Credit card issuers, like many other financial-services companies, have greeted the Internet revolution not only with a profound sense of opportunity but also with a vague feeling of dread. For they know that their traditional business model—in which they earn 65 percent of their revenues, net of the cost of funds, from cardholders paying high interest rates—will probably come under severe pressure from on-line competitors.1 The on-line entrants do enjoy certain advantages over incumbents: they often use state-of-the-art technology, historically have lured employees with stock options, and can afford to spend large sums of money acquiring customers without worrying about how that could affect this quarter’s earnings. Yet incumbents too have strengths, arising mainly from their dominant brands and large scales. If they move quickly, the ultimate winners might emerge from either camp or from both.
Curse or blessing?
To be sure, the incumbents’ fears are founded in reality. Consumer financial services are, for many people, commodities; one survey, carried out by McKinsey in 1999, found that 73 percent of the people who thought about applying for credit cards on the World Wide Web did so in hopes of securing a lower financing rate. Clever pricing strategies, such...