Change the Way You Create Value

The financial services industry did it by rethinking credit cards. What do you sell that you need to rethink?

By Rita McGrath

Posted on Dynamic Strategies: June 27, 2008 10:51 AM

Executives often complain that politics, embedded systems, and processes make it hard for them to combat new competition that comes into their industry and competes with a different business model. Yet, there are plenty of examples of companies doing a great job innovating in their business models—changing what we call the "unit of business." Consider these examples from financial services, an industry in which innovation is notoriously difficult.

Example #1: The photo-bearing credit card. In 1994, Citibank was the first financial services organization to offer its customers the opportunity to put their photographs on its credit cards, an offering that was marketed as the Citi® Photocard (Citibank Corporate Website, 2006). This was marketed primarily as a security technique, making it more difficult for criminals to falsely charge stolen credit cards. The cards proved unexpectedly popular in places like Florida, New York City, and Chicago. It turns out that in locations in which many people don’t carry a drivers' license, the photo feature of the credit card was accepted by many merchants as an alternative.

Example #2: The VISA Buxx Card. Visa Buxx, launched in 2000, is a debit card developed for teenagers and their families. The idea is that someone who earns an income (i.e., mom & dad) transfers money from their own credit cards or bank accounts to the teen's card (up to $1,000). The teen can then spend it on all of life's essentials (or inessentials, say mom and dad), up to the limit of their budget. That alone is a terrific idea—parents can get their teens the convenience and flexibility of a credit card with some sensible limits built in. At the same time, the teens learn budgeting skills and can use the card when traveling, for instance, which is safer than carrying cash around.

It gets better. If the parent transfers money from a different bank than the one issuing the Buxx Card, a small transfer fee is assessed to the parents' card. A desire to avoid the fee in turn leads some customers to open a new, no-annual-fee account with the sponsoring bank. It actually happened to me—I'm now the proud holder of a Wachovia VISA card because that's the one that funds my kids' BUXX card. A much better solution than sending them off to college with credit cards in hand.

Example #3: The "keep the change" debit card. Bank of America has come up with an imaginative twist on the conventional debit card. Here's how it works: The customer uses a debit card to make a small purchase (say a cup of coffee). It costs $1.50. The bank will round the purchase cost up to the next dollar (in this case $2) and put the value of the rounded amount into the customers' savings account. Moreover, the bank will put a bonus of 5% of the saved amount on top of the savings, up to a total of $250/year. As of this writing, the program has been credited with attracting 2.5 million customers in less than one year, to open more than 700,000 new checking accounts and one million new savings accounts. These customers also "churn" less than typical customers. BOA estimates their retention rate at 95 percent.

What's the bottom line? Sometimes there is a lot to be gained by rethinking where you create value and what you sell.

Provided by Harvard Business—Where Leaders Get Their Edge