From Smart Money Magazine
Consumer Action
Playing Favorites
By Aleksandra Todorova

THE HOTTEST TREND in credit cards these days is rewards programs. Customers are racking up free travel, gift certificates — even free Starbucks coffee — simply by paying with plastic. For those who use a no-fee program and pay off their balance each month, it's one of those rare cases where the lunch really is free.

But some cardholders are getting a decidedly tastier lunch than others are getting — even within the same rewards program.

I've experienced this first-hand. My boyfriend and I have the same rewards card: BankOne's Amazon.com Visa, which allows us to earn three points for every dollar spent on Amazon.com and one point per dollar spent everywhere else. That's not our only financial similarity: We're also both in our 20s, pay our credit cards in full each month and are free of all other types of debt. Our bank accounts are combined and together we rent an apartment.

Despite these similarities, it seems that BankOne has developed a liking for me. A couple of months ago, I received a letter telling me that for the next year I would earn double points when using the card with certain retailers, including supermarkets, drug stores and restaurants. My boyfriend didn't get the offer.

A BankOne spokeswoman explained that I have been selected for a targeted promotion sent to certain BankOne card members. She would not comment, however, on the specifics of how those cardholders were selected. I figure the added incentives could earn me an extra 10,000 points over the next year at the very least. (And that's just based on the extra points I'd get for the groceries I buy anyway.) That's an extra $100 or more in Amazon.com gift certificates. (Cha-ching!)

BankOne isn't the only creditor using such targeted promotions. Pam Schwartz, a 32-year-old Web designer in San Diego, carries the same Providian card as her husband. But while he was given the opportunity to enroll in one of the lender's rewards programs for free, Schwartz was offered the option to enroll in that same program for a $49 annual fee. "It makes no sense," she says. "My history with them is better than my husband's, but he gets all the cool stuff."
Susan Ehrlich, a senior vice president of marketing at Providian, says certain Providian rewards programs are indeed offered to customers at different costs. "You see stronger usage among customers who pay an annual fee because they're involved. They see enough value in [the rewards program] to pay the fee," she explains. "But it's a disincentive to apply," Ehrlich concedes. So who gets the perk? That's determined by analyzing customer characteristics, such as spending patterns, she says.

Targeted marketing is nothing new in the credit-card business. And given the industry's emphasis on rewards programs, it's not surprising that a targeted approach would be applied within specific rewards programs, say industry experts. With the number of solicitations for rewards cards growing steadily (55% of all card offers in April 2004 had a rewards program attached, according to Mintel's Comperemedia, which monitors direct-mail solicitations nationwide), this is the card companies' latest way of encouraging customer loyalty. And as always, some card holders need a bigger carrot dangled in front of them.

"Loyalty programs have become an expectation on credit cards," says Gail Sneed, market development director of financial services at Maritz Loyalty Marketing, which develops loyalty programs. "So in order to differentiate themselves from another credit-card company, loyalty programs have to be very specific to be able to draw an audience. What we're seeing is just the beginning of segmentation [within rewards programs]."

Another cause for this segmentation is maximizing wallet share, according to Kelly Hlavinka, director of consulting services for Frequency Marketing, which designs loyalty programs. With the average American walking around with at least seven credit cards, according to CardWeb.com, it's not unlikely that two or more cards would come with some sort of rewards program. "The credit-card companies want their customers to pull their card out for most — if not all — of their purchases," Hlavinka says. And they realize that may take added encouragement.

So who gets the special treatment? That depends on the objective of the card company, explains Bruce Cundiff, an analyst at JupiterResearch. Naturally, companies want to reward what they consider their most profitable cardholders, so while some companies are looking for high volume and target the cardholders who spend most, others go after cardholders who carry a balance and pay the most interest.

Or, it could be just the opposite. For example, for some of its promotions, Providian targets card members who use their card infrequently, regardless of which card or rewards program they have. "If we see that a customer has a lot of potential based on their credit line, and we don't see them actively using our card, it suggests that we may be the third or fourth card in the wallet," says Providian's Ehrlich. "That's not the position we want to be in, so we're making extra incentives available to make the Providian card top-of-wallet."

Just how widespread these promotions are is unknown. "You don't see ad campaigns," says Cundiff. "It's really kept under wraps and reserved as a [preferred] benefit." That said, when it comes to designing the promotions themselves, the more targeted they are to the cardholders' needs or interest, the more effective the campaign will be, according to Sneed. Even demographic characteristics like age, income and geographical location come into play.
"When we find that a customer has three kids that are ages six, 10 and 17, for example, we may send them specific offers at Toys 'R' Us for the six-year-old and back-to-school promotions where you earn extra points during back to school time," Sneed explains. "Or we find out that one customer is an outdoor enthusiast, so we send them offers for special-reward items like tools for fishing and hunting."

To obtain this sort of personal information, the card companies monitor spending patterns and reward-redemption history, and often mail out surveys to their cardholders, according to Sneed. Some programs also often test a certain promotion before they roll it out for a larger segment of their members.

"If we want to determine the level of interest in a certain category of spending, we offer a promotion," says Molly Faust, vice president of corporate affairs at American Express, which pioneered the development of targeted promotions. "If we find there's particular interest in home improvement, for example, we could provide bonuses for that category to help [the selected groups of card members] earn rewards more quickly. We find they appreciate it," she says.

While some customers will certainly appreciate the extra points, others don't enjoy having their credit-card company look over their shoulders. "Some people...worry about the whole Big Brother thing," says Robert McKinley, chief executive of CardWeb.com. But, he adds, with the credit-card market being so saturated, it's a logical step for companies to take. "You want to develop [your customer base], and the best way to do it is by tailoring the card as best as you can to the way that the customer is really using the card," he says.

For what it's worth, the new tactics seem to work. Schwartz says she and her husband mostly use his Providian card now and are getting free gas and other perks, while her card sits neglected in her wallet, since she never signed up for the $49-a-year offer.

And as I slap down the plastic every day to buy my morning coffee from the local supermarket, I suspect next month's bill will be so thick, it will be delivered in a box. But I'm already planning on how to spend those extra rewards.