EMBRACING DIGITAL PAYMENTS TO INFLUENCE CARDHOLDER BEHAVIOR AND ISSUER LOYALTY

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1 EMBRACING TO INFLUENCE CARDHOLDER BEHAVIOR AND ISSUER LOYALTY ROMINA ABAL AND JOHN GRIFFITHS EXECUTIVE SUMY There is great opportunity for financial institutions to enhance their profitability through credit card digital engagement: Cardholders who regularly make multiple types of digital payments spend 10 times more than those who are digitally inactive This can lead to revenue from digitally active accounts being 2 to 3 times higher, equivalent to between $600 and $1,000 incremental income per account over a three-year period These cardholders are also more loyal, with lower levels of attrition (2 percent, versus 15 percent for those not making digital payment transactions) Early adoption of digital payment technologies provides clear advantages for financial institutions: Their portfolios exhibit accelerated growth, with earlier digital adopters showing percent higher growth in active cards over a 2-year period compared to those that adopted later Their cardholders spend more, with total point of sale (POS) spend being percent higher, and e-commerce 37 percent higher BACKGROUND Digital payments (defined as consumer credit transactions via digital wallets, contactless or e-commerce channels) already represent more than 20 percent of total consumer credit card volume in the United States 1. In addition, digital payments in the United States are growing at more than twice the rate of overall consumer credit card spend, and personal consumption expenditure (PCE). While total credit card spend shows similar growth to PCE, credit card e-commerce spend growth has consistently surpassed them both. In fact, this growth gap has increased year over year from 2011 to (Graph 1). Digital payment growth in the U.S. 1 MasterCard proprietary transactional data analysis, 2015 This document is proprietary to MasterCard and shall not be disclosed or passed on to any person or be reproduced, copied, distributed, referenced, disclosed, or published in whole or in part without the prior written consent of MasterCard. Any estimates, projections, and information contained herein have been obtained from public sources or are based upon estimates and projections and involve numerous and significant subjective determinations, and there is no assurance that such estimates and projections will be realized. No representation or warranty, express or implied, is made as to the accuracy and completeness of such information, and nothing contained herein is or shall be relied upon as a representation, whether as to the past, the present, or the future. 1

2 GRAPH 1. E-COMMERCE GROWTH TRENDS 35% Year 1 Growth PCE 4% E-Comm 9% Year 2 Growth PCE 3% E-Comm 9% Year 3 Growth PCE 3% E-Comm 8% 25% 15% 5% 2011 E-Comm Spend Total Spend PCE Growth in credit card e-commerce spend significantly exceeds total credit card spend growth and PCE growth at 8-9% per year. E-commerce spend has grown by greater than 25% over the 3 year period 2 Digital payments, particularly mobile, are likely to experience continued accelerated growth rates in the United States due to the ubiquity of smart devices and consumers increasing desire for omni-channel shopping. While financial institutions understand the growing share of digital commerce in the United States, to date, the magnitude of impact that a digital payment strategy can have on cardholder behavior has been unclear. Subsequently, many financial institutions do not fully appreciate the potential upside that an end-to-end digital engagement strategy can have on the growth, stickiness and profitability of their credit card portfolios. ESTABLISHED ST DEVICES EMERGING ST DEVICES $235B Estimated payments via mobile devices in 2 $721B Projected payments via mobile devices by $1.5T Estimated digital and mobile influenced payments by US. Bureau of Economic Analysis (). 2

3 MASTERCARD ADVISORS STUDY THE FIRST O F ITS KIND For the first time, MasterCard Advisors has conducted proprietary research and analysis that has demonstrated the linkage between digital payment adoption and preferential cardholder behaviors. This analysis demonstrates the impact of financial institutions digital payment adoption on cardholder engagement, as well as the importance of moving quickly in developing a digital strategy. Digital Study Main Definitions: TABLE 1. CARDHOLDER SEGMENTATION SEGMENT DESCRIPTION DEFINITION DIGITAL INACTIVE CONTACTLESS ACTIVE E-COMM ACTIVE DIGITAL WALLET ACTIVE MULTIPLE DIGITAL ACTIVE Cardholders who are not utilizing digital payment channels Cardholders who regularly use contactless payment technologies Cardholders who regularly complete e-commerce transactions Cardholders who regularly complete e-commerce transactions Cardholders who are utilizing multiple digital payment channels Cardholders with zero digital wallet, e-commerce and contactless transactions throughout the time period considered Cardholders with at least one contactless transaction in every month considered Cardholders with at least one e-commerce transaction (non-digital wallet) in every month considered Cardholders with at least one digital wallet transaction in every month considered Cardholders with at least one transaction in more than one digital payment channel, in every month considered TABLE 2. FINANCIAL INSTITUTION SEGMENTATION FI CATEGORY EARLY OR LATE DIGITAL ADOPTER DESCRIPTION Financial institutions were classified based on multiple metrics, both qualitative and quantitative, including: the timing of issuance of contactless technology and/or digital wallets, levels of digital payment activity and digital payment penetration rates. Cardholders who regularly make multiple types of digital payments spend 10 times more than those who are not engaged with digital payment methods Based on this proprietary research and analysis, it can be concluded that there is a direct correlation, sustainable over time, between the level of digital engagement and the level of cardholder credit card spend. Explanatory Note: For each channel, the chart shows the reported percentage range of credit card customers newly acquired that are new-to-the-bank, across the survey participant banks; the marker is the mean across all participating banks, as indicated Source: MasterCard Advisors analysis 3

4 Graph 2 shows that all cardholder categories with digital payment activity have higher levels of spend compared to cardholders who are digitally inactive. Cardholders who regularly use digital wallets show the second highest level of spend. The highest level of spend was recorded from cardholders who are regularly engaged with multiple digital payment channels. GRAPH 2. SPEND PER ACTIVE CARD BY LEVEL OF DIGITAL ACTIVITY $5000 $4500 $4000 $3500 X 10 $3000 $2500 $2000 X 6 $1500 $1000 X 3 $500 $0 JUN Multiple Digital Active Contactless Active Digital Wallet Active Digital Inactive E-Comm Active The significant levels of incremental spend driven by digital engagement directly drive transactional revenue and increase issuer profitability. Table 3 shows the projected incremental income driven from increased levels of digital engagement versus the baseline of a digitally inactive account. A cardholder who frequently makes multiple types of digital payments is estimated to generate incremental revenue of between 2 to 3 times that of an account that is digitally inactive, equivalent to between $600 and $1,000 per account over a three-year period. TABLE 3. REVENUE ANALYSIS* 3 YEAR NET PROFIT PER ACCOUNT % UPLIFT (VS. DIGITAL INACTIVE) DIGITAL INACTIVE E-COMM ACTIVE 5 10 CONTACTLESS ACTIVE DIGITAL WALLET ACTIVE MULTIPLE DIGITAL ACTIVE *These estimates have taken into account that cardholders who spend less may be more likely to revolve a balance and therefore have higher levels of interest income 4

5 Cardholders who regularly make multiple types of digital payments have lower levels of attrition The analysis shows that digital engagement decreases attrition over both short and long term timeframes 3. Graph 3 shows that initial attrition for a digitally inactive cardholder is 15 percent versus 2 percent for a cardholder that regularly makes multiple types of digital payments. This demonstrates how digital engagement mitigates intermittent spend patterns and acts as a catalyst for enhancing overall cardholder engagement. In addition, when tracking attrition rates for one year, cardholders who regularly make multiple types of digital payments exhibit 3 percent less attrition than digitally inactive cardholders. GRAPH 3. CUMULATIVE ATTRITION MULTIPLE DIGITAL ACTIVE VS. DIGITAL INACTIVE 5 45% vs. 43% 35% 2% vs. 15% 25% 15% 5% JUN Multiple Digital Active Digital Inactive 3 Attrition is defined as the percentage of cardholders that become spend inactive (MasterCard, ) Improvements in cardholder retention lead to a reduced need to acquire new accounts in order to maintain healthy portfolio growth. If the attrition benefit exhibited from digital adoption is viewed in terms of a cost saving to acquire new accounts, it is estimated to save between $2MM and $4MM per year. This is based on a cost to acquire range of $75 to $5 per account, and an average portfolio size of 1MM accounts. 5

6 Active card growth is materially higher for early digital adopters 4 Financial institutions that were early adopters of digital payment technologies experienced percent higher growth in active cards over a 2 year period, when compared to those that adopted later (Graph 4). Active card growth can have multiple drivers, including increased acquisition, improved retention, and improved consistency of usage. GRAPH 4. PERCENT GROWTH IN ACTIVE CARDS: EARLY ADOPTER VS. LATE ADOPTER 45% 35% 25% % 15% 5% JUN Early Adopter Late Adopter Financial institutions that adopted digital payments earlier show incremental spend both in e-commerce and at point of sale. 5 In addition to the higher growth in the total number of active cards, early adopters also exhibited higher growth in spend from those cards. Graphs 5 and 6 show that early adopters of digital payment technologies not only captured higher e-commerce spend (37 percent) but also higher total POS spend ( percent). This analysis validates the importance of early adoption of digital payment technologies as a driver of primary card behavior. It also indicates that the growth in digital payments does not come at the expense of existing credit card spend made at the brick and mortar points of sale. 4 Early/late adopters were classified based on multiple metrics, both qualitative and quantitative, including: the timing of issuance of contactless technology and/or digital wallets, levels of digital payment activity and digital payment penetration rates 5 MasterCard, 6

7 GRAPH 5. % GROWTH IN E-COMMERCE SPEND GRAPH 6. % GROWTH IN POS SPEND % % - JUN JUN Early Adopter Late Adopter Early Adopter Late Adopter CONCLUSION & CONSIDERATIONS As this analysis shows, digital payment technologies are now vital, not only as a cardholder engagement tool, but also as a core strategy to maximize spend and reduce attrition ultimately leading to incremental growth in issuer profitability. In light of this analysis, and in the current environment, delayed adoption of digital payment technologies and lack of a comprehensive digital strategy is a key impediment to financial institutions achieving these benefits. Key considerations for financial institutions to activate their growth in digital Analyse your portfolio s current level of digital engagement. MasterCard Advisors can assist by segmenting and benchmarking your portfolio s level of digital engagement, and consequently identifying strategies and actionable insight to capitalize on opportunities identified. Remember that digital payment engagement comes in stages and is progressive. Apply learnings from the behavioral segmentation in order to identify customer needs. Ensure you tailor product propositions and marketing strategies to the unique needs and wants of the customer segment. Maximizing cardholders digital payment engagement pays off. A fully-formed digital strategy should also focus on moving cardholders up the ladder of digital engagement. Payments are only one component of a successful digital strategy. Evaluate other digital value-add services before, during and after the payment transaction, in order to stay top of the cardholder s mind throughout their experience. Leverage partner s digital solutions to improve time to market and guarantee a frictionless digital experience for cardholders. MasterCard offers two platforms to immediately activate a digital strategy; MasterPass and MasterCard Digital Enablement Service (MDES). These two solutions will provide cardholders with simple and secure ways to pay across multiple channels, whether it is via a click, touch or tap. CONTACT YOUR MASTERCARD ACCOUNT REPRESENTATIVE TO DISCUSS HOW YOU CAN IMPLEMENT A HOLISTIC DIGITAL PAYMENT STRATEGY 7