The Bitter Legacy Of The At&T Card

Universal Card came, conquered--and bruised its industry

When AT&T entered the credit-card business in 1990, it did so with a bang. The telecommunications giant blanketed the U.S. with card offers and promised consumers who signed up no annual fees for life. The AT&T Universal Card became an overnight sensation--turning a profit ahead of plan and snagging a Malcolm Baldrige National Quality Award in 1992.

But as AT&T reached out to more than 10 million credit-card customers in just two years, it set off a brutal competition that continues to this day. Universal's aggressive marketing "changed the future landscape of the credit-card industry," says Visa U.S.A. CEO Carl F. Pascarella. The price war Universal set off has left issuers with a record heap of bad debt. Delinquencies have risen 30% so far this year, according to Moody's Investors Service. Return on assets in credit cards for the top bank issuers has been halved since 1990, with average returns on assets currently at 1% or less. And consolidation is rampant as banks try to build sufficient scale to survive on thinning margins.

BIDDERS MUM. Now, AT&T is exiting the business with a whimper. Faced with more pressing problems in its core long-distance business, management is selling AT&T Universal Card Services and other non-strategic units (table). Bids for Universal are due on Dec. 15, according to industry sources, but they don't expect many. Published reports had analysts initially predicting a $4 billion price tag for the business, which has $13.5 billion in receivables. "If anyone paid $4 billion, I'd be genuinely surprised," says Moshe A. Orenbuch, banking analyst for Sanford C. Bernstein & Co.

Bank analysts estimate the winning bid will come in at $1.5 billion to $2.5 billion. Potential buyers include Citicorp, GE Capital, Chase Manhattan, Banc One, and National Australia Bank Ltd. None would confirm or deny their interest. But industry sources say National Australia, which acquired Michigan National Corp. in 1995, would be a likely purchaser since it tried but failed to buy the ailing credit-card company Advanta Corp. earlier this year.

As AT&T bows out, other credit-card issuers are left with the hangover from years of chasing customers. They're stuck with more and more deadbeats on the books--which is bad enough when the economy is strong and jobs are plentiful, but could become downright dangerous in a downturn. In April, 1997, the industry's uncollected balances as a percentage of loans outstanding hit 7%. Meanwhile consumer debt continues to pile up and stood at $1.23 trillion at the end of October.

Another danger sign: The difference between issuers' interest income and costs is steadily shrinking--from 5.39% in 1995 to 4.12% in 1997. Companies are spending heavily on direct-marketing campaigns to lure new customers--often with super-low rates on balance transfers. That has encouraged some customers to continually jump from card to card, keeping any issuer from making a profit on their business. Chase Manhattan's credit-card unit expects 14% revenue growth for 1997, but flat earnings of about $3.1 million. A spokesman says the bank is happy just to match 1996 returns: "It was a miserable year in terms of losses for the industry. They were up everywhere in the double digits."

The game has gotten too risky for some players. Advanta, after losses related to bad card debts, on Oct. 28 announced a deal to sell its consumer portfolio to Fleet Financial Group Inc. for $500 million. In November, Chase bought Bank of New York's remaining credit portfolio for an estimated $400 million.

TEASER RATES. Even some big issuers are bailing out: Banc One bought First USA Inc. in June for over $7 billion. Visa's Pascarella traces much of this to AT&T's innovations. "The heated solicitation process with introductory offers that had teaser rates associated with them, lower interest rates..., and co-branding cards, which meant sharing revenue streams with another corporate partner, really put pressure on the margins and profitability on the card business," he says.

In the end, Universal may turn out to be among the biggest victims of the price war it set off. As issuers rushed to match AT&T's no-fee offer and began offering super-low teaser rates to attract new customers, AT&T scrambled to keep up--with disastrous results. It targeted riskier customers and used more aggressive solicitation techniques, and its losses rose to 6.3% of its receivables in 1996 from 1.4% in 1991. The losses decimated the unit's profits. Return on assets was 0.76% in 1996, well below the industry average. "This company could be a Harvard business school case study on how to build the most successful business in the country and then just as quickly how to destroy it," says one former senior executive at Universal. AT&T Universal's new chief executive, Richard Srednicki, says the company is now on the mend and growing.

Universal, backed by a $37 billion company with 90 million residential customers, once was the stuff of business legend. Marketing to AT&T phone customers, it picked up a million accounts in its first 78 days. Its no-fee offer startled veteran credit-card issuers, who had never dealt with a nonbank player making such inroads.

But before long, they retaliated, slashing their annual fees, too. In 1991, 66% of new gold cards had no fees. By the end of 1996, that figure had grown to 95%. Issuers of standard cards followed suit. Banks also began offering low introductory interest rates to undercut the 18% charged by AT&T. In 1993, 33% of standard credit cards offered an introductory rate averaging 10.25%. By 1996, 61% offered introductory rates averaging 8.21%, according to BAIGlobal Inc., a market research firm.

Meanwhile, co-branding flourished. Credit-card issuers joined ranks with gas companies, airlines, and charities to target new consumers. For instance, Household International Inc. in 1992 launched a co-branded card with General Motors Corp. that let consumers earn discounts on cars.

But AT&T Universal let this new world pass it by. By 1993, Universal executives were focusing on other problems. It wasn't that AT&T cardholders didn't pay their bills. Too many paid immediately, thereby avoiding the interest payments that generate the majority of revenues for a typical credit-card operation. In addition, a large chunk of Universal cardholders just weren't using the card at all.

In 1994, to help boost interest revenue and fees, Universal decided to target riskier customers. But that tactic backfired, says Srednicki, who joined last February. "The losses on those customers were higher than we expected them to be." AT&T's operating margins for the financial-services division--comprised mostly of AT&T Universal--declined from 13% in 1995 to 3.8% in 1996. Charge-offs hit an all-time high of 6.2%.

OLD HABITS. AT&T says it is beginning to turn the card business around. Srednicki says that under his regime the company has started making money again, though he won't say how much. Problems remain, however. Data from the public portions of AT&T's portfolio show that just under half of Universal customers currently do not have a balance on their cards. That means that AT&T is spending money to service those accounts but getting almost no revenues in return.

A buyer might be able to revoke the no-fee-for-life pledge--but AT&T is stuck with it.

As AT&T slinks off the stage, other players are starting to clean up the debris. Many are adding new fees, particularly for premium cards, such as the platinum ones that offer a plethora of services. However, consumers who have been deluged with low-rate, no-fee credit-card offers over the last several years may well keep up the old habit of shopping around for attractive come-ons. It won't be easy for other card issuers to shake the effects of AT&T's brief career in their business.

Before it's here, it's on the Bloomberg Terminal.