Credit-Card Issuers to Market to 'Deadbeats'

Legislation Makes Those Who Pay Balances in Full More Enticing Prospects

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YORK, Pa. (AdAge.com) -- Deadbeats may once again become the target audience for credit-card marketing.

Of course, in the credit-card world, "deadbeats," until now, were people who paid off their bills every month, incurring no finance charges, usually while racking up rewards.

SIGNING OFF: President Obama signs the Credit Card Accountability, Responsibility and Disclosure Act on May 22.
SIGNING OFF: President Obama signs the Credit Card Accountability, Responsibility and Disclosure Act on May 22. Credit: Kristoffer Tripplaar
But a recession partly caused by extending too much credit to unqualified borrowers seems to be changing the approach of credit-card issuers. And the credit-card-reform legislation President Barack Obama was set to sign into law last week will only make solid prospects who pay their bills on time all the more attractive.

Measured media spending in the credit-card category (which includes issuers and transaction companies) was $1.7 billion in 2008, down almost 6% from $1.8 billion in 2007, according to TNS. Not only is ad spending expected to continue to go down, companies will be targeting a different audience.

"The industry is going to be shrinking: fewer people having cards and fewer cards being issued," said David Robertson, publisher of the Nilson Report. "The legislation, though, is coming as a second punch. The first punch, and much worse for the industry, was the recession."

Revolving door
The recession is taking its toll on everyone, including "revolvers" -- customers who keep turning over balances month after month and paying fees to do it. They used to be highly desired by credit-card issuers because they carried debt and paid fees. College students were another heavily targeted audience.

Revolvers now can't repay their debt and are running up issuers' charge-off rates to unprecedented (and unsustainable) double-digit levels. The Credit Card Accountability, Responsibility and Disclosure Act, among other things, will freeze interest-rate terms and fees on canceled cards, set limits on fees and interest charges, and prohibit unilateral changes to cardholder agreements. It will also prohibit issuing cards to people under 21.

So the "deadbeats" likely will be getting marketing attention again.

Charge-off-weary credit-card issuers, who still collect the 2% to 3% fee paid by merchants whenever a sale is made, will seek out customers who charge thousands of dollars a month and always pay off their balances.

"The industry has become so risk-averse that even any kind of balance makes them nervous," said Curtis Arnold, founder of CardRatings.com. "That higher end of the market -- folks with above average spending and above average credit -- will be sought-after."

Desirable targets
There's evidence of that already. Even before the recession started, Barclays launched its Visa Black card with a $495 yearly fee, and Fidelity and Schwab began offering cards that funnel 2% cash back into investment accounts.

"I do think annual fees will come back, but I also think there will be rewards for everyone in every possible way -- anything you want," Mr. Robertson said. "There will be much more reliance on loyalty programs and making them as robust as possible ... to retain existing customers."

Credit-card issuers contacted for this story either declined to be interviewed or didn't answer requests for comment. A spokeswoman for the Consumer Bankers Association said that's in part because they don't know yet exactly how the new legislation will affect their marketing. "Card issuers have already been preparing to comply with the new federal regulations on credit cards," she said in an e-mail. "Now they will need to incorporate the requirements. ... We will need to wait and see the impact of these changes will be on marketing practices."

The regulations won't mean changes for all credit-card marketing. Transaction companies such as MasterCard and Visa don't issue cards directly, so the legislation should have little effect on their messaging, though both have reported spending less on marketing during the recession.

"It's not going to change the way we market very much. ... The regulations themselves really target issuers with respect to credit," a MasterCard spokesman said, adding that the company will continue its "Priceless" campaign. "The growth of our business is not being driven by people putting more and more on credit cards ... but using cards as opposed to cash or checks."

Selectivity
Credit-card issuers are being selective as they feel their way back into the market. While direct-marketing solicitations have been down, some issuers are starting to make more offers, said Michele Bodda, VP-prospecting and acquisitions at credit-information company Experian.

"The ones who are doing it are being very methodical about how they make offers," she said. "They're extremely selective and [doing] segment targeting from both a risk and profile perspective."

Issuers are tapping Experian analytics more than in the past for testing and learning when it comes to marketing, whether to find out how different creative and messaging will be received or to see how a combination of features in a revised product will fare.

"I absolutely expect direct-marketing rates will go up sometime within the next several months, then gradually go up from there," Ms. Bodda said, adding that they likely won't hit pre-recession levels because the offers will be more customized and targeted.

Keeping cardholders
Will any customers be receptive to new come-ons after months of unpopular decisions and negative press? Many have had their card limits slashed without warning, sometimes to the detriment of their credit scores. Couple that with higher fees and the talk of reinstating annual fees, and already some consumers are wondering if they should use credit cards at all.

Mintel data show that debit cards account for 58% of all card transactions, and 80% of consumers in January reported an increase in debit-card ownership and use.

A strategy that could become popular is offering cards that promote and reward financial responsibility. Citibank is concentrating its marketing efforts on the Citi Forward card, which is meant to help "build and maintain a good credit history." Users get a .25% decrease in their APR for using credit wisely and collect thank-you points for paying on time and staying under credit limits.

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