RECURRING PAYMENTS AND ONLINE BILL PAYMENTS: THE KEY TO BECOMING TOP OF WALLET

Transcription

1 RECURRING PAYMENTS AND ONLINE BILL PAYMENTS: THE KEY TO BECOMING TOP OF WALLET BY Michael Nashold As consumers consolidate card usage following the global financial crisis, recurring payments (RP) and card-based online bill payments (OBP) have grown in popularity, becoming key indicators of top of wallet behavior. For issuers, this means an opportunity to tap into greater spend potential and lower spend attrition rates, both of which correlate highly with RP/OBP activity. Research also shows a high correlation between income level, education and RP/OBP usage, as well as greater acceptance of these payment methods among Generations X and Y. This gives issuers an ideal target for marketing efforts; however, to be successful, such efforts must be carefully timed to the correct stage of the cardholder lifecycle. By making RP and OBP messaging a high priority, remaining aware of the timing and channel of each message, and continuing to evaluate their marketing budgets, issuers can take advantage of this changing landscape and the renewed consumer focus on personal finances. ACCORDING TO THE AITE GROUP SURVEY (JULY 2010), THE NUMBER OF BILLS PAID ONLINE IS FORECASTED TO INCREASE Approximately 18% 18% FROM 2010 THROUGH Executive Summary Recurring payments and online bill payments are vital card usage behaviors that now, more than ever, are leading indicators of achieving top of wallet status with a cardholder. The positive impacts on spend and spend attrition metrics for cards active in these transaction types are evident across the card lifecycle. Changes in the economy and the payments landscape further reinforce why issuers should evaluate the allocation of their marketing budgets to motivate these behaviors. ADVANCING INSIGHTS ADVANCING COMMERCE. December 2012

2 MARKET SHIFTS AND CONSUMER CONCERNS HAVE SET THE STAGE FOR RP AND OBP Recurring payments and card-based online bill payments have become increasingly more important and key indicators of top of wallet card behavior over the past five years in the U.S. As the circulation of credit and debit cards greatly declined in the aftermath of the global financial crisis, cardholders have begun to consolidate usage of their existing active cards, thereby reducing the trend of compartmentalization of spend. Cardholders, now focusing on fewer cards, have been enabled to better optimize their accounts and payments to provide greater insight into their overall finances. With the decrease in the number of cards in force, RP and OBP have become more important in achieving the top of wallet. A 32% decrease in cards in force from 2008 to 2011 has reduced the compartmentalization of consumer spend. The Distinctions between RP and OBP Recurring Payment (RP) Merchant-initiated payment, performed on a periodic basis based on a standing pre-authorization from the cardholder Includes RP flag in the authorization message Online Bill Payment (OBP) Cardholder-initiated card payment to a merchant through the online channel May be a one-time or repeating series of transactions, as long as each transaction is independently initiated by the cardholder Figure 1: Credit Cards in Force The total number of cards in force decreased 32% from 2008 to 2011, from 647M to 439M Cards in Force (millions) Y2002 Y2003 Y2004 Y2005 Y2006 Y2007 Y2008 Y2009 Y2010 Y2011 Y2012 Source: Quarterly U.S. Visa/MasterCard Credit Cards in Force (2002-Current) from CardData/CardWeb.com. 2 ADVANCING INSIGHTS ADVANCING COMMERCE.

3 Although there has been a decrease in the number of cards, there has been an increase in RP and OBP. These methods of payment, along with the consolidation of cards, have allowed consumers to budget more effectively, have more control of their accounts, gain extra rewards and guarantee that bills are paid in a timely manner. According to the Aite Group Survey (July 2010), the number of bills paid online is forecasted to increase approximately 18% from 2010 through Additionally, the payments industry has seen steady growth in merchant acceptance for RP and OBP. Networks have been instrumental in supporting RP and OBP acceptance through efforts such as MasterCard s Automatic Billing Updater (ABU) service. ABU is designed to reduce RP and other account-on-file transaction declines for example, those caused by expired cards. ABU enables participating merchants, through their acquirers, to obtain the most recent issuer-reported account changes for accurate card billing, so cardholders can receive services as expected, enabling them to have a good experience with both the issuers and the MasterCard brand. 6.3 billion consumer bills are estimated to be paid online in Figure 2: Number of Bills Paid Online Number of Bills Paid Online, 2010 to 2013 (in millions of bills) ,338 e2011 5,660 e2012 5,981 e2013 6,303 Source: Aite Group Survey of 4,696 U.S. Consumers, July The focus of the cardholder on personal finances, the growth of RP and OBP, greater acceptance, and the consolidation of the cards market have all come together in a perfect storm scenario to set the stage for issuers and the battle for marketing budgets. Emerging from that storm, it is evident that issuers should allocate budgets and marketing real estate to drive RP and OBP messaging to cardholders. As we will demonstrate, the commitment of those marketing dollars can be allocated based on the stage of the cardholder s lifecycle. Recurring Payments and Online Bill Payments: The Key to Becoming Top of Wallet 3

4 RP and OBP Behavior Is Directly Linked to Better Returns RP and OBP provide benefits not only to the cardholder, but to issuers and merchants as well. Cardholders engaged in RP and OBP display greater spend and lower spend attrition. As seen in the MasterCard Data Warehouse, the separation between monthly average spend and spend attrition is evident both for new or early month on book ( EMOB ) accounts, defined here as actively purchasing for fewer than 12 months, and those more tenured accounts, defined as accounts active for 12+ months. As seen in the MasterCard Data Warehouse, the separation between monthly average spend and spend attrition is evident both for new or Early Month On Book accounts, defined here as actively purchasing for fewer than 12 months, and those more tenured accounts, defined as accounts active for 12+ months. In order to understand the impacts of RP and OBP, we looked at the differences in accounts across the first 12 months post-rp/obp adoption, while also holding a control for accounts that do not adopt either behavior. The data analyzed was based on a random sample of aggregated and anonymous U.S. consumer credit card accounts. Figure 3: The Four-Quadrant Approach to Segmentation OBP (No RP) OBP & RP Neither RP (No OBP) 4 ADVANCING INSIGHTS ADVANCING COMMERCE.

5 Knowing that issuers scrutinize their marketing budgets across all tenure segments, we analyzed both EMOB and tenured accounts to identify opportunities across the cardholder lifecycle. Beginning with the EMOB segment, we identified accounts whose first occurrences of RP/OBP were in February The monthly average spend over the following 12 months is directly correlated to a cardholder s engagement with RP/OBP such that accounts that are neither RP nor OBP active spend only an eighth as much as those that are active in both categories as follows: February 2010 to January 2011 Monthly Average Spend for EMOB Accounts: OBP Active (not RP) $475 Both RP and OBP Active $1,629 Not Active in RP or OBP $215 RP Active (not OBP) $864 While it cannot be determined that RP/OBP activity creates a higher level of spend, there certainly appears to be a high correlation. A cardholder who is willing to put RP/OBP transactions on a new card account is likely to utilize that card for larger portions of their spend. That said, RP/OBP should have a place very early on in marketing communications, if not directly in the welcome kit or initial offer, as cardholders are most amenable to changing their payment behaviors when their card is new. Secondly, and just as important, cardholders who use RP/OBP have lower spend attrition. In fact, RP has a bigger impact here. As shown in the table below, at the end of the 12-month period post-rp/obp adoption, those accounts that are RP active are more likely to remain purchase active in comparison to those not active in either RP or BP. While it cannot be determined that RP/OBP activity creates a higher level of spend, there certainly appears to be a high correlation. A cardholder who is willing to put RP/OBP transactions on a new card account is likely to utilize that card for larger portions of their spend. Index of EMOB Spend Attrition at Month 12 Compared to the No RP No BP Attrition (Index = 100) OBP Active (not RP) 94 Both RP and OBP Active 103 Not Active in RP or OBP 100 RP Active (not OBP) 104 Recurring Payments and Online Bill Payments: The Key to Becoming Top of Wallet 5

6 Figure 4: Index of EMOB Spend Attrition Compared to No RP No OBP Attrition Compared Monthly to the No RP No BP Attrition (Index=100) In the case of accounts that had actively engaged in both RP and OBP, the spend attrition index for those accounts was lower than for those that were only active in RP. This underscores the importance for marketing RP versus OBP for EMOB. Index Feb-11 Mar-11 Apr-11 May-11 June-11 July-11 Aug-11 Sept-11 Oct-11 Nov-11 Source: MasterCard Advisors Analysis of the MasterCard Data Warehouse. Dec-11 Jan-12 No RP No BP BP (No RP) RP (No OBP) RP BP Even in the case of accounts that had actively engaged in both RP and OBP, the spend attrition index for those accounts was lower than for those that were only active in RP. This underscores the importance for marketing RP as opposed to only OBP in the EMOB period (and, as stated above, potentially within acquisition efforts). We also evaluated spend and spend attrition metrics for tenured accounts on an aggregated and anonymous sample of U.S. consumer credit card accounts. We identified accounts active for 12 months or longer with no RP/OBP behavior evident until February As with EMOB accounts, we saw a separation of spend behaviors for those accounts that are RP/OBP active as compared with those that are not. As tabulated below those tenured accounts with both RP and OBP spend nearly three times as much as those who use their card for neither. February 2011 to January 2012 Monthly Average Spend for Tenured Accounts: OBP Active (not RP) $671 Both RP and OBP Active $1,061 (15% increase from 2/11 to 1/12) (26% increase from 2/11 to 1/12) Not Active in RP or OBP $370 RP Active (not OBP) $499 (11% increase from 2/11 to 1/12) (13% increase from 2/11 to 1/12) 6 ADVANCING INSIGHTS ADVANCING COMMERCE.

7 Figure 5: Impacts on Spend for Tenured Accounts $1,400 $1,200 $1,000 $800 OBP (No RP) in February 11 RP & OBP in February 11 RP (No OBP) in February 11 $600 Neither $400 $200 $0 Feb-11 Mar-11 Apr-11 May-11 June-11 July-11 Aug-11 Sept-11 Oct-11 Nov-11 Dec-11 Jan-12 Source: MasterCard Advisors Analysis of the MasterCard Data Warehouse. From a spend perspective, it is clear that converting an account to become both RP and OBP active has a great impact on usage. In reviewing the tenured accounts, it is also apparent that converting accounts to OBP later in the lifecycle may result in greater usage over those accounts that are only RP active. Tenured populations display varied trends with respect to spend attrition. Accounts not active in either RP nor OBP are more likely to have spend attrition over those that are active in both. It is also evident that accounts active only in RP are more likely to be retained from a spend active perspective than those that are only OBP active. Index of Tenured Spend Attrition at Month 12 Compared to the No RP No BP Attrition (Index = 100) From a spend perspective, it is clear that converting an account to become both RP and OBP active has a great impact on usage. In reviewing the tenured accounts, it is also apparent that converting accounts to OBP later in the lifecycle may result in greater usage over those accounts that are only RP active. OBP Active (not RP) 116 Both RP and OBP Active 132 Not Active in RP or OBP 100 RP Active (not OBP) 123 Recurring Payments and Online Bill Payments: The Key to Becoming Top of Wallet 7

8 Figure 6: Index of Tenured Spend Attrition Compared to No RP No OBP Attrition Compared Monthly to the No RP No BP Attrition (Index=100) Index No RP / No BP No RP / BP in February 11 No BP / RP in February 11 RP / BP in February 11 Feb-11 Mar-11 Apr-11 May-11 June-11 July-11 Aug-11 Sept-11 Oct-11 Nov-11 Dec-11 Jan months after adopting both RP and OBP behavior, accounts index at 132 compared to those who did not adopt RP or OBP. Source: MasterCard Advisors Analysis of the MasterCard Data Warehouse. For tenured accounts, those that never adopted RP or OBP are far more likely to display an attrition in spend within 12 months, while RP-only and OBP-only segments show spend attrition indexes of 125 and 116, respectively. Furthermore, for accounts that become active in both RP and OBP, the spend attrition index after 12 months is 132 compared to those not active in either RP or OBP. When reviewing the impacts on spend and spend attrition collectively, we come to a similar conclusion regarding the rank order of marketing RP versus OBP. In comparison to EMOB, tenured accounts may benefit more from receiving OBP messaging through marketing channels and communications. However, RP, with its 13% increase in spend (versus 15% for OBP only) and a spend attrition index difference, still needs to be embedded within marketing strategies. It is at this point where the results of including RP and OBP messaging intersect, such that each still as a stand-alone message and not mixed within the same creative should be pushed across multiple channels. (Again, RP messaging should take precedence, especially in higher-cost channels.) Overall, RP and OBP messaging should be a high priority both for EMOB and tenured accounts. Issuers should be cognizant of the timing and channel in which the messaging is being pushed to ensure the best return for their marketing investment. 8 ADVANCING INSIGHTS ADVANCING COMMERCE.

9 RP AND OBP RESONATES WITH HIGH-POTENTIAL POPULATIONS The importance of RP/OBP is not merely reflected in spend and spend attrition metrics; it also says something about cardholders and the changing payments industry landscape. Messaging RP/OBP helps issuers connect with the segments of the population they most yearn for well-educated and high-income earning. In addition to targeting key segments of the population, RP and OBP have long- term growth potential, which further supports the argument for aggressively marketing the benefits of these behaviors to cardholders. There is a high correlation between income level and OBP (and RP) usage. While there are multiple variables that can factor into a cardholder s bill payment channel, households with income over $150,000 use OBP nearly twice as much as those with income under $49, Figure 7: OBP Is Correlated to Household Income Online and In-Person Bill Pay Correspond to Household Income. 50% 45% 40% 35% 30% 25% 20% 15% 10% -$25K $25K- $49K $50K- $74K $75K- $99K $100K- $149K $150K+ Online In Person There is a high correlation between income level and OBP (and RP) usage. While there are multiple variables that can factor into a cardholder s bill payment channel, households with income over $150k use OBP nearly twice as much as those with income under $49k. Source: Rowe, Elizabeth. Consumer Payments in the U.S.: Trends Driving the Credit, Debit, and Prepaid Card Industries. Packaged Facts, It is no surprise that more highly-educated populations also use OBP and RP more often; this correlates similarly to higher-income populations. These segments are generally more technologically savvy and cognizant of their household finances wherein maintaining regularly scheduled payments helps to preserve stability. Recurring Payments and Online Bill Payments: The Key to Becoming Top of Wallet 9

10 It has been established that there is a linkage between channel preference, income, and education. Therefore, it is important to understand how cardholder preferences are changing. Figure 8: Education Corresponds to Bill Pay Channel Preference Bill Payment Channel Preferences by Education, All Consumers Online Non High School Graduate Mail Phone ACH (Automatic Bill Pay) In Person High School Graduate Only Same College Undergraduate Degree Only Graduate Degree 0% 10% 20% 30% 40% 50% 60% 70% Source: Packaged Facts, It has been established that there is a linkage between channel preference, age, income and education. Therefore, it is important to understand how cardholder preferences are changing. As U.S. demographics change, so does the channel mix. 10 ADVANCING INSIGHTS ADVANCING COMMERCE.

11 Figure 9: Channels Used by Generations X and Y to Pay Recurring Bills, 2011 Respondents All Consumers Generation X Generation Y Online 34% 44.1% 43.8% By mail 50% 47.9% 40.9% Surveys reveal that compared with other populations, both Generation X and Y are much more open to using OBP and RP. For issuers, this change highlights the importance of timing their marketing efforts to capture these key spend behaviors. By phone 15% 17.6% 19.5% Automatically deducted from bank account 26% 24.5% 25.6% In person 22% 24.8% 24.6% Source: Experian Simmons Consumer Payments Survey, 2011 and Packaged Facts, Not surprisingly, surveys reveal that compared with other populations, both Generation X and Y are much more open to using RP and OBP. For issuers, this change highlights the importance of timing their marketing efforts to capture these key spend behaviors. Recurring Payments and Online Bill Payments: The Key to Becoming Top of Wallet 11

12 ISSUERS CAN PROACTIVELY ENGAGE CARDHOLDERS INTO RP AND OBP THROUGH A TARGETED AND SEQUENCED APPROACH In order to drive adoption issuers should execute a multi-phased and targeted approach based on tenure. With multiple communication channels and new account procedures already established, RP and OBP can easily be integrated into existing marketing materials to minimize the expense in the development of an altogether new marketing program. RP should be messaged early and often, particularly for the EMOB segment,. Utilizing credit card welcome kits, space available throughout activation materials and visible placement within existing issuer online account management tools are all readily available and aid the reinforcement of the benefits of these payment activities for a cardholder. When a new rewardsbased cardholder is going through the initial stages of the EMOB process this also allows the issuer to reinforce the value of rewards and how RP transactions can yield an ongoing annuity of rewards currency to the cardholder. Figure 10: Let your rewards add up while you relax knowing your bills are paid on time. Your Bills Monthly Cost Monthly Reward Phone/Wireless $70 70 points Cable/Satellite TV $ points Internet $50 50 points Insurance $ points Gym Membership $50 50 points Estimated Annual Rewards 5,040 points For illustrative purposes only. 12 ADVANCING INSIGHTS ADVANCING COMMERCE.

13 As the account matures, the importance of RP and OBP, as demonstrated on the previous page, is still vital to a more successful portfolio. It is essential that marketing efforts are well sequenced and targeted to ensure the best possible response and return on the marketing investment. Best practices in targeting tenured accounts is multi-layered in the timing, channels and segmentation aspects for campaign development and execution. Evaluation of transaction behaviors and spending patterns through data modeling is a key aspect in targeting accounts likely to setup new RP or make OBP transactions. Modeling at the account level is used not only to target but also aids in the provision of incentive-based offers as opposed to informational messages alone. By identifying accounts that are highly likely organically to transact with RP or OBP, issuers can reduce expense exposure through exclusion, lower-value incentive offers, information-only collateral and low-cost channel concentration such as instead of direct mail. Results from Five Recent Recurring Payments Campaigns Response Rates 14.7% Large Credit Issuer Figure 11: When targeted and aggressively marketed, RP programs can drive significant results Lift Across Multiple Portfolios & Geographies Cumulative Percent Target 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Sample Portfolios Cumulative Percent Base Model is deployed as a score based on likelihood that a cardholder, who does not currently have a RP relationship with a biller, will begin showing RP transactions Model is used across a range of card portfolios (debit, credit, co-branded and business) Source: MasterCard Warehouse pool sample data. Baseline In client mailing, top-scoring 10% of accounts produced response rate that was 4 times as high as the average % 9.7% 6.7% 1.6% 0.4% Large Retail Co-Brand Regional Credit Issuer Regional Credit Issuer Large Retail Co-Brand Untargeted (no model), including long-term inactives Typical Break-Even Recurring Payments and Online Bill Payments: The Key to Becoming Top of Wallet 13

14 MasterCard has managed RP campaigns with a range of response rates from 1.6%, when no modeling or targeting is applied, to up to 14.7% and consistently over 6% when best practices, including targeting via MasterCard Advisors Recurring Payment Propensity Models, timing and channel, are utilized. Timing of campaigns is a crucial factor in the allocation of marketing budgets. In the development of a campaign, we recommend assessing the penetration of an issuers portfolio at the merchant category level for RP and OBP behavior and overlaying that information against the seasonal index of spending, also at the merchant category level. Based on the trends within the US consumer population, we see two ideal timeframes for capturing spend and share through RP and OBP campaigns: the end of the first quarter/beginning of the second quarter as well as the fourth quarter. While other months may also be suitable for information-only messaging through more passive channels (i.e. statements, and online), the investment in marketing through highercost channels such as direct mail should be consolidated on a larger scale within these preferred windows. CONCLUSION Following the perfect storm created by the Great Recession and consumers renewed focus on taking control of their personal finances, payment preferences are changing and issuers continue to battle for top of wallet status. As a result, issuers should bring RP and OBP messages to the forefront, taking care to balance a stronger push for RP in the early stages of the cardholder lifecycle with a transition to a shared RP and OBP focus in more mature stages. By balancing the messaging to tenure, while at the same time incorporating a data-driven targeting strategy, issuers will better penetrate RP and OBP within their portfolios, with all the good things that follow. Endnotes 1 Aite Research, October 2010, How Americans Pay Their Bills: Sizing and Forecasting Bill Pay Channels and Methods, Rowe, Elizabeth. Consumer Payments in the U.S.: Trends Driving the Credit, Debit, and Prepaid Card Industries. Packaged Facts, ADVANCING INSIGHTS ADVANCING COMMERCE.

15 About the author Michael Nashold Michael Nashold is a Principal for MasterCard Advisors responsible for client business development within the US Region and a subject matter expert in credit card marketing strategy. Mr. Nashold has over 12 years of payments industry consulting experience. He has developed, delivered and managed a wide variety of engagements including research, marketing execution, management of large scale technology platform implementations and strategy work. Prior to MasterCard, Mr. Nashold worked at Accenture where he was a manager supporting financial institutions in business process redesign engagements and led large scale technology implementation programs. Mike resides in Waldwick, New Jersey. He holds a Bachelor of Science in Mathematics from Clarkson University. CONTRIBUTING CONSULTANTS JP Gerard Jean-Pierre JP Gerard is the head of analytics delivery for North America. In this role, Mr. Gerard leads a team responsible for the design and implementation of specialized analytics to improve banks marketing strategies and product development using transaction-based predictive modeling and customer segmentation. Prior to joining MasterCard, Mr. Gerard held several management positions in Decision Science groups within JPMorgan Chase and Citi Cards. Mr. Gerard also worked at Nielsen/NetRatings where he managed custom analytics projects linking online behavior to survey panel data in order to improve online customer acquisition, brand building and online transactions. Mr. Gerard holds a Masters in Economics from New York University. He received a Bachelors in Economics/Mathematics from Manhattanville College in Purchase, New York where he graduated cum laude. Chanelle Lowe Chanelle Lowe is a junior at the State University of New York at Albany and part of the 2012 MasterCard Summer Intern Program. Ms. Lowes responsibilities include consulting project support, industry research and assisting on strategic engagements concentrating on the credit card payments space. Ms. Lowe is currently studying Information Science with a minor in Business Administration. She is a part of her university s campus Residential Life Organization as a Residential Assistant. She is also actively involved in several academic, voluntary and youth professional development organizations such as INROADS. Recurring Payments and Online Bill Payments: The Key to Becoming Top of Wallet 15

16 For additional insights, please visit and insights.mastercard.com MasterCard. All rights reserved. Proprietary and Confidential. Insights and recommendations are based on proprietary and third-party research, as well as MasterCard s analysis and opinions, and are presented for your information only. ADVANCING INSIGHTS ADVANCING COMMERCE.