Co-Branded Credit Cards Charge Full Speed Ahead
Rose Nakao, a Los Angeles retiree partial to imported vehicles, bought a U.S.-made car this summer for reasons that had nothing to do with changing consumer tastes in the automobile industry.
Using a rebate from her credit card purchases, Nakao bought a 1993 Oldsmobile Cutlass that cost $16,000. While the rebate was only $265, it was enough to spur her to buy American, exemplifying how a new generation of “freebies” is altering consumers’ buying habits and transforming the nation’s omnipresent credit card industry.
“I wanted to see how much I could save up for a rebate,” said Nakao, 70, whose family was urging her to buy cars ranging from a Hyundai to a Mercedes-Benz. “It was kind of a challenge, I guess.”
More than 30 million Visa and MasterCard accounts today feature the logos of banks that issue them along with those of the manufacturers and service firms that offer the rebates. Because they display more than just a bank trademark, they are known as co-branded cards.
Helping fuel the popularity of the cards are consumers who have become increasingly value-conscious in the slow-growth 1990s. Cutthroat competition in a glutted credit card market is another factor, as is the extreme pressure on manufacturers and service companies to boost revenue in a sluggish economy.
Despite warnings from consumer advocates that the rebates cost more than they are worth, the trend is growing rapidly. In all, co-branded cards now represent 20% of all Visa and MasterCard accounts, up from 1% seven years ago.
Nakao’s case was typical: She received her unsolicited application for a General Motors Corp. MasterCard in February via direct mail, and by March she was using the card for virtually every charge. Five percent of her card expenses for purchases went toward a rebate on a new GM car.
General Motors alone has opened 5.5 million credit card accounts since it began offering its card 14 months ago. Since the program was launched, 80,000 cardholders have used rebates to buy or lease GM cars--about one third of whom probably would have bought other makes instead, according to the company.
The added sales are why AT&T;, Ford, United Airlines and other blue-chip corporations have joined GM in spending tens of millions of dollars this year on advertising and direct mail to credit-worthy consumers. Some people receive half a dozen or more mailings a week.
(A cousin of the co-branded cards are so-called affinity cards, which typically have ties to social or professional groups such as alumni organizations, bar associations and trade unions. Cardholders usually receive lower fees and interest rates rather than rebates.)
The co-branded cards have been around since the mid-1980s, when airlines began offering frequent-flier mileage as an incentive for using the cards. But they leaped in popularity after AT&T; introduced its MasterCard in 1990 and after GM launched its MasterCard.
The Citibank AAdvantage card is so popular that Citibank and American Airlines recently moved to limit the rebates in most cases to 60,000 frequent-flier miles a year. The move was directed at a growing number of businesses that use the cards to charge their monthly expenses.
A co-branded card seems to be a no-lose proposition to someone like C. David Urbanski, a Solana Beach investment broker. Urbanski gets a 10% discount on each long-distance call he charges to his AT&T; MasterCard, the co-branded leader with more than 11 million accounts.
“It makes sense because you are getting something extra for nothing,” he said.
But for credit card issuers, the rebates are a sign of a much tougher market. After two decades of rapid growth, the credit card industry has seen a leveling off of new accounts and purchases.
Issuers today have to “steal customers from the other guy” to grow and prosper, said Robert B. McKinley, president of RAM Research Corp., a Frederick, Md.-based consulting firm.
“It used to be that card issuers threw out the same types of cards to anyone who qualified,” said James Daley, editor of Credit Card News, a Chicago-based trade publication. “Now it’s just like any other mature industry. They segment the market and go after profitable niches.”
One recent introduction was a card from Shell Oil and Chemical Bank offering up to $70 in annual rebates on gasoline. Apple Computer and Nissan are among the many other firms expected to launch credit cards soon.
Some card issuers will waive annual fees to those who agree to transfer balances from old accounts to new ones. GM and AT&T; issue checks so new customers can pay off their old accounts.
Consumer advocates caution that some fee waivers are only carrots dangled to attract new business. AT&T;, for example, launched its new card with no fee, but now charges most new customers $20 annually to use the card.
Among the losers in the heightened competition are big banks that find plain-vanilla Visa and MasterCard to be a tougher sell.
Bank of America, for example, saw its outstanding Visa and MasterCard receivables drop as of June 30 to $7.5 billion, down from $8.3 billion in June, 1992. Great Western Bank sold its credit card portfolio in September, saying it wasn’t large enough to be sufficiently profitable.
To compete with co-branded cards, some bank issuers are coming up with rebates of their own. Wells Fargo, for example, recently introduced a credit card with which holders can qualify for up to $700 annually in discounts on points and fees on a mortgage loan.
Heightened competition was also a factor in the August reshuffling of management at Visa USA. The San Mateo, Calif.-based credit card leader has seen its market share decline in recent years, partly because it was slower than MasterCard to join the co-branded craze. About 70% of all co-branded credit cards are MasterCards.
Despite the marketing hype, co-branded cards make little economic sense for the typical credit card user, said Gerri Detweiler, executive director of Bankcard Holders of America, a nonprofit consumer group based in Herndon, Va. The higher annual fees and interest rates that co-branded cards generally charge outweigh the benefits, she said.
“The main pitfall for consumers is that they get so taken with the freebies or ‘bennies’ on the card that they end up paying more than what the benefit is worth, in interest charges and fees,” Detweiler said.
Most credit card customers are better off shopping for a low-fee, low-interest-rate card, said San Diego bankruptcy attorney Gerald Sims.
He noted that consumers must charge $10,000 a year on their GM MasterCards to get the maximum annual benefit of $500, or 5% of purchases, back as a rebate on a GM car purchase.
“That’s a lot of money to spend for a benefit which, if you are a hard negotiator, you might get anyway by just asking a dealer to knock down the price,” Sims said.
Only cardholders such as Urbanski, the investment broker in Solano Beach, who charge relatively high amounts on their cards--$10,000 or more a year--do indeed “get something for nothing,” Detweiler said.
That’s because they pay off their balances on a monthly basis to avoid finance charges.
But most credit card users--about 72%, according to Detweiler--don’t have the cash or discipline to pay their accounts off every month. And credit counselors say the rebates only make it harder for debtors to settle their accounts.
Nakao acknowledged that she spent more money than usual earlier this year to build up her rebate, mainly on gifts and clothes for her grandchildren.
And she said she charged groceries on her credit card to boost her rebate--a no-no according to many credit advisers who believe that charging living expenses is a bad practice.
The Credit-Card Market
Co-branded credit cards--Visa or Mastercards that bear the logos of issuing banks and of manufacturers or service providers such as Ford and AT&T--are; claiming a growing share of a leveling credit-card market. Consumers increasingly see the “value-added” cards as a way to get something for nothing, either in the form of rebates on purchases or lower credit fees and interest charges.
Top issuers (in co-branded accounts):
AT&T;/Universal Bank: 11.6 million
General Motors/Household Bank: 5.5 million
AFL-CIO/Bank of New York: 2.6 million
American Airlines/Citibank: 1.1 million
United Airlines/First Chicago: 1 million
Ford/Citibank: 900,000
AARP/Banc One: 850,000
General Electric Credit/GE Rewards Credit Card Bank: 800,000
NEA/MBNA America: 725,000
AmeriTech/Household Bank: 650,000
Source: RAM Research Corp.
