Another Day, Another Corporate Credit
Just like Disneyland, California now has its very own currency. But where Disney mints millions of its “Disney Dollars” for frolicking theme park families, the state of California has issued millions in IOUs to unhappy creditors. So which currency offers the better long-term value: public or private?
In fact, one of the most intriguing financial phenomena of this decade will be the inexorable rise in the importance of “private money” issued by companies to lock their customers into their “economic systems.” Once upon a time, this kind of private money--or scrip--was associated with railroad towns, the armed forces and the Great Depression. Today, think of these shadow currencies as the “scrip of the elite.”
“It’s not a bad gimmick to use to promote brand loyalty,” asserts Arthur J. Rolnick, research director at the Federal Reserve Bank of Minnesota and an expert on the history of American scrip.
While Walt Disney or, say, American Airlines won’t have its own Paul Volcker or Alan Greenspan, these companies are going to be just as careful about managing “money supply” and “inflation rates” as their Fed counterparts. Just as the global economy has become more integrated over the last 20 years, America’s shadow economy of frequent flier, frequent caller and frequent purchaser programs is also seamlessly blending.
The issue is no longer individual “frequent flier” or “frequent purchaser” programs to buy brand loyalty--it’s the gradual fusion of these plans to create a new kind of consumer credits economy. It’s only a matter of time before a new generation of “central bankers” emerges to coordinate exchange-rate issues.
Citicorp credit cardholders can “buy” frequent flier miles on American Airlines as well as hotel and rental car discounts. Selected American Express cardholders can buy “membership miles” on other frequent flier programs or purchase phone time on MCI and Sprint via the Connect-Plus programs. At the same time the ruble is becoming convertible to world currencies, corporate currencies--frequent flier points and frequent traveler credits--are becoming more convertible to each other. This is an economy that is now worth billions--and growing.
“In the customer’s mind, it may well be a currency,” says Alfred F. Kelly Jr., vice president of frequent traveler marketing at American Express Travel Related Services. “There’s no question that you’ll see more partnerships between organizations as they try to provide additional value to customers. We’re trying to create segment-specific programs that not only provide value to our customers but also instill a loyalty to us and our partners.”
For example, Kelly notes, if American Express customers want to have “convertibility” between Membership Miles credits and Connect-Plus, that’s something Amex’s “central bank” might be prepared to arrange. All of a sudden, Amex credits begin to rival dollars as a medium to purchase both travel and communications.
But what if an American Express or a Citicorp or a GE decided to create its own economic currency bloc? What if companies such as Walt Disney, Federal Express, Marriott Hotels, Walden Books, Procter & Gamble, Exxon and Kmart had their own “frequent purchaser” plans and agreed to make the credits between their plans convertible at acceptable exchange rates? Say, a credit-for-credit conversion for Walt Disney to Federal Express but only three-quarters of a credit for a Walt Disney from a Marriott? Wouldn’t elite consumers like to enjoy the benefits of that shadow currency bloc?
“I think it’s a very good idea,” asserts George Gould, a former Reagan Administration Treasury undersecretary and now vice chairman of Klingenstein, Fields, a New York-based investment house. “One of the characteristics of the 1990s is that pricing power is moving from sellers to buyers. These ‘currencies’ represent a very sophisticated way of discounting.”
Private currencies are on the rise not just because companies are pushing them--but because they are what the elite customers want. If the ruble can be convertible, why not the American Airlines frequent flier program?
Indeed, as sophisticated information technology continues to seep through the economy, the ability to grow and manage private currencies increases. It becomes both cheap and easy to track individual purchases and credits. Just as people try to manage their credit cards, they will soon be managing their “credits” cards to handle a variety of shadow currencies.
As corporate credits blocs emerge, consumers will decide if they want to purchase goods and services with cash, credit card, charge card or credits card--just as today’s frequent fliers now purchase air travel, rental cars and hotel accommodations with their pseudo-currency mileage coupons.
Who knows? Maybe someday Wall Street will make a lucrative market selling options and futures on the private currencies of tomorrow rather than merely the public currencies of today.
