Chase Cardmember Services (CCS), the credit card-issuing business within financial services conglomerate J. P. Morgan-Chase, found itself at a critical juncture at the dawn of the 21st century. Faced with an array of converging forces, both internal and external, CCS would have to redefine itself if was to survive going forward. The prior fifty years had seen the emergence and growth of the of credit card industry.
The concept began as an issuance of a deferred payment plan (a line of credit) by retailers to their favored customers for purchases on those retailers’ goods and services–to be tracked on an imprinted card, each with unique information on it (per customer). Banks got hold of this concept, began issuing credit cards, and thus, the industry was born. Industry Analysis: As with any emergent industry, the nature of the credit card and its offerings rapidly diversified and segmented. Companies employed a number of differentiation strategies.
American Express famously introduced a variation called a ‘charge card’, in which no revenue was earned on debt, but rather on higher annual fees. This appealed more to business-people and travelers. DiscoverCard led the trend of adding value-propositions, by granting rebates on purchases with the card. Another such example would be co-branding, in which a credit card issuer affiliates itself with a company, such as a flight company, and offers customer rewards on spending towards the company (in the form of airline miles in this case).
A company like Capital one differentiated itself by seeking out the low or subprime market (high risk) segments, which most credit card issuers had ignored, and demonstrated that it could be profitable by slightly modifying the product (Secured Cards). As soon as the capacity for electronic billing arose, credit card companies immediately filled the niche, providing added convenience to the customer by having bills sent and paid-for online.
In fact, the Internet afforded an array of new opportunities, as the segment of those who shopped online expanded enormously. Examples include, aggressively marketing on high-traffic websites, particularly those designed for online purchasing; plus, digitally enhanced cards that facilitated the input of payment information online. Eventually, government regulation would provide a major restructuring of the financial services industry in 1999 through the passing of the Financial Services Modernization act.
It essentially dissolved the legal separation between the securities and banking industries, which kick-started a massive wave of mergers and acquisitions between financial institutions. Additionally, the fact of globalization opened a new arena of markets for credit card companies world-wide, and many of the larger financial groups with credit card-issuing subsidiaries were keen on establishing global presences. By the close of the 20th century, after decades of growth and steadily rising demand, the credit card industry was entering its maturity stage.
Differentiation in the areas of products, market segments, technology, and customer services had nearly saturated the market, and most importantly, legislation (see above) precipitated the consolidation of the industry amongst a few big players who collectively had a substantial market share. The smaller to mid-sized credit card issuers were being absorbed by the larger conglomerates, who competed with one another for market dominance.
It was therefore critical that a particular cc issuer became the card of choice for customers, and cost leader strategies were used to entice customers, including (unprofitably) low interest rates. As important was retention of these customers, and so the remaining big players battled fiercely to lock customers in with added value propositions. Strategic Issues: Chase Cardmember services had become one of lone standing credit card issuing firms through the period of massive consolidation, after the commercial bank Chase Manhattan merged with J. P. Morgan, primarily an investment bank.
It had now a number of strategic issues to consider moving forward– * CoBranded Cards- As was a common strategy for cc issuers for decades, CCS had arrangements with various companies, including Shell, Walmart, and Verizon, in which customers would reap mutual benefits from both the CCS and the affiliate company for card purchases on the company’s products. CCS had to decide whether this arrangement would continue to be worthwhile. * Financial Services Conglomeration-Due to the rapid consolidation of the industry, CCS had become part of J. P. Morgan, which was foremost an investment bank.
As a result, CCS would now have to bid competitively for company resources within the corporation’s larger investment agenda. * Geographic Scope: CCS certainly aimed for continued growth, as all companies would, but it had to decide where to grow. It could either continue to grow more reliably within the US, or choose to expand internationally, where the scope for markets growth could be much greater. * Firm’s Relative Strengths: By far, the firm’s greatest strength was its size and scale. Having emerged from the major absorption period still intact, it was now only stronger and larger.
The industry was reduced to only a few major players, and having a well-recognized investment bank like J. P. Morgan as its partner would only strengthen its brand. It could now leverage significant capital from its partner (parent company) to create endless new branches, develop its technology, and extend its channels within the US and possibly abroad. Alternatives and Analysis: 1. The strategy behind co-branding was for a card-issuer to leverage customer loyalty to a certain brand, and reward customers with benefits for usage of the card towards that brand.
The objective was to create a win-win situation for the card-issuer and the branded company. For example, issuing the Shell card made customers already partial towards Shell gasoline even more incentivized to buy from them, since CSS promised rewards like rebates on purchases of Shell products. Shell would get the benefit of exclusive business from Shell cardholders, while CSS would now be preferred as the card of choice for loyal customers of Shell. The problem with this strategy is that it tended to appeal to the less profitable customers. Customers were usually one of two types.
There were those who used the card often, but they paid off their monthly bills on time. These were called transactors. Then there were customers called revolvers, who would incur outstanding debt by failing to pay the monthly balance on time, and interest on this outstanding debt is how credit card issuers would earn much of their income. Co-branding usually attracted transactors, and as a result, this arrangement was just not producing the revenue CCS had hoped. 2. The benefits of having a prestigious investment bank like J. P Morgan become its parent company are obvious and enormous.
CCS brand equity would surge, along with its reach and access to prime resources, including land (locations), capital, and recognition. But there were disadvantages as well. J. P. Morgan was primarily an investment bank, and investment banking would be its number one priority. This meant that there would be added pressure on CCS to perform, since as a commercial bank, it becomes a more dispensable subsidiary to the overall corporation. CCS would have to continue to grow to sustain itself, and yet, it would essentially have to compete for its funding with the J.
P Morgan’s other financial functions in order to grow. It was very possible that CCS could be sold off if it did not continue to acquire portfolios and remain profitable. 3. In terms of where to expand, the global frontier was certainly an option for CCS. J. P. Morgan and Chase were well-recognized international firms, and continuing consolidation abroad meant that there were still quite a few portfolios that could be absorbed. The one setback to this strategy was its rivalry with Citibank.
Citibank had been the other major conglomerate to emerge after the consolidation period, and was absorbing portfolios at a competitive rate. CSS was not experienced in international commercial banking, and Citibank was certainly stronger on the global front. The alternative to this avenue of growth was to focus solely on domestic expansion. This was clearly the more feasible option since CSS already had the commercial banking infrastructure in place. As long as Citibank devoted itself to primarily international growth, CSS would be the dominant player in the domestic scene.
The likelihood of a competing bank being able to enter the industry and draw business away from CCS was small. J. P. Morgan-Chase was connected to every major company in the US in one form or another, plus it could depend on its existing, loyal customer base. The only legitimate threat was just in case Citibank decided to refocus itself in the domestic sphere. That would bring CSS’s number one rival back into direct competition, and change the dynamic entirely. Recommendations: I would recommend that CSS should either abandon or somehow reinvent its co-branding strategy.
With the added pressure it has now to perform, it cannot afford to spend resources or employ strategies towards unprofitable pursuits. Clearly, it’s the ‘revolving’ customers from which CSS draws the most revenue, and any product or plan that does exploit these customers should be dispensed with. A possible solution would be to change the means of revenue from its customers. For example, instead of earning income from interest on outstanding debt, it could charge higher annual fees, like some other credit card issuers do. But that would likely alienate existing customers.
Geographically speaking, I think it makes more sense for CSS to look to grow in the domestic market. While it may be passing up an opportunity in the international arena, it can stay safely away from its rivalry with Citibank, which poses the number one threat to CSS’s business. CSS has the strongest national presence, and only looks to be getting stronger with J. P. Morgan now backing it. Citibank would have the head start globally if CSS chose to venture there, and so a move to expand there would expose too much risk to CSS, which is already on somewhat shaky ground within its own conglomerate.