial direct marketing.



Get Rid of the Paper

With ever increasing printing and postage costs, the business case for
e-statements continues to grow stronger. Although paper-suppression efforts are
still in their infancy, we expect credit card issuers will be the first to
successfully wean a critical mass of users off paper. Although it will take
years of marketing efforts, for example, we’ve already received eight messages
from Chase encouraging us to switch to a
credit card e-statement; the formula for adoption is relatively simple: 

Lessons from the Card Marketers

Innovating in online marketing and delivery

Credit cards have
always fascinated me. From my first card in 1982, through my stint as a card
product manager in the late 80s, I’ve been a student of the industry,
watching and learning from the best: American Express, Citibank, First USA,
Capital One, and others.

As we entered the Internet era in the mid-to-late 90s, I fully expected
the credit card issuers to lead the financial services sector online. For a
while, it looked like a good prediction. Many of the early online banking
pioneers, NextCard, Providian/GetSmart, Wingspan Bank,
C2it, Juniper Financial, had their roots, and business plans,
centered on credit cards.

But a funny thing happened as that story was being written. Recession.
Whether it was an unseasoned portfolio (NextCard), problems at the parent
(Wingspan), or an over reliance on sub-prime (Providian), these pioneers
lost their funding and retrenched (Providian, Juniper) or disappeared (NextCard,
Wingspan, C2it).

But as card companies recover from the beating they’ve taken during the
past three years, we are seeing renewed innovation from the sector. For
example, after a decade of struggling to get traction, the card companies
have put online bill payment on the map with their convenient card-payment
options. As a result, card issuers have some of the largest registered user
bases in the financial services arena (Table 1 below):

Table 1

Top 5 Online Cardholder Bases, Year-end 2003
number of online cardholders


Online Users

Cardholders (WW)

% Online

American Express

12 mil (e)

60 million

17% to 21%


10 mil (e)

140 million

6% to 10%

Discover Card

9 mil (e)

50 million

17% to 20%

Capital One

8 mil (e)

47 million

15% to 18%


6 mil (e)

40 million

13% to 16%


Source: Companies, (e) Online Banking Report estimates, +/- 25%, 2/04

We still believe that long-term you are better off wrapping your direct
banking efforts around plastic rather than paper ( “Will that be Paper or
). If NextCard had been more patient in building its portfolio,
they could have been a powerhouse today. So who will take their place as
The Internet Credit Card
? It’s one of the more intriguing opportunities
of the decade.

Table 2

Top 5 Online Cardholder Bases, 2000 to 2003
number of online cardholders


2003 Dec

2002 Dec

2001 Dec

2000 April

American Express

12 mil (e)

8.9 mil

5.2 mil

1.8 mil


10 mil (e)

7.6 mil

5.5 mil

1 mil (e)

Discover Card

9 mil (e)

8.0 mil

6.0 mil


Capital One

8 mil (e)

6.3 mil (d)

3.5 mil (d)



6 mil (e)

4.5 mil

2.7 mil


    % change

45 mil

35 mil

23 mil

4 mil

Sources: Companies except, (d) Dove, (e) Online Banking Report
estimates, +/-25%, 2/04


Online Card Usage

According to a recent Forrester report,1
75% of U.S. credit card customers have online access, and of those 36% (20
million) access their card statements online. More than 60% of those users
(12 million) accessed their account regularly. Fisite Research, a company
founded by ex-Gomez payments analyst, Paul Jamieson, found even higher
usage; with 57% of online cardholders saying they manage some aspect of
their card online2 (see Table 3, right). Whether the true
number is 20 million or 30 million or somewhere in between, we do know that
the use of online credit card management has exploded. Three years ago
(year-end 2000), fewer than five million households accessed cards online (see
full details, Table 5, opposite
). Now, at least five individual card
issuers have online user bases of five million or more (see Table 2,

There is even a greater disparity in estimates of the number of
cardholders paying their card bill online. Forrester found that just 36% of
online card statement viewers
(7 million HHs) pay their bill online, while Fisite reported 74% of online
card managers paid online.2 Gartner estimated that 22 million
adults pay their card bill online, either directly or through third-party
bill pay.3 Based on these estimates and usage numbers from
individual card issuers, we estimate 16 and 18 million households pay their
card bills online directly at the issuer, up nearly 20-fold since less than
one million users at the beginning of 2003.

1How To Right-Channel Credit Card Customers, by
Catherine Graeber, Forrester Research, Jan. 2004, $675, ,
fielded, Q2, 2003
2The TSYS Summer 2003 Executive Online Credit Card Survey,
Finite Research, $2495,
 fielded May/June 2003; the numbers
may be higher because respondents included pay-anyone third-party
payments in their answers
3EBPP Future Blends Direct Bank Aggregation Models,
Jan 13, 2004, by Avivah LItan, Gartner,  $95,
fielded May ‘03


Table 3
U.S. Online Credit Card Usage Estimates





Credit card households

75 mil*

75 mil*

% of cardholders online

56 mil

% of online cardholders using online card account

20 mil

32 mil*

% of online card managers using it regularly

12 mil

% of online card HHs paying their card bill online

7.2 mil

24 mil*

22 mil**

Source: Companies, Online Banking Report, 2/04
*OBR estimates, Fisite reported usage as a percent of cardholders responding
to its online survey fielded summer 2003, household extrapolations by OBR
**Includes online payment direct at card issuer or through third-party bill

Table 4
Online Card Evolution



Product Positioning

Primary Market

Beta 1997 to 1999 Easy way to apply for a card Geeks and scam artists
Version 1.0 Novelty 2000 to 2001 Cool  to check your card online Early adopters
Version 2.0 Utilitarian 2002 to 2003 Easier way to pay your card bill Early mainstream
Version 3.0 Value-add 2004+ Save time and money with total credit
50% of U.S. households

Source: Online Banking Report,



The convenience and reliability of paying card bills
online will continue to drive online credit card growth. For 2004, we
project overall growth of five million new online credit card households
(range: 4 to 7 million), the same number of newcomers as in 2003. However,
the rate of growth will slow slightly to 25% compared to 33% last year. Ten
years from now, online credit card penetration is projected to grow to 47
million, 40% of U.S. households, compared to 19% today.

Table 5
Online Credit Card Forecast

U.S. households using online credit cards at

Source: Online Banking Report projections based on industry data (+/-
30%), 2/04





Table 6a

Consumer Households Using Online Credit Cards: U.S. vs.

millions of households actively using online banking and/or
online bill payment

Source: Online Banking Report estimates 2/04, accuracy estimated at plus
or minus 30% U.S., 40% worldwide

Table 6b

Annual Growth Rate of U.S. Credit Card Households

millions of U.S. households and percent change from
previous year

Source: Online Banking Report estimates, 2/04; accuracy estimated at
plus or minus 30%


Table 7

OBR Definition: Online Credit Card Household

  •         Someone in the household must have done at least ONE of the
    following during the past 6 months:

  •        Viewed balance/available credit or transaction data
    online1 for a general purpose2 credit or charge card

  •        Authorized a card payment at the site of the card issuer
    (not at a third party such as a bank’s pay-anyone bill-pay service)

Does not include:

  •        Online point-of-sale
    transactions using a credit card

  •        Debit or prepaid card account management, application,
    or purchase

(1) Any connection from home, work, school, or other place where data can be
viewed through any device (Web phone, browser, proprietary software,
Quicken, Money, etc.)

(2) Visa, MasterCard, American Express, Discover

Table 8

Gomez Top Card Companies

Q3 2003 Scorecard


Source: Gomez, 1/04