Digital Matters - Issue 40

"Uni-Card is only part of the hurricane bearing down on the credit industry."

I have many cards in my wallet. There are three credit cards, one debit card, two grocery-store cards, four airline cards, two health- and dental-insurance cards, one rental-car card, two department-store cards, two phone cards, and a health-club membership card. I'd carry many more if I could. But I need room for my driver's license and my Fast Company business cards, so I leave the rest at home.

What I would like is a "Uni-Card": one piece of plastic with a smart chip in the middle that would house all of my data, securely, in one place. It would be nice if the chip were removable, so that I could insert it into my cell-phone or my PDA in the event that I needed to transact business wirelessly. Eventually, I would also like to have all of my genetic data (and all of my children's genetic data) on a Uni-Card to help ensure our safe passage through the health-care system.

The question is, Why don't I have something like a Uni-Card now? Why hasn't it been offered to me by an industry leader like American Express, MasterCard, or Visa? The answer is — well, the question is the answer. Which is to say that American Express, MasterCard, and Visa are stuck in a legacy model that they are doomed to protect. They can't afford to offer a Uni-Card because in order to do so, they would have to install an entirely new operational system, enter into a host of nonexclusive agreements, and, in the process, produce negative quarterly results for at least one year and probably two.

Imagine for a moment that you are standing before the board of directors of American Express, and you say, "I have an announcement to make: I've decided to lose money for the next four to eight quarters." How long before the board throws you out the window? Ten minutes? Three minutes? Instantly?

The good news is that a consortium of new- and old-economy companies will soon be introducing something very much like a Uni-Card. Of course, they don't call it that. They call it a "joint company to deliver smart card-enabled security products and services for e-business payments and identity protection." And that's what it is — for the moment. But what these companies have in mind, what they are working toward, is the Uni-Card: one card containing all of your data, encrypted and password-protected — for whatever you might need, whenever and wherever you might need it.

Now, I know what you're thinking: How are they going to do that? Visa is everywhere you want to be. MasterCard is ubiquitous. American Express has a global network and "membership rewards." How can back-office, no-brand-name companies compete with established brands like these?

Here's the E-Z test. Walk into any retail operation, buy $100 worth of stuff, and ask the following question: Instead of paying a $0.25 transaction fee on that $100 purchase, would the store rather pay a $2.50 fee (in the case of MasterCard), or a $3.25 fee (in the case of American Express)? Then walk into a car dealership and put $3,000 down on the acquisition of a three-year lease. Ask the car dealer how a $0.25 transaction fee stacks up against a Visa fee of $75. So much for established brands. It's a cents-on-the-dollar no-brainer.

Many companies are involved in the development of the Uni-Card, but the key player is First Data Corp. First Data processes 250 million credit- and debit-card transactions every week. It serves more than 2 million merchants, 1,400 credit-card issuers, and millions of consumers worldwide. In concert with Certicom, Compaq, CyberSafe, InterWorld Corp., and Transaction Systems Architects Corp., First Data is building, piece by piece and under the cover of e-commerce, a smart card for all kinds of commerce and all kinds of customers.

The hook for First Data will be that 25-cent transaction fee. The hook for consumers will be Uni-Card's convenience, encryption technology (privacy protection), and competitive interest rates. The combination of just those two hooks alone will transform the credit-card industry. American Express, Discover, MasterCard, and Visa will have to cut their transaction fees to compete, which in turn will cut their revenue streams, which will cause Wall Street and member banks to get ugly. Transaction fees — a key link in the value chain that has sustained these enterprises for as long as anyone can remember — will deconstruct right before our eyes.

Uni-Card is only part of the hurricane bearing down on the credit industry. Consumer-advocacy and small-business-advocacy companies will also have a huge impact. To give you some idea of how important these companies will become, consider the following arithmetic. Roughly speaking, the average American family spends one-third of its annual income on living expenses; one-third on local, state, and federal taxes; and one-third on interest payments (mortgages, credit cards, car loans, student loans). The average small business (and small businesses are the engine of economic growth in North America today) also spends a healthy chunk of its revenue on interest payments of various kinds, such as business loans and leases. Altogether in the United States, there are roughly 140 million active credit profiles — which constitute a total of $8 trillion in consumer debt.

At the moment, both consumers and small businesses are being bombarded with appeals from lenders and lessors. Credit providers spend roughly $36 billion trying to attract and acquire consumers. Just last week, my wife and I received 10 credit-card solicitations, 2 phone-company solicitations (AT&T's being the more desperate), and 3 home-equity come-ons. Small businesses — particularly those that are growing really fast — are inundated with appeals for various credit services every day.

What all of this adds up to is a fantastically inefficient marketplace for credit. Credit providers spend $25 to $40 for leads — which often are nothing more than lists of various consumers. Consumers are bombarded with endless and often misleading appeals for credit. Women, in particular, are targeted for high-interest cards. Small businesses are conned into entering leases that are more expensive than outright purchases. Overall, interest rates are exorbitantly high. Like telephone marketing of yesteryear, the whole credit marketplace seems to thrive on confusion and disorienting amounts of contradictory information ("low introductory APR" in bold type, "18.9% interest after six months" in tiny type on the back).

What's missing from this picture is a service that works for both provider and consumer, but that sides with the consumer. There is exactly one such service in existence today: CreditMinders.com Inc., an Internet startup being incubated by GSD&M, an Austin-based advertising agency and marketing consultancy. Listen to Bill Hillestad, founder of CreditMinders, and you can hear how the credit marketplace will change in the years ahead.

Hillestad is a man on a mission. Having worked in marketing, owned part of a leasing company, and been an active player in the credit market, he knows only too well the social cost of a dysfunctional credit market. He created CreditMinders to change the rules of the game: He wanted to use the power of the Internet for the benefit of creditors.

CreditMinders, explains Hillestad in the company's executive summary, is a "free, membership-based, online, personal financial service provider and infomediary. The company's business model features a consumer advocacy, customer-to-business structure which provides consumers free access to their credit report, and a host of automated services designed to optimize their credit rating, minimize their interest expenditures and maximize their discretionary income. These services include a personalized credit-report analysis, which helps members to create the optimal credit package, content for the members to help them understand and manage their debt, and a stored credit package that may be anonymously submitted for offers to the entire universe of credit providers."

The beauty of the site is that it dramatically minimizes the cost of lead generation for credit providers. As noted previously, credit providers today spend anywhere from $25 to $40 per lead. (A large part of TRW's business model depends on this revenue stream from lead generation for credit providers.) CreditMinders charges a fee of roughly $1 per lead, and the leads come from people who have signaled that they are in the market for some kind of credit, be it a car loan, a home-equity loan, or a student loan. Offers are tendered anonymously through CreditMinders until the consumer or small business decides to deal direct. At that point, CreditMinders steps out of the way (having picked up as many as 25 offers for a single customer and about $25 in fees from lenders), and the consumer and the credit provider hash out the deal.

One million members making four credit inquiries a year equals $100 million in revenue for CreditMinders — and a significant cut in the cost of lead generation for credit providers. The better job CreditMinders does providing consumers and small businesses with high-quality information and connections to high-quality lenders, the more enthusiastic consumers become about the service. The more consumers who sign up with CreditMinders, the more revenue CreditMinders generates to provide consumers with ever better service. This, friends, is what we call a "virtuous circle."

It's possible that CreditMinders won't work. It might be mismanaged, or it might burn too much money in startup mode and cause investors to shut it down, or its servers might crash and burn — who knows? But the problem is real, the opportunity is huge, and the model absolutely works. CreditMinders — or something similar to it — will exist, it will work, and it will ultimately change the credit business forever.

And when that company does work, it will then turn to insurance and other financial services, and revolutionize those industries as well. The net effect, as in the case of Uni-Card, is that the consumer will be better served and that the value chain of the credit industry will be torn asunder and reconstructed along lines that are much more favorable to the creditor.

New-economy enthusiasts say, over and over again, that we live in the age of the consumer. That is true. But it's not nearly as true as it is going to be. For as long as anyone can remember, only the very rich have had any power in the credit market. All of the information, all of the money, and all of the control have been in the hands of bankers and credit companies. Uni-Card and CreditMinders are the vanguard of a whole new order in a multitrillion-dollar marketplace. More power to them. They deserve the credit.

John Ellis (jellis@fastcompany.com) is a writer and consultant based in New York. Contact Bill Hillestad by email (weh@creditminders.com).

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