Credit card companies fight the battle for shoppers' online wallet share

As marketing-driven companies whose profits are tied to how much their cardholders spend, credit card issuers have a history of delivering incremental sales to retailers in the physical world through joint marketing ventures. Now they are seeking the same goal in the online world. Hence, they are aggressively maneuvering to establish their web sites ahead of Internet portals, such as Yahoo and MSNBC.com, as the primary gateways to Internet shopping for their own customers.

To accomplish this feat, credit card issuers are employing a two-pronged strategy built around partnerships with Internet retailers that not only deliver special incentives to their cardholders but that also provide cardholders with a high level of convenience and security.

In November, Riverwoods, Ill.-based Discover Financial Services, the fourth largest credit card issuer, became the latest heavyweight to flex its muscle in this game of high stakes poker. That’s when Discover unveiled DESKSHOP 2.0, an Internet shopping service that provides online retailers access to Discover cardholders by offering incentives ranging from discounts and free shipping to Discover’s trademark cash-back bonus.

DESKSHOP also offers cardholders the ability to create a single-use credit card number when making an online purchase for protection against fraud and an e-wallet service that automatically supplies the account number and shipping address in the checkout lane for greater convenience.

American Express, which has a long history of striking marketing relationships with retailers in the physical world, is aggressively promoting its online shopping mall, known as the Offer Zone. AmEx touted Offer Zone during Q4 of 2000 via radio commercials and mailed a booklet to cardholders containing special offers from Internet retailers participating in the offer zone. The booklet also provided hints on safely shopping online.

Offers vary by what the merchant is willing to underwrite and range from free shipping and discounts to special tie-ins for AmEx’s Membership Rewards program. AmEx also offers a search engine through its web site so consumers can go comparison-shopping. “We want to be the launch pad for our card members when they want to shop online,” says an AmEx spokesperson. “We want to deliver the same shopping value in the world of online retailing as we do in the world of brick-and-mortar retailing.”

The presence of such big hitters in e-commerce is providing Internet retailers with an infusion of marketing power that can help them cultivate both new and repeat customers. “Companies like American Express, MasterCard and Visa have strong brands that can help us reach customers and send the message that we have the resources to deliver value,” says Peter Cobb, co-founder and vice president of marketing for eBags.com, which has marketing partnerships with AmEx and Visa. “As more consumers shop online, they are going to sites through which they feel comfortable starting their journey and credit card issuers’ sites are one of those homes.”

The ability to reach new customers is only the tip of the iceberg. Since credit card issuers record their customers’ transactions for monthly billing statements, they possess a wealth of data that Internet retailers can tap to create customized offers targeted around individual cardholder purchasing habits.

NextCard has taken a leadership role on this front with the creation of its e-commerce index. Published monthly, the index details the leading sites at which its 577,000 cardholders made a transaction the previous month. The index, which is about 20 months old, is available through NextCard’s web site.

“Merchants use the index as a barometer of how they are doing,” says Lisa Subramanian, vice president of e-commerce for NextCard. “We thought this would be a benefit to the industry. Purchasing activity is key for Internet merchants and us.”

That is an understatement, especially since few credit card issuers are known to be supplying that type of data to Internet retailers for marketing purposes. “The NextCard index is a powerful tool,” declares Paul Jamieson, senior analyst, banking and payment services for Gomez Advisors Inc. of Lincoln, Mass., which tracks the 17 largest card issuers with an online presence. “Card issuers have a wealth of transaction data but that tool is being underutilized for online shopping.”

One of the potential uses of cardholder transaction data for Internet retailers is to create e-mail marketing campaigns targeted at cardholders who are active online shoppers, but who are not customers of their site, theorizes Jamieson.

MasterCard’s Preferences program is one example. MasterCard cardholders register at MasterCard.com. They record the types of merchandise they are interested in purchasing online, their email address and how often they wish to receive special offers from Internet retailers geared to their preferences. Subsequent email campaigns built around that data typically include a link to an Internet retailer carrying the merchandise being promoted.

Although MasterCard cannot determine whether a cardholder makes a purchase—the merchant and the credit card issuer track data—it can determine whether the messages are opened. “Merchants tell us the program is bringing incremental sales,” says Jennifer Lavelli, vice president of Internet marketing for MasterCard. “The ability to deliver personalized value is nirvana for consumers.”

One reason the program has delivered incremental volume to Internet retailers is a low attrition rate for the program, according to MasterCard. Less than 0.5% of those who register drop out of the program, Lavelli says. Since launching the program in 1997, MasterCard had registered about 5,000 users as of the end of 2000.

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Individual card issuers have their own success stories when it comes to generating incremental sales for Internet retailers. NextCard says cardholders who use its concierge service increase their online purchasing activity by 30%, compared to cardholders who do not use the service.

While Internet retailers acknowledge success partnering with individual card issuers, one of the benefits of partnering with a brand marketer such as MasterCard and Visa is that they get greater mileage out of joint marketing campaigns.

“Visa and MasterCard have the ability to push promotions with merchants out to their card-issuing members, who then push it to their cardholders, so it’s a great way to stretch your marketing budget,” explains John Herr, senior vice president of sales and marketing for Buy.com. “Sometimes they even approach us about a promotion and will pay us to run it, so in that instance marketing dollars flow to us.”

Buy.com last year partnered with Visa to participate in a promotion sponsored by Visa and the NFL in which Visa cardholders who made a purchase at Buy.com were entered into a sweepstakes. Weekly drawings awarded such prizes as electronics, with the grand prize drawing a trip to the 2001 SuperBowl. “Visa and the NFL are two great brands to partner with for marketing purposes and the promotion did deliver repeat buyers,” says Maggie Ford, promotion manager for Buy.com. “We are also starting to look at doing promotions with individual issuers.”

First USA Bank, the credit card issuing subsidiary of Bank One Corp., offers consumers carrying its Buy.com co-branded platinum card a 5% credit for each $1 spent on the card at Buy.com and a 1% rebate at other merchants. Rebates are redeemable on merchandise at Buy.com.

“A lot of the promotions that card issuers are using in the online world have proven effective in the offline world,” says Jill Frankle, director of retail e-commerce for Gomez. “Free shipping is used a lot during high traffic periods, such as the holiday shopping season, but it’s a subsidy and there are a lot of other meaningful values that can be offered.”

One such value is convenience. Several card issuers include search engines in their shopping malls that allow consumers to locate Internet retailers carrying the type of merchandise they desire. Retailers do not pay for placement in the search process. The malls choose retailers based on compatibility with other merchants and their willingness to underwrite incentives. Many of the search engines also perform price comparisons for a specific product carried by more than one Internet retailer and even provide products reviews.

“Merchants want their affiliation with a card issuer to be more than just low price, they want to provide a level of service that makes its easier to shop online and facilitates cardholders going to their site,” states Marc Metcalf, president of Brodia Inc., a San Francisco-based vendor of e-wallet technology. “The idea is to put all customer services in one place.”

Brodia, which supplies e-wallet services to six of the 11 largest credit card issuers and MasterCard, is employing that strategy to help issues build a broader array of shopping services and secure transaction applications around its technology platform. The company has financial backing from MasterCard and Morgan Stanley Dean Witter, Discover card’s parent. It also has relationships with more than 500 online merchants that it can deliver as marketing partners to credit card issuers.

“Card companies are investing in Brodia because it can help them capture more volume from online shopping and that is enough to warrant an equity investment,” adds Gomez’s Jamieson.

To address security concerns among its cardholders Discover has included a virtual credit card in DESKSHOP 2.0 that allows cardholders to create a single-use credit card number when making an online purchase. The single use account number protects the cardholder’s actual account number from being intercepted online, thereby reducing the potential for fraud.

Unlike other single use card numbers offered by AmEx and MBNA, which can be used only once, Discover has added the flexibility to allow its single use card number to be accepted by the same merchant for recurring payments or to pay for items on back order. Orbiscom Inc. supplies the technology.

“This can help merchants attract new customers to online shopping who previously were not comfortable giving their account number online,” says Colleen Zambole, vice president of e-commerce for Discover.

The ability of card issuers to deliver consumers who have never shopped online is critical for Internet retailers, especially those just establishing their brand. “We may not have as large a cardholder base as the leading issuers, but our cardholders are more active online shoppers,” says NextCard’s Subramanian. “We have been able get better deals for our cardholders from some merchants because of this. Plastic is the currency of the web, so people will pay attention to the offers that come to them through their card issuers’ site.”