Dennis Alter, CEO of Advanta, wants entrepreneurs to take the credit. After all, what better way to make a professional impression on a vendor than to pay with a personalized credit card?
So when vendors swipe Advanta’s small business credit cards, Alter doesn’t mind if they gloss over his company’s logo, which is discreetly positioned on the back of the card. He knows his customer base appreciates the positive PR from personalized credit cards.
“How impressive,” vendors think, noticing a name other than that of Advanta, a credit card company with $4.9 billion in managed assets and more than $394 million of combined interest and noninterest income. It is one of the nation’s largest issuers of small business credit cards.
But why pass up an opportunity for face-time why draw attention away from the Advanta name?
“We’ll take the customer’s brand,” Alter says.
Advanta might be at the top of its game in the commercial card sector, but its strategy is very different from that of its competitors. Doling out customized cards is one way it deflects customers from applying for cards with the usual suspects the big-name giants that reel in consumers with gimme promotions.
“Citibank or Chase would not do this because they have their brand to protect,” Alter says. “They want millions of people to take out their credit cards that say Citibank or Chase. That is their strategy. We put the customer first.”
Advanta is more of a boutique company its cards target entrepreneurs, homegrown businesses and small-scale organizations with fewer than 10 employees and less than $3 million in revenue. Meanwhile, its competition includes credit card heavyweights with billions of dollars in revenue, and it must compete against them in a temperamental industry where no one gets all of the business.
Advanta wins big by thinking small. Focus, relationships and industry-specific perks position Alter’s family business in the lead at least for today.
“I’ve been CEO for 33 years,” Alter says. “The environment certainly has changed in three-plus decades, and depending on how rapidly you can adapt to your environment generally determines how successful you are whether you are a victim of consequences of the environment or whether you embrace it.”
Alter’s first exposure to Advanta Corp. was as a young boy. Then called TSO Financial, the company started by Alter’s father in an extra bedroom provided individual, need-based loans to schoolteachers.
Alter’s role in the family business evolved as Advanta outgrew its homegrown headquarters, expanding exponentially by the time he left his teaching position in the Philadelphia city school system in 1969. When he was named CEO in 1971, Advanta (still TSO until 1988) had 30 employees, still served mostly teachers and was licensed only in Pennsylvania, Florida and Delaware. The business only provided fixed-payment loans; it didn’t own a bank and it wasn’t involved the mortgage or financing business.
It was simple, with a focused strategy, much like it is today.
But before it attained its streamlined structure the small-business niche Alter prefers Advanta had ballooned to $25 billion in managed assets. In the early 1990s, when revenue and assets were at an all-time high, 7 million consumers had Advanta cards.
Advanta was one of the giants, though still a minor player considering the trillions of dollars other banks held in assets. It was running with the bulls, and its survival depended on the economy, prime rates and the latest promotions.
“We had the sixth-largest consumer credit card business in the country, and there was tremendous consolidation going on in the industry,” Alter says.
The pressure prompted Alter to start thinking small. At the time, Advanta’s 50,000 small business customers were overshadowed by Advanta’s strong consumer customer base. In that, Alter saw opportunity.
“We had this little small business sector a tiny tail of our consumer business,” Alter says, describing the seed that started what Advanta is today. “In looking at the competition and consolidation, we determined that no one else was going to offer a small business credit card. None of the issuers at the time were doing that not Citibank, Chase, Bank of America.”
Advanta sold its consumer market business and its assets to focus on the small business niche. And for a while, it was the only credit card company in the small business market.
“We saw a market that was untapped, highly fragmented, not saturated with marketing and direct mail, and the big guys were overlooking it,” he says.
The bad news was that you can’t lock competition out of opportunities like that for long.
“After four or five years, the competition said, ‘Look at this market. Look at what Advanta is doing,’” Alter says. “And they all dove into it. We now compete against all those same banks, and it’s tougher now.”
Advanta’s strategy to simplify has its disadvantages. The competition has stronger brands and a larger fiscal footprint with thousands of branches and services, ranging from inventory financing to letters of credit. Advanta has none of this.
“There is brand and size, so they have a lower cost of capital than we do,” Alter says. “And we are specialists. We only offer a credit card to only small businesses around the country.”
But don’t mistake Alter’s realism for pessimism. An adapt-or-fail mindset defines his competitive strategies. The sheer scope and dollar power of his competitors could overwhelm him but instead, Alter considers ways to dart out of their shadow.
Modest-sized companies, after all, are more nimble more capable of innovation, creative marketing strategies and developing close relationships with customers. And targeting small businesses is natural for Alter.
“We embarked a number of years ago on a strategy of building a business based on attracting and deepening relationships with profitable, high-credit quality small business customers,” Alter says, noting that Advanta closed the third quarter with a 92 percent year-to-date increase in its number of new customers compared to the same period last year.
But Alter also recognizes the nature of credit card users. They are fickle, and they will always want more than one.
“People will not want to have all of their business with one financial institution because they do not want one institution to have the keys to their kingdom,” he says.
This gives Advanta an opportunity to attract customers with innovative perks.
“We can zig and zag,” he says. “And that is what we do.”
Strength by numbers
Customized credit cards are one point of differentiation, but there are other ways Advanta bobs and weaves out of the limelight of the large competition. This specialization of targeting only small businesses affords Advanta opportunities to really mine its customers for information. Where do they shop? What perks will appeal to them?
For example, Alter knows from Hanley-Wood research that there are approximately 800,000 business owners who check the box next to “construction small business” when filling out employment surveys. And Advanta owns close to 10 percent of this market.
“We identify [construction customers] through our analytics, so when we mail information to them, we have ancillary products and services that might appeal to them,” Alter says.
A partnership with Hanley-Wood publishing allows Advanta to offer construction customers discounts on trade shows and more than 40 magazine titles.
“We give them cash-back rewards at places like The Home Depot or Lowe’s Home Improvement,” Alter says.
These industry-specific perks appeal to small business customers, Alter says. After all, why not save money where you spend money? Advanta cardholders use the plastic, and they prefer working with a smaller institution like Advanta.
How does Alter know all of this?
Analytics lots of them.
“There are 30 million small businesses in the country, and that is always changing,” he says.
One changes that Advanta is taking advantage of is the explosion in the number of people who earn some of their living from eBay, the online auction powerhouse. Are these home-based brokers also considered small business owners? Are they potential customers for Advanta?
The definition of small business owner has undoubtedly evolved as technology and economic trends encourage more people to explore self-employment, Alter says.
“Will they want a credit card to buy inventory, separate their expenses or have a line of credit to help pay for building up inventory and the cost of doing business?” he says.
He thinks the answer is yes, and Advanta’s research shows that this population is an untapped market that needs credit card services.
“Targeting these people is one opportunity that a changing environment presents,” he says.
Still, how will Advanta sift through small business demographics to find these potential customers? Thirty million mailers, 30 million prospects that’s a daunting analytical process.
Advanta skims though the small business population by turning to the Consumer Credit Bureau and Dun & Bradstreet, among others, which provide psychographic and demographic data.
“We analyze data from a credit perspective, usage perspective and responsiveness,” Alter says. “Will they respond to an offer through the mail?”
Besides turning to such outside organizations for data, Advanta has built its own prediction models to weed out those business owners who look like a terrific person but who won’t use Advanta’s credit cards. The company relies on card-usage patterns to determine card users versus card collectors.
Once they are cardholders, Advanta will decide if customers need another card. Again, usage patterns reveal far more than how often a business owner says, “Charge it.” Those frequent card users are candidates for employee credit cards, checks or a credit line increase.
“This business is really very analytically grounded,” Alter says.
And, from the 50 percent of customers who respond to Advanta’s direct mail solicitations by logging on to its Web site, Alter knows that more customers today prefer to conduct business online. Advanta must constantly tune up its technological capabilities so its time-pressed clients can enjoy the convenience of Internet services with the real-time information they need to manage their businesses.
Innovation for inspiration
Small businesses are responding to Advanta’s strategy as evidenced by the company’s 18 percent transaction volume increase in the third quarter of 2005 to $2.5 billion. Advanta Business Card income grew 33 percent from 2003 to 2004 and since 2003, managed receivables have increased 10 percent annually.
“But that will not continue indefinitely,” Alter says, always considering the competition.
Every week, credit card companies switch up their offers to lure in customers.
“There were long periods of time where we didn’t have the best offer there are tremendous fluctuations in business in a given year,” he says.
Customer attrition is generally 10 percent in the industry, and Advanta has a slightly lower rate. The difference between Advanta and its competitors is that when economic challenges surface, Advanta’s narrow focus allows it to change its course quickly.
“The business is more manageable today, and this scale is something I am more comfortable with on a personal level,” he says.
When Advanta needs to better understand eBay businesspeople or learn even more about its small business customer base, Alter turns to his employees for inspiration. They and the small businesses they serve motivate him to be successful because of his own humble beginnings.
“I can still picture that little room with my dad sitting in it alone at his desk,” he says. “I can picture the small businessperson toiling away, trying to make a living doing what they do.
“I don’t admire a giant company that will prevail and do well regardless of who the CEO is. Momentum will carry them. I admire the guy who is competing with Wal-Mart.”
How to reach: www.advanta.com or (215) 657-4000