Credit Card Retention Strategies. Product code: VR0843MR

Transcription

1 Credit Card Retention Strategies Product code: VR0843MR

2 TABLE OF CONTENTS 1 Executive Summary The Significance of the Credit Card Business for Banks Profitability of Credit Cards Interest Income Non-Interest Income Fees The Importance of Payments in the Customer Relationship Country Survey: The UK The Importance of Credit Card Customer Retention The Favourable Economics of Customer Retention Retention as a Response to Competition and Regulation The Impact of Regulation on Card Profitability Retention as a Response to Alternative Payment Systems Understanding Customer Retention Defining Customer Retention Customer Engagement and Retention Economic Defection Life-Cycle Management The Market Life Cycle The Card Life Cycle Setting the Retention Strategy Measuring the Success of the Retention Strategy Understanding Customers Customer Segmentation Data Mining and Retention Prediction Tools Fractal Analytics Case Study Listening to Customers JPMorgan Chase s facebook marketing initiative The Visa Business Network on Facebook American Express Open Forum Retention and Organisational Structure Retention and Marketing Using acquisition to enhance retention Using Word-of-Mouth Marketing to Enhance Retention Using Branding and PR to Enhance Retention Best practices in engaging customers with social media Using Rewards and Promotions to Enhance Retention Merchant-Funded Rewards Payment Information Value Added Services (PIVAS) Using Activation and Usage-Stimulation Programmes to Enhance Retention Retention, Product Design and Pricing Retention and Product Design Page 2

3 11.2 Personalization and Customization Pricing and Retention Retention and Credit Risk Management Retention and Customer Service Customer Service and Engagement Bank of America Customer Service on Twitter Customer Service and the Mobile Channel Retention and Credit Card Payments Customer Retention in POS Credit Card Payments Customer Retention for Online Credit Card Payments Appendix Methodology Contact Us About Timetric Disclaimer Page 3

4 LIST OF FIGURES Figure 1: Non-Interest Revenue as Percentage of Assets for Credit Card Lenders and Other Consumer Lenders, US... 9 Figure 2: Debit Cards in the UK Figure 3: Credit Cards in the UK Figure 4: Charge Card Volumes in the UK Figure 5: Marketing Needs to Align to Profit Figure 6: Screenshot of PayPal Home Page (Source: PayPal) Figure 7: Screenshot of Bill Me Later Homepage (Source: Bill Me Later) Figure 8: Correlation Between Primary Card Designation and Share of Spending, Figure 9: Cardholder Satisfaction vs Average Card Spend Figure 10: Ron Shevlin s Schema for Measuring Engagement to help Marketers Understand Their Customers Figure 11: Relationship Between Bank Customer Engagement and Purchase Intent Figure 12: The Credit Card Market Life Cycle Different Markets Figure 13: Life-Cycle Management European Examples Figure 14: Life-Cycle Characteristics of Main Stages of Market Development Figure 15: Key Strategic Imperatives in a Growth Market Figure 16: Steps in Setting a Retention Strategy Figure 17: Example of a Detailed Timetable of Risk Management and Collections Rollout Figure 18: Example of a Strategic Assessment of Current Position of Retention Skills Relative to Desired Future Position Figure 19: Segmentation Model of Revolvers and Transactors Figure 20: Segmentation Comparison: Revolvers vs Transactors Figure 21: Understanding Customer Segment Profitability Figure 22: Screenshot of the Chase +1 Facebook Page Figure 23: Screenshot of the Visa Business Network Facebook Login Page Figure 24: Screenshot of American Express Open Forum Figure 25: Cards Organization Structure Figure 26: Consumer Credit Operations Figure 27: Relationship Between Customer Spend and Attrition Figure 28: The Wells Fargo Wachovia Blog Figure 29: Promotion for Citibank Cardholders at a Singapore Restaurant Figure 30: Promotion for HSBC Cardholders at a Singapore Gas Station Figure 31: Promotion for American Express Cardholders in the UK Figure 32: PayPal s Fanclub Figure 33: Selected Results from Welcome Real-Time s Card Payment Promotions Solution Figure 34: Example of Coupon from Chockstone s SingleSwipe Solution Figure 35: Checkout by Amazon Cart Up-Sell Steps Figure 36: Screenshot of the Winning Entry in the Caisse d Epargne Visa Card Design Contest Figure 37: Screenshot of Flexi Site Figure 38: Screenshot of Capital One Card Lab Homepage Figure 39: Screenshot of the Bank of America Twitter page Figure 40: Oyster Contactless RFID Card Figure 41: The Octopus Card Figure 42: Suica Card Figure 43: Oyster Card Figure 44: Barclays Contactless Card Page 4

5 LIST OF TABLES Table 1: Return on Assets, Large US Credit Card Banks, (%)... 8 Table 2: Average Most Common Interest Rates on Credit Card Plans ( )... 9 Table 3: Proportion of Non-Cash Payments (in Volume Terms) by Payment Type in the UK Table 4: Number and Value of Transactions Debit Cards Table 5: Number and Value of Transactions Credit and Charge Cards Table 6: Visa Interchange Fees for Selected UK Payment Methods Table 7: Account Life-Cycle Management Table 8: Example Prime vs Sub-Prime Portfolios Table 9: US Card Issuer Account Benchmarks Table 10: Major differences Prime and Sub-Prime Segments Table 11: Examples of Possible Segmentation Table 12: Possible segmentation strategies, example 2 (Source: VRL KnowledgeBank) Table 13: External view of a European market (* signifies total number of cards (issued) Table 14: Activation and Usage-Stimulation Programmes Table 15: Retention Tactics in Usage-Stimulation Programmes Table 16: Successful product upgrade timings (Source: VRL KnowledgeBank) Table 17: Successful cross-selling strategies Table 18: Comparison of Online Panels and Online Communities Table 19: Example of Basic Segment Product Features Table 20: Pricing and Enhancements Page 5

6 1 Executive Summary Credit cards make the most attractive line of business available to retail banks Credit cards, if managed effectively, are extremely profitable. Credit card business normally provides return of three to four times the cost of equity in markets like the UK and the US. Furthermore, growth rates even in the US, the world s most mature cards market have typically been ahead of nominal GDP. The revenue normally comes from revolving credit extended to cardholders, while other revenue comes from commission fees paid by retailers and fees charged to cardholders. Though the profitability of the US credit card industry declined a little during the recession, profitability started showing signs of recovery to pre-recession levels in The credit card industry s earnings valued US$XX.X billion in 2011, a XX% increase when compared with The rate of return excluding securitized assets was X.XX% in 2011, which was higher than the average rate of return over the timeframe which is estimated to be X.XX%. Shares of credit and debit cards in online payment steadily declining Credit and debit cards are still used for four out of five payments online, but that share is steadily declining. It is predicted that XX% of online payments will be made by alternative providers by Estimates of the cost to card issuers vary: Celent estimates the figure to be as high as US$XXX million in interchange alone in 2008 across the industry, and predicts that this will increase to US$XX billion by The need to ensure customers stay engaged with card products means developing a coherent retention strategy and offering convenient and relevant services, a must in the current environment. Successful retention strategy A successful retention strategy will take a holistic view of the cardholder relationship and seeks to identify key actions that will improve the relationship in terms of brand advocacy, loyalty and profits. A retention strategy will have limited success if it is positioned solely as a marketing tactic; successful retention strategies typically involve developing an organisational vision. This vision needs to encompass an agreed set of goals to dealing with the threat from debit and the online space. The strategies also require actions at all levels, including acquisition, customer service, collections, credit, operations, activation and attrition. One of the first steps in this strategy development is to understand existing customers. Do these customers feel loyal to the credit card brand? Will they recommend the credit card to others? What are the factors behind reduced use and cancellation? Segmentation and profitability measures allow the organisation to apply a value to each customer relationship. One of the many myths about customer segmentation is that highly profitable customers are the most satisfied and loyal; these customers will not switch over to another brand or reduce the use of credit card. These and many other questions need to be challenged. A successful retention strategy will provide credit card issuers with one of the most powerful strategies to fend off increased competition and react to the shorter product life cycles. The successful rollout will also focus the organisation s efforts on customer loyalty, satisfaction and profitability Economic crisis and emergence of new payment channels caused credit card companies to increase focus on customer retention The search for innovative card products has been a major focus in the past decade. However, the importance of customer retention for credit card issuers has grown in the wake of the global economic slowdown. The switch towards debit and cash spending in mature markets, the emergence of a range of new payment channels, increase in legislation and the continuing trend for customers to reduce consumption all present significant obstacles to the credit card industry. Credit card issuers in the US took drastic measures during the recession, such as by making it harder for consumers to compare credit card offers online and more expensive to transfer balances to other providers. Issuers also cut back their cooperation with comparison sites and raised fees for balance transfers. While such actions were stop-gap measures and not necessarily Page 6

7 indicative of mature retention strategies, they do attest to the increasing importance being placed on card retention in today s economic climate. This new edition of this report will explore customer retention in the credit card industry both in general and in light of present conditions, and discuss best practices in developing and implementing a successful retention strategy for global issuers. The report also looks at the areas which pose the biggest threat to customer spending on credit and debit cards, notably online payments rivals like PayPal and Bill Me Later. Page 7

8 2 The Significance of the Credit Card Business for Banks 2.1 Profitability of Credit Cards Credit cards, if managed effectively, are extremely profitable. While the profitability of US credit card industry declined a little during recession, the profitability started showing signs of recovery to the pre-recession level in The credit card industry earnings valued US$XX.X billion in 2011, a XX% increase when compared with The rate of return excluding securitized assets was X.XX% in 2011, which was higher than the average rate of return over the time frame which is estimated to be X.XX%. Table 1: Return on Assets, Large US Credit Card Banks, (%) Year Return Including Securitized Assets Return Excluding Securitized Assets 2001 X.XX X.XX 2002 X.XX X.XX 2003 X.XX X.XX 2004 X.XX X.XX 2005 X.XX X.XX 2006 X.XX X.XX 2007 X.XX X.XX 2008 X.XX X.XX X.XX -X.XX 2010 X.XX X.XX 2011 X.XX X.XX Source: Reports of Condition and Income, and VRL analysis VRL and Timetric Page 8

9 2.2 Non-Interest Income Another reason that card-issuing banks are more profitable than other lenders is that a greater percentage of their revenue comes from non-interest sources. As shown in Figure 1, FDIC data indicates that the ratio of non-interest revenues to assets is about XX% for credit card banks, compared with less than XX% for other lenders. Non-interest income includes interchange, annual or other periodic fees, penalty fees and fees associated with securitisation. Figure 1: Non-Interest Revenue as Percentage of Assets for Credit Card Lenders and Other Consumer Lenders, US 12% 10% 8% 6% 4% 2% 0% Credit card Mortgage Consumer Source: VRL and Timetric analysis VRL and Timetric Page 9

10 3 The Importance of Credit Card Customer Retention 3.1 The Favourable Economics of Customer Retention Figure 5 shows the results of a detailed study of the impact of retention, activation and acquisition on profit made by a European card issuer. By placing greater emphasis on retention, the issuer saw profit double over two years. Figure 5: Marketing Needs to Align to Profit Source: McLean Rosche VRL and Timetric Page 10

11 4 Life-Cycle Management Life-cycle management is used to identify the development stages in the credit card life cycle and apply varying retention strategies accordingly. This applies to the life cycle of the credit card market as a whole and to the life cycle of individual cards. 4.1 The Market Life Cycle Commonly, there are three stages in the life cycle of a credit card market: 1. Adoption 2. Growth 3. Saturation. Figures 12 and 13 give examples of the life-cycle stages in various credit card markets in Asia and Europe relative to the highly developed markets of the US, UK and Canada: Figure 12: The Credit Card Market Life Cycle Different Markets Source: McLean Roche VRL and Timetric Page 11

12 5 Appendix 5.1 Methodology Timetric s dedicated research and analysis teams consist of experienced professionals with an industry background in marketing, market research, consulting and advanced statistical expertise. Timetric adheres to the Codes of Practice of the Market Research Society ( and the Society of Competitive Intelligence Professionals ( All Timetric databases are continuously updated and revised. 5.2 Contact Us If you have any queries about this report, or would like any further information, please contact info@timetric.com. 5.3 About Timetric Timetric is an independent economic and business research firm that provides critical intelligence on emerging economies and key global industries. The company offers detailed economic and sector intelligence, business insights and independent and authoritative commentary. Underpinning all Timetric s research services is a belief that data if gained following the right technologies and analytic frameworks can provide unique and powerful economic and business insights. The Timetric economic and industry intelligence centers are premium decision tools that provide access to comprehensive research, data and expert analysis. They provide invaluable decision support, presented in an easily digestible format and grounded in rich, proprietary data and data analysis frameworks. Each year, Timetric produces hundreds of high-quality research reports across countries, industries and companies. These reports draw on in-depth primary and secondary research, proprietary data and highquality modeling and analysis to give its readers a deep insight into global market dynamics and economic trends. Timetric helps its clients to: Gain an unbiased, expert insight from a genuinely independent and trusted source Save time in researching, visualizing and comparing economic and industry data Access the latest and most useful data sets, indices and forecasts Gain access to a unique methodology for understanding economic trends Forecast and predict trends more accurately Economic Research Services Timetric s economic research services are founded on three key goals: 1. To provide the strongest base data: The most accurate data The most timely and frequently updated data sets The best data curation methodologies and standardizations Unique data sets and forward-looking indicators Industry-specific, premium data sets 2. To develop the best data analysis frameworks: Unique economic indices and data analysis frameworks Forward-looking indicators Proprietary indices and surveys Page 12

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