How the Internet Finally Reshaped the Credit Card Business

Back in the early 2000s, it was considered risky for credit-card companies to lean heavily on their websites to sign up new customers. The perception was that people who were scouring the Web for credit offers tended to be desperate and unreliable.

"The Internet bank is really like the new bank that opens in a small town," then-Comptroller of the Currency John Hawke Jr. said in 2002. "Every time a new bank opens, the first people in line at its doors are the people who were turned down for credit at every other bank in town."

How times have changed.

Since the Great Recession, the nation's largest credit card issuers have turned sharply away from their traditional enrollment methods, including direct mail, in favor of online sign-ups. The shift has coincided with a years-long stretch of historically low credit losses, and no one sees it as a risky gambit anymore.

For the card companies, the danger of attracting less desirable customers has fallen because of improved targeting of specific consumers, according to experts. At the same time, the online channel means lower customer-acquisition costs for issuers, as well as new opportunities to interact with card holders on an ongoing basis.

"Once you get them to come in through the Internet door, the goal is to keep them there, and keep them engaged," said Brian Riley, a research director at the advisory firm CEB TowerGroup.

"We figure that by about 2017, you're going to be seeing about 60% of applications coming through this channel," he predicted.

Even today, the online channel's rapid growth has reshaped the card industry.

Last year at JPMorgan Chase, 56% of card originations came through a website, up from just 29% three years earlier, according to a company presentation earlier this year. Most of that growth came at the expense of account openings in a branch or through the mail.

U.S. consumers still receive plenty of card offers in their mailboxes. But the percentage of mailings that result in customer applications has fallen sharply, according to industry consultants. And the costs of printing and postage add up.

By 2013, the card industry's direct mail volume was 49% lower than it was eight years earlier, according to data from Mintel Group.

In one sign of how perceptions have changed, Capital One Financial Chief Executive Officer Richard Fairbank described direct mail as "the Pony Express" during an investor presentation last year.

American Express President Ed Gilligan noted the same trend at a conference in February. "If you look back 10 years ago, we were predominantly a direct mail company. We are now predominantly a digital company."

Referring to direct mail, credit-card industry consultant Robert Hammer said: "It's just unsustainable as a major source of customer applications."

The large issuers' strategy today relies partly on driving traffic to their websites with TV ads. Viewers will notice that credit-card ads on TV these days often include a prominent web address. Another piece of the strategy involves online ads that are targeted to consumers who fit the customer profile the issuers are looking to enroll.

The card issuers want to drive traffic directly to their websites, rather than relying on aggregator sites that get paid a commission for referrals.

Once customers enroll online, the issuer has a better chance of weaning them off paper billing statements, which is another cost saver. It also becomes easier to engage with cardholders on an ongoing basis, through rewards offers and other promotions, which promote more frequent use of the card.

"That entire relationship has in some ways migrated online," said Mike Taiano, a banking analyst at Burke & Quick Partners.

And there's another advantage for card companies: the speed with which they can respond to changes in the marketplace. If one issuer changes the terms of an offer, competitors can respond immediately, rather than waiting for the time it takes to print and mail fliers.

The benefits of the shift online are accruing primarily to the largest card issuers, analysts said. The credit card industry was already top-heavy, but it has become harder for smaller banks to keep up, as the largest firms make bigger investments in their web presence.

"You can bet that the major banks have invested a lot of money in getting their act together," Hammer said.

The large issuers' view of the Internet has turned 180 degrees since the demise of NextCard Inc. in 2002, before the rise of more sophisticated, targeted online marketing. NextCard had hoped to attract high-quality borrowers online, but went belly-up after regulators became concerned about high credit losses.