Understanding Credit Card Profitability

Transcription

1 Understanding Credit Card Profitability Outstanding professional experience in the area of banking and payment systems The European Commission

2 TABLE OF CONTENTS ACKNOWLEDGEMENTS 1 About the author: David J Cavell FCIB 1 About the publisher: RBR 1 Confidentiality 1 Disclaimer 1 TABLE OF CONTENTS 3 TABLE OF FIGURES 8 EXECUTIVE SUMMARY 9 Section A: The case studies 9 Section B: Marketing and Marques 9 Section C: Credit risk management 10 Section D: Operational overview 11 Section E: Credit card profitability 12 Conclusions 12 INTRODUCTION 14 Objectives 14 Why credit cards? 14 Four (and three) party payment systems 15 Card issuing business models 16 Co-branded schemes 16 Affinity schemes 17 Private label schemes 18 Conclusions 19 SECTION A: CASE STUDIES American Express (Amex), USA Background Strategic diversification The small business sector Conclusions Australia & New Zealand Banking Group (ANZ), Australia Background Consumer credit cards Small business credit cards Conclusions Chase Bank (JPMorgan Chase Group), USA Background The Chase credit card business Consumer products 32 RBR 2015 Page 3

3 3.4 Small business products The Ultimate Rewards programme Conclusions Dubai Islamic Bank (DIB), UAE Background Strategic repositioning Committing to the Islamic credit card The DIB Islamic credit card portfolio Conclusions MBNA, UK (Bank of America Group) Background MBNA The affinity proposition Conclusions UniCredit Bulbank, Bulgaria Background Retail banking and the women s sector The Donna concept The Donna classic Visa credit card Conclusions Vanquis Bank, UK Background The target segments The product Conclusions Wells Fargo and Company, USA Background The consumer card products The business credit card products Other consumer and business card issues Conclusions 58 SECTION B: MARKETING AND MARQUES The credit card portfolio The consumer credit card portfolio The electronic or online credit card The standard card The Gold card The Platinum card The exclusive credit card The private label credit card The SME credit card portfolio Product development issues Key drivers of customer take-up New card concepts Core card features 68 Page 4 RBR 2015

4 11. The product launch project Product validation Customising the package Card design and production principles Going to market Conclusions MasterCard Europe Background MasterCard and the small business sector Understanding the SME sector Segmenting the market The new card proposition Go to market Staff and channels Conclusions Visa Europe Background The credit card products The Classic card: The Gold card: The Platinum card: The Infinite and Signature cards: Other issues Conclusions 86 SECTION C: CREDIT RISK STRATEGY The credit strategy function The scope of scoring Application scoring and related techniques Limit management Authorisations Collections strategies Scorecard monitoring and strategy analysis Provisioning Infrastructure requirements for credit strategy Conclusions Scoring and analytics for consumer cards Background Identifying and evaluating prospects and customers Managing ongoing relationships Fighting fraud Conclusions Risk management for the SME sector Background Defining SMEs The use of scoring Credit reference agency data Summary 113 RBR 2015 Page 5

5 17. Advanta, USA SMEs and the credit cycle Introducing Advanta Business development the turning point! Risk management strategy Conclusions Critical management functions The steering committee The programme manager Conclusions 124 SECTION D: OPERATIONAL OVERVIEW Risk management operations Application processing Authorisations The collections function Fraud administration Other operational areas Background The customer service function The customer dialogue Managing the call centre The payment systems organisation (PSO) ongoing relationships Operational accounting Mailing and plastic card production Premises issues Contingency planning! Outsourcing the rationale Comprehensive capabilities Third party processing who is using it? Why use a service provider? Conclusions The outsourcing partnership Defining the service requirements Contracts and service level agreements Getting started Managing the service provider Conclusions External debt collection agents Background Collection operations Engaging with the debtor The cost of collection Conclusions 163 Page 6 RBR 2015

6 SECTION E: CREDIT CARD PROFITABILITY Account base development Applications received Decline rate Accounts opened and closed Total number of accounts (year end and average) Active accounts Key metrics Income from lending and other sources Aggregate outstandings Percentage of balances revolving (earning interest) Yield, funding cost and net margin Income from sales turnover Cash advance income Creditor protection insurance income Card fees Other income The cost base Background Marketing costs Operating costs in-house and outsourced The payment systems organisations (PSO) Other business costs Bad debt and fraud costs The bottom line 179 CONCLUSIONS 181 Credit cards for all 181 Credit risk management and operations 181 Profitability 182 APPENDIX: CONTRIBUTORS 184 RBR 2015 Page 7

7 TABLE OF FIGURES Figure 1: Reward points by product and scheme (Amex and Visa) Figure 2: Qantas points by product and scheme (Amex and Visa) Figure 3: Dubai Islamic Bank card rewards Figure 4: The dedicated Donna branch in Sofia, and its attractively restyled interior Figure 5: The new Donna logo, developed in-house Figure 6: The EU s SME Enterprise Definitions Figure 7: Advanta corporate and business credit cards Figure 8: Percentage of receivables and their FICO score at origination Figure 9: Breakdown of TSYS accounts by type (end-2013) Figure 10: Debt collection agent tranche analysis Figure 11: Time to first payment analysis Figure 12: Pro forma profit and loss account Page 8 RBR 2015