How At&T Skimmed The Cream Off The Credit Card MarketLeah Nathans Spiro
Paul G. Kahn, chief executive officer of AT&T's Universal Card division, used to be a ranking member of the club. He spent 10 years working for the credit-card operations of major bank issuers of plastic, from First Chicago Corp. to Wells Fargo & Co. Each year, he would receive 50 to 75 Christmas cards from friends at other banks. But since Kahn defected to American Telephone & Telegraph Co. in May, 1989, not one of his banking colleagues has sent him holiday greetings. How does the snub make him feel? Without missing a beat, Kahn says: "Successful."
Ever since AT&T launched its Universal Visa card in March, 1990, the comfortable world of credit cards hasn't been the same. While the card has yet to turn a profit, AT&T in less than two years has put more than 11 million of them in circulation, making it the third-largest issuer after Citicorp and Chase Manhattan Corp.
AT&T's emergence as a top credit-card player is a testament to the clout of the AT&T name, especially compared with most bank issuers. "There's no name in consumer services that compares," says Kahn.
'BETTER MOUSETRAP.' But AT&T's success also reflects plain old price competition. The Universal card was initially offered with no annual fee for life. It also has a variable interest rate of 6.9% over the prime rate, which made its rate slightly lower than what the big banks were charging. In its first year, it scooped up 8.5 million cardholders. "Everyone thought it was a saturated market, and we built a better mousetrap," brags Kahn.
AT&T later tacked on an annual $20 fee. But just hours after President Bush on Nov. 12 asked banks to lower their credit-card interest rates, AT&T dropped its rate from 17.4% to 16.4% for charter members instead of waiting until a scheduled January rate adjustment. The move produced a surge of favorable publicity and card applications. "It's like termites," says Kahn. "Our competitors think they have a structure, and all of a sudden, it's eaten out."
AT&T's name recognition and cut-rate prices have allowed it to cherry-pick the best customers from its competitors. Kahn says AT&T turned down 1 out of every 3 or 4 people who applied for a card -- about 1 million people from March to December, 1990. The result is a 1.3% rate of charge-offs for deadbeats. It helps that some card customers pay their bills promptly out of the misplaced fear that if they don't, their phone might be disconnected.
QUICK PAYOFFS. AT&T's higher-quality customer base, Kahn predicts, will eventually allow it to be as profitable as competitors. He estimates that a money-center bank earns 19.8% on its credit-card debt, spends 6% for funds and 5% on operating costs, and loses 5% in charge-offs, for a profit of 3.8%. AT&T pays only 5% for funds because of its higher credit rating and spends 6% on operating costs. But since AT&T loses a scant 1.3% on charge-offs, its return should be comparable, about 3.1%.
AT&T's strategy has one big flaw. About 65% of its cardholders pay off their balances monthly, with 35% paying interest for revolving credit, says Bruce Brittain, an Atlanta consultant. Profitable banks usually have the reverse ratio. 'They AT&T can't make any money until a majority of their portfolio is carrying balances," says Brittain.
Brittain concedes that AT&T's portfolio will probably resemble bank-card portfolios within 18 to 30 months. Kahn predicts that the AT&T card will be as profitable as his competitors' cards by 1995. Few of those competitors are betting against him -- which is why Kahn's mailbox may be just as empty this Christmas.