Designing A Sustainable Card Model

The growth challenge In the face of dire predictions about the health of the global credit card Industry, a number of Issuers are rallying around new positioning, new products and new value propositions - seeking profits there rather than through risk-based charges and fees. The new positioning Includes making finer doltishness among consumer groups. The new products range from family charge cards to "programmable" credit cards.

And the new value propositions Include richer Incentives for affluent customers, innovative introductory offers for under- and unseeded card customers, youth- friendly offerings for families, partnerships for card issuers and merchants, and high- tech solutions as smart cards and mobile payment systems. Together these models may help preserve credit cards' status as one of the most profitable segments of the payments industry. Philip Reproach David Chubby Sesame Galatia IS Gasper Maria Martinez Industry dynamics require new issuer strategies As we note in "U.S. Payments trends: Enduring a turbulent passage" (page 3), regulatory uncertainty, shifts in consumer behavior and typically high loan losses continue to erode the profitability of the U.

S. And global credit card industry. We estimate U. S. Credit card profits at $16 billion in 2012, down by nearly half from their 2006 peak. Pre-tax returns on assets, meanwhile, will rebound to the 2.

5 to 3 percent range by 2013-14, but will likely remain below levels established In the middle of the past decade.A similar story Is playing out In Europe, where regulations enacted between 2004 and 2006 continue to depress the longer outlook for profitability (Exhales 1 Aslant markets offer even less profitably, reflecting low consumer demand and high bevels of regulation. For these reasons, quick fixes will not significantly boost future growth. In the a new model based on cutting operating costs ("Designing a sustainable card model," McKinney on Payments, October 2010).

But costs are only part of the answer; issuers must also focus on growth.The increase in direct mail Designing a sustainable card model: The growth challenge solicitations in the U. S. In 2010, for instance, suggests that issuers have turned their focus once more to revenue growth (Exhibit 2, page 18). But more effort is needed. We suggest three integrated actions: issuers must target heir customer segments in a more granular way; they must create value propositions that answer the specific needs of their customers; and they need to develop more effective delivery channels to get their new value propositions out into the world.

A reevaluation of credit card customer segments To design better value propositions, issuers must take into account how new regulations and changes in customer behavior have reshaped the marketplace (Exhibit 3, page Exhibit 1 In Europe, a wide variety of regulatory initiatives have been implemented or are under discussion 17 Since 2007, for instance, U. S. Customers who value revolving credit have been the hardest hit of all segments.Issuers, responding to restrictions on risk-based re-pricing and fees, have decreased lines to this segment, raised their rates and boosted their costs through new fees. For these reasons mass-market consumers - consisting primarily of such "revolvers"- were a barely profitable segment in 2010.

Nevertheless, we believe that these customers cannot be ignored, and that there are innovative ways to meet their particularly important, as we believe that by 201 5 this segment will once again account for early 70 percent of industry profitability.Meanwhile, affluent consumers - who tend to behave as "translators" - have emerged as E. IS. Consumer Credit Directive Credit card default: Threshold for intervention fee per default charge Clear rules regarding the annual percentage rates charged by credit cards Display of Summary Box for store card credit services (also known as an Honesty Box or Schemer Box) listing interest rates and penalty charges, etc.Bundle of payment protection insurance with loans banned Germany Standardized pre-contractual information has to be provided Effective interest rate shown in n advertising has to fit the situation of at least 66% of all possible customers France Anti-usury law Closure of credit lines after 2 years of inactivity Credit/loyalty cards: ban of commercial benefits related to credit only Reduction of the maximum length of oppressiveness plans (from 10 to 8 years) Source: McKinney analysis Italy Interest rate cap (anti-usury law): Maximum interest rate is equal to 1.

5 times the average rate by product Exhibit 2 In 2010 the U.S. Saw a revival in the volume of direct mail - and new credit card value propositions - sent to customers the industry unsung heroes. The irony, forever, is that while they drove most of the industry profitability in the U. S.

In 2010, they do not need revolving credit, and moreover, they are generally unhappy with the benefits they currently get from card providers. For these reasons, they are particularly susceptible to debit card migration, a trend encouraged by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which provides incentives for merchants to steer customers into debit.Home goods company 'KEA, for example, offers a 1 percent reward towards future purchases for customers who use a debit card instead of a credit card. A prime opportunity here, as we explain later in this article, is in reclaiming these consumers with enhanced benefits.

However, given the recent Federal Reserve proposal on debit interchange and its potent- till impact on debit rewards value propositions, this segment may begin migrating back to credit on its own.Three segment opportunities While revolvers and translators constitute the card industry traditional segments, issuers need to segment the card-holding universe more completely. A more granular view of segmentation, given the new regulations and the reach of card usage, promises to reveal ewe opportunities. Three segments in particular that deserve attention are ; . Small business: This segment is not regulated in the U. S.

Under the Credit Card acquiring credit over the past three years. By moving this segment from personal cards to professional and business cards, U.S. Credit card mail solicitations Billions 6. 0 5. 7 5.

3 3. 9 2. 3 1. 4 Source: Syncopate 2005 2006 2007 2008 2009 201 OWE issuers can create a value niche. In several industries and areas, banks are already opening the spigot to small business and professional lending.

; Undeserved and unseeded: This segment memories about 25 percent of the U. S. Banking population. While regulations restrict traditional offers to this group, new approaches such as prepaid and next-generation secured cards offer opportunity. Youth consumers under 21: While new regulations restrict offers to this group, opportunities remain to attract and educate the segment through family bundles and prepaid cards. Since youth consumers will naturally form the next generation of 19 Reshaping value propositions With a better understanding of customer segmentation, issuers can design tailored and more creative value propositions.

Studies indicate that consumers have walked away from revolving credit, for instance, partly because they feel that issuers have been opaque in the application of interest rates and fees.To recapture the revolving credit market, issuers need to offer simple, easy-to-understand value propositions to their customers. Bank of America's Basic Visa card, for example, offers an attractive rate tied to prime, no penalty rates, late fees capped at $35 and a one-page explanation of terms and conditions. In its mortgage business as well, Bank of America offers a home loan "clarity commitment," a Leary stated, one-page explanation of mortgage costs designed as a breath of fresh air for small-print-weary consumers. Exhibit 3 In the U.

S. New regulations and macroeconomic pressures have complicated the customer landscape for issuers Adverse impact Little to no impact Impact on profitability levers Revolvers Translators Restrictions on risk-based re-pricing and fees requirements limit line increases New payment allocation "Ability to pay' Potential reduction in spend given merchant debit steering Small business Undeserved/ unseeded Small business cards specifically excluded from exultation Restrictions on risk-based re-pricing deter offering traditional credit products to this segment acquisitions without co-signer or financial means test Increase in small business and professional cards, particularly for affluent segments New value reduce risk (e. G. Partially secured cards) More family-oriented products to acquire youth market early Richer rewards on business cards Greater use of non-traditional data and partnerships to identify prospects prepaid for youth segment Youth Consumer delivering Potential impact on go-to-market strategy New variable-rate strategies (e. G. Variable rates based on customer behavior) Increase in annual fees for lower-spend translators New fee strategies New earn/burn strategies Leveraging of in underwriting New value-added services beyond rewards (e.

G. , enhanced customer service) 20 Other issuers are battling back with "preferred" target customer segments. Suntanned and RIBS offer credit cards with preferred rates for their current customers. A twist to this model might include the right of offset against a customer's DAD (or other bank asset) in return for an improved PAR, credit line and rewards.

Ices market as well.Marks & Spence's &More" credit card, targeted at prime translators, not only gives card users special "M&S points" (redeemable at Marks & Spencer stores), but triple points for other in-store purchases. And consider Cities experiment with Cit Specials, a program that offers cardholders exclusive discounts and certificates on both local and national products and services. In the U. K. , the 02 Money card is a prepaid debit card targeted at near-prime students.

It features an online "money manager" to help students manage their expenses. Some issuers are offering lower rates and expanded credit lines to customers who taiga risk for the issuer. In the U. K. , the Egg combination deposit/credit card not only pays a high interest rate on net positive balances, but charges a low variable PAR on net negative balances.

Similarly, the Afflicted from Commemorate in Germany offers revolving credit linked to a debit card, with revolving rates Affluent customers want richer rewards and additional benefits, and some issuers are responding. Chase, for instance, recently unveiled its Ultimate Rewards platform, which offers flight selections without blackout dates and other restrictions. Cit, meanwhile, has turned its sights to commercial awards, which have fewer restrictions. Cit now offers some new customers an Advantage Mastered with 75,000 promotional bonus miles, beating most airline acquisition promotions. Banks are not alone in advancing such offers; retailers are entering the financial serve- For the undeserved or unseeded, prepaid and releasable cards are available. In the U.

K. , the 02 Money card is a prepaid debit card targeted at near-prime students.It features an online "money manager" to help students manage their expenses. Some prepaid and releasable cards function like credit and debit cards and even offer free bill moment and free checking. Given the breadth of innovative payment approaches, do traditional credit cards still have a role? The answer is yes.

Start the customer relationship with prepaid and releasable cards, then allow responsible users to graduate over time to more traditional credit card products. Family-oriented cards can be built off existing usage. The Ames Family Charge Card, for instance, allows parents to set spending limits for additional cards on a single account.It also issues separate account numbers for additional cardholders, so the entire account does not have to be closed when one card is lost.

American Express encourages parents to add their teens to these cards; it helps them understand credit and develop financial responsibility. How can issuers capture smaller and more specialized segments? Spain's Bonnets offers a card that gives soccer fans two euros for every goal scored by Real Madrid. Likewise 21 Lineal in Italy issues an "AC Milan" card that offers discounts on soccer tickets. Many issuers offer cards that donate to environmental organizations.