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Credit Cards on the Internet: Current Use and Future Potential

(originally published by Booz & Company)

In the financial services industry, credit card issuers have been innovative and creative in capturing an ever-growing customer base. Telemarketing, enhancement services, affinity group tie-ins -- all are examples of areas in which card issuers have excelled. Will card issuers prove as adept in utilizing the Internet, the newest channel for reaching consumers? How are they using the Internet today, and what uses do credit card issuers foresee for computer networks such as the World Wide Web?

As part of an ongoing effort to understand the strategic impact of the Internet on the financial services industry, Booz-Allen & Hamilton recently conducted an extensive analysis of current usage of the Internet by credit card issuers, as well as a study of the industry's top issuers, to determine probable future uses for computer-based communication with consumers. The study was based upon a survey of the top 100 credit card issuers as well as interviews with industry leaders and other Internet participants.

A Good Beginning, Heavy Traffic Forecast

The study found that nearly all credit card issuers (98 percent) have a presence on the Internet or are working toward establishing some type of presence. However, of existing credit card Web sites, approximately half (53 percent) offer only basic information for current and prospective customers, including telephone numbers for applications. Just over one-third of the sites (37 percent) offer E-mail capabilities with applications to be downloaded. A small number of sites (10 percent) offer the potential for increased functionality, with advanced E-mail and the ability to check statement and balance information soon to be available.

For most credit card issuers, marketing departments have led the drive to establish a presence on the World Wide Web. Card marketers view the Internet as a tool to increase cardholder retention by providing an additional service channel to existing customers. Respondents to the Booz-Allen study indicated that experimenting with new technology and assessing its impact on the business, including its potential for reducing the cost of customer servicing, were other important reasons for establishing a Web site. In addition, respondents view Web sites as opportunities to gain market share by attracting new applicants as well as to prevent competitors from gaining at their expense. Marketers of credit cards also feel that their brand image would suffer from not having a presence on the Internet.

Although current usage of credit card Web sites is below that of other financial services companies' sites (e.g., retail banking), 64 percent of card issuers that responded to the study are satisfied with their Internet presence. Low usage is generally attributed to the limited functionality of current sites, and most issuers are confident that one-third of their customer base will be using the Internet to access account information in as little as five years. As a result, issuers will be increasing their Internet investments to enhance and improve sites. By 2002, it is likely that there will be approximately 800 card issuer sites, with the majority offering fully functional, advanced capabilities. (See Exhibit I.)

Multiple Advantages

As the credit card industry continues to grow, use of the Internet as a marketing and servicing vehicle will grow too. In an increasingly competitive environment, traditional marketing options, such as direct mail and telemarketing, are becoming more expensive and less successful. The Internet offers an attractive alternative with important advantages.

By and large, the Internet reaches a wealthier, more highly educated customer base than other mass solicitation techniques. The average income of Internet households is $66,700, compared with an average of $42,400 in the United States as a whole. Eighty-one percent of Internet users have a college degree, compared with just one-third of the adult population in the United States.

Links with other sites offer the added opportunity to attract additional applicants and cross-sell other products and services, including moving existing customers to more profitable products, such as gold or platinum accounts. Advanced Internet capabilities also will enable issuers to pursue smaller affinity groups profitably. And as advertising on the Internet evolves, there may be the potential for offsetting marketing costs with advertising revenues.

The Internet also offers potential improvements to the critical ability to excel at cardholder servicing. While servicing is already handled through remote channels (mail and telephone), computer-based communication provides another important servicing option with greater functionality than existing systems.

Importantly, for both servicing and customer acquisition, the Internet offers the potential for dramatic cost savings. Marketing costs have grown 46 percent since 1992, representing approximately 30 percent of issuers' operating expense today. In acquiring new cardholders, savings over direct mail can range from $12.50 to $97 per approved application (depending on mail volume, processing costs, credit bureau unit costs and response rates). Savings over telemarketing can range from $2.50 to $77 (depending on response rates, and staff, processing and credit bureau unit costs). In addition to reaching an attractive audience, the Internet can improve application processing through greater efficiency. Internet-processed applications save data entry costs and are more likely to be error free, because applicants enter their own data and applications are not accepted until complete.

Savings Forecast For On-Line Delivery

Savings in servicing costs can arise through automated processing and delivery. The cost of on-line delivery of statement information is estimated to be as low as 18 percent of traditional means. Internet-based servicing represents considerable savings over phone channels (approximately 72 percent) and paper channels (approximately 40 percent). And costs to enroll existing cardholders in benefit and fee services can be reduced approximately 92 percent using the Internet. (See Exhibit II.)

While these savings numbers are attractive, card issuers looking to the Internet must be aware of potential trouble spots. The most common objection to Internet use is security. Ironically, this is more of a perceived
problem than an actual concern. With ongoing improvements in hardware and software reliability, this issue will fade. More critical for credit card issuers is the reality that while Internet users are demographically more attractive, it remains to be seen whether they will prove to be more profitable cardholders.

Reaching the right audience over the Internet is another important hurdle. Today, card issuers must pull current and potential customers in with promotions, links with other sites and free offers. Issuers who achieve success with the Internet will be those who develop innovative ways to push messages and offers to attractive consumers.

The growth of the Internet as a marketing and servicing vehicle is undisputed. How can credit card
issuers move to take advantage of this new tool? Issuers should experiment with push-marketing strategies, analyze data gathered from the results and act quickly to advance ahead of the competition.

As Web site functionality improves, issuers should market their site capabilities to migrate existing cardholders to this less-expensive servicing option. Cross-marketing opportunities should be researched, tested and rolled out as appropriate. Likewise, additional marketing and servicing opportunities that arise should be piloted and results studied.

Key Is Innovation

The Internet is surely the wave of the future, but it is a tool that is available today. Successful credit card issuers will be those that continue the industry's tradition of innovation, taking advantage of the functionality the Internet offers and developing ways to use it to their competitive advantage.

Reprint No. 97401

David E. Howe, David E. Howe is a vice president in the New York office of Booz-Allen & Hamilton. Since joining the firm in 1986, he has worked extensively in retail financial services for a variety of clients in the United States and around the world. Mr. Howe received a B.A. from Harvard University and an M.B.A. from the Amos Tuck School of Business Administration at Dartmouth College.
Shamal P. Ranasinghe,

Shamal P. Ranasinghe is a lead consultant in Booz-Allen's financial services group. Since joining the firm in 1994, he has worked on several projects involving electronic distribution in the financial services industry. He is currently on educational leave to pursue an M.B.A. at Stanford University. Mr. Ranasinghe received a B.A. with honors from Northwestern University.

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