Is proactive credit card marketing fair?
Credit card providers have been faced with a problem over the past few years: how can they keep customers, hard won with introductory offers such as rewards and 0% deals, spending and prevent them from switching?
Their solution? Proactive marketing.
We take a closer look at the practice in this guide and find that proactive marketing campaigns aren't always the jackpot for cardholders that they claim to be.
What is proactive marketing?
The official definition of proactive marketing is simply advertising goods and services at a time and place where specific, potential customers are present.
This could be on a search engine where adverts are targeted at users dependent on their search terms, for example, or letters sent to specific consumers.
Most consumers only take credit cards after having been "worn down by continual marketing" like this, a Financial Conduct Authority (FCA) report released in April 2014 found.
In this article, however, we're using a more specific definition: advertising services and offering rewards to current customers to encourage them to use their existing products more or to take out more borrowing.
For example, in June 2011 Nationwide offered its customers a reward, crediting their accounts by £20.
This all sounded very nice but their generosity turned out to have quite an enormous hole in it.
A customer could only keep their reward if they spent £1,000 during the next two months.
If this didn't happen, the £20 would be removed, with potentially disastrous consequences.
The campaign was effectively encouraging customers to spend more, and perhaps beyond their means, to grab that £20 reward.
Similarly, credit card reward sites encourage cardholders to spend on the bank's card in return for shopping discounts.
These discounts aren't always very good value, however, see more on this here.
More balance transfers
Another example of proactive marketing was seen just a few months ago when Halifax launched a 0% super balance transfer offer.
The 0% rate was valid for nine months, effectively offering customers an interest free period of credit card borrowing.
A free balance transfer is no bad thing, surely, for those who have high interest credit card debts elsewhere which could benefit from being paid off at a 0% rate.
But by making the offer a super balance transfer, which allows cardholders to move the card's credit limit to a bank account and access the borrowed cash, Halifax are, like Nationwide, also effectively promoting easy access to vastly increased borrowing.
More of everything
Credit card providers have also been known to promote their other services through proactive marketing.
A few years ago, Barclaycard sent out a letter to their customers promoting the use of cash withdrawals on their credit cards.
They even extended many of their customers' credit limits without their knowledge to encourage extra cash spending.
However, these withdrawals had a 27.9% p.a. variable rate on them plus a handling fee, extremely costly for any customer.
A Lloyds TSB campaign also created a few waves in 2009 by encouraging some of its customers to gamble with their cards.
The bank seemed to ignore the fact that credit cards charge the same high fees for cash as they do for any gambling transaction, as well as the risky nature of the activity itself.
This campaign even managed to ruffle a few feathers in the House of Commons since Lloyds TSB is a state-owned institution.
All in all, as they gain more information on consumers so the number of ways providers can target adverts increases.
Why do credit card providers sell 'proactively'?
But if these campaigns have been so unpopular in the past and have caused such a mass outcry, then why, you may ask, do credit card providers continue to use these techniques?
Well, as unsavoury and underhand as it may appear to many, there's a simple reason: proactive marketing does work.
In fact, according to research undertaken by research and consultancy firm Celent, the providers most successful at clinging on to customers are the ones undertaking proactive marketing campaigns.
And holding on to customers is becoming more and more difficult, as such a high number of credit card holders jump between card deals.
The big question: is it fair?
The huge outcry over previous campaigns seems to suggest that proactive marketing isn't fair and many people feel strongly against it.
The act of doing something without customer permission or even knowledge, e.g. increasing a credit limit or placing a 'carrot' £20 into an account, has particularly enraged those targeted.
This can easily disrupt the finances of someone on a tight budget, causing them to spend beyond their needs without the knowledge that they have even done so: the same argument has been made with regard to reward cards offered to those with poor credit ratings.
Some proactive marketing campaigns also undoubtedly encourage reckless spending in those who may not be financially stable.
A case in instance, during the Lloyds TSB gambling promotion, a letter was sent to a customer on £12,000 a year telling him to gamble with his card, and the credit limit on the card was increased.
This proves that although many banks argue that they only target those who have healthy finances, in this instance that certainly was not the case.
However, it is also true that we tend to only hear about the major, and most worrying, proactive marketing campaigns that have made the headlines over the last few years.
There are plenty of campaigns that point out new and beneficial services to their customers rather than enraging them.
And in a way, the really unfair proactive marketing campaigns are self-regulating: a truly irresponsible campaign can have the opposite effect to that intended since, under the Lending Code, customers should have a right to unsubscribe from promotional material if they want to and that option to unsubscribe should be offered alongside any other promotional material as well as in account application forms.
Indeed, both the Nationwide and Halifax promotions mentioned above certainly backfired as both banks not only lost current customers but discouraged many potential ones with their campaigns.
All in all, proactive marketing is worth being aware of but it's not always as unfair as it can appear.