The Challenge of a Small Competitor Part 2

There is a new, small, credit card issuing company in the market. The company is PartnersFirst and they promise to change the credit card world by making that world more cardholder friendly. This new firm, based in Wilmington, Delaware, has introduced an unusual credit card. The card has no fees and relatively low borrowing rates, along with less onerous penalties. The upstart company challenges the four giants in the industry, Bank of America, Citigroup, JP Morgan Chase and Capital One. Industry veterans formed and run this new credit card company. They believe that the company’s card should be particularly attractive in the light of new Federal rules that restrict credit card practices.

A few years ago, we did an extensive analysis of how a company whose market share was #3 or below in its industry could succeed against much better competitors. (See the Perspective “Rare Mettle: Gold and Silver Strategies to Succeed in Hostile Markets” on More specifically, we studied these companies in hostile markets, where pricing pressure was intense and returns for most competitors in the industry were low. If a company could perform well in a hostile marketplace, its model would be instructive in all other marketplaces. We succeeded in finding a number of small competitors who performed well in these difficult markets. They had both growth rates and returns on investment above their industry averages. We named these successful smaller companies Silver competitors.

Once we found those successful competitors, we analyzed their business models to look for common patterns. Our analyses covered segments, product and service innovation, pricing and cost management. We will use our findings to evaluate the prospects for PartnersFirst. We will do this analysis in two parts. Part 1 of the blog covered segments and products. Part 2 will cover pricing and cost management and summarize our conclusions.


As the market slips into hostility, the best Silver competitors may offer low prices to gain share. But chronic low prices are not their hallmarks. If the largest competitors in the market are in a Leader’s Trap, Silvers will exploit that price umbrella by discounting against the largest competitors to gain share. However, once the industry leaders match price discounts, Silvers eliminate their discounting. From that time on, they match the changes in the general price levels in the industry.

Silvers do have some price advantages in the customers they serve. Their customer portfolio of Large and Medium customers gives them a very few percentage point advantage over the largest competitors in average unit prices.

PartnersFirst offers very low pricing. Using the SEIU credit card as an example, the basic card carries a 16% interest, does not include any annual fees and imposes no late penalty charges. These prices are likely to stay low since PartnersFirst has agreed that it will not raise rates or change terms without SEIU’s permission. PartnersFirst makes money from the interest rate it charges borrowers. It foregoes the additional revenues from the high fees their credit card issuing competitors charge.

PartnersFirst’s prices virtually guarantee they will have low returns compared to the largest industry competitors. Their revenues per customer will be markedly lower than those of the industry leaders.


In tough marketplaces, Silver competitors achieve high returns by improving the Productivity of their cost structures. In general, the Silvers can not enjoy the Economies of Scale of the largest competitors in the industry. However, they are extremely disciplined in R&D, marketing, sales and in the general overhead functions. For example, they are fast followers, rather than innovators, in new products. They refuse to spend marketing and sales dollars to attract customers that do not fit their tightly defined profile. Few will undertake large advertising programs. This discipline allows them to have competitive costs.

They can, and do, produce attractive returns with their cost structures. An analysis of over 240 industries we did a while ago showed that companies ranked third or fourth in market share had a 22% and 24% probability, respectively, of achieving the highest returns among the top four market share leaders in the industry. (See the Perspective, “Is Bigger Really Better” on

PartnersFirst suffers significant economies of scale disadvantages against the four largest Standard Leader competitors it faces. This disadvantage is compounded by the fact that PartnersFirst has to be very careful to extend credit card loans only to the best credit risks. So, rather than using the industry leaders’ low cost approach, employing automation and computer generated credit scores to determine a consumer’s ability to carry credit, the company has analysts who review each application by hand. This is a much more costly process than the largest competitors have.


Overall, PartnersFirst seems to have adopted a strategy with very low prospects for success. Its chosen segments are those most sought by the big four competitors. Its value proposition is very attractive to its target segments because it offers high service levels, superb Reliability and low prices. But the company cannot hope to compete in their competitive market with their high costs and low revenues per customer. The company faces a grim future.

Posted 10/22/09