TOWARD A MORE SUCCESSFUL DIGITAL CHANNEL ACQUISITION

TOWARD A MORE SUCCESSFUL DIGITAL CHANNEL ACQUISITION MICHAEL J. McEVOY AND MARGOT VAUGHAN EXECUTIVE SUMMARY Digital channels offer the promise of reduced costs and a more efficient means of acquiring new credit card customers, but banks struggle to realize that potential today. In a recent study conducted in North America, card issuers report that digital channels are often plagued by low approval and response rates, commensurately driving up acquisition costs. To perform better, banks will need to become more intelligent about their target audience and make wiser decisions on channel choices. For banks utilizing digital channels for customer acquisition, a key success factor is the need to match the right channels with the customer segment that is targeted. Members of younger demographic cohorts, for example, are increasingly found to be unresponsive to direct mail, yet may be receptive to solicitations through the digital channel equivalent (i.e. email). Digital channels may also be effective at reaching new-to-the-bank customers and more efficient recruitment of customers for institutions in less developed markets. However, despite their potential, digital channels are not always the best choice. For instance, some banks find that cross-selling to existing customers continues to work best through traditional channels (e.g. in-branch and direct mail ). With banks having more channels to choose from than ever before, alignment of channel strategy with consumer preferences, needs and behaviors is critical. Equally important is the implementation of that strategy for both marketing effectiveness and success in acquiring new customers. DIGITAL CHANNELS ARE BOTH PROMISING AND CHALLENGING For most banks, traditional channels which include direct mail, TV and print media, telemarketing (i.e. call center) and in-branch/store continue to be the primary means of acquiring new cardholders. However, in mature markets especially, acquiring new credit card customers has become increasingly challenging and expensive over time. In markets where direct mail is prominent, ever-rising costs are often accompanied by declining response rates. Banks and others are responding by utilizing the direct mail channel more efficiently. They may, for instance, reduce postage costs by not including applications with packages: instead, they encourage the recipient to use alternative channels for fulfillment, such as online or call center. This type of multichannel approach to acquisition will become increasingly common as issuers seek to improve channel optimization. In broad terms, in both mature and developing markets banks are turning to digital channels, in the hopes of both reducing customer acquisition costs and attracting customers that are more tuned in to digital experiences. For the purposes of this paper, digital channels consist of email marketing, display marketing (e.g. banner advertising on websites), affiliate sales (e.g. creditcard.com), Search Engine Marketing (SEM, described on next page), mobile and issuer website (e.g. when a consumer goes directly to a bank website, without following an online search result or web banner). 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

SEARCH ENGINE MARKETING In the present context, Search Engine Marketing (SEM) is concerned with driving traffic to a bank s website when online or mobile users use a search engine (e.g. Google) to search for particular words or expressions (e.g. low interest credit card ). If consumers include a named bank as part of their search string, the search becomes a branded search for that bank (i.e. SEM Brand ). Otherwise it is non-branded (i.e. SEM Non-Brand ). Banks and others can bid on search words (including competitor names) to help ensure their institution is prominent in the search results returned to the online consumer. To be successful with SEM, banks must frequently reassess their own tactics and the effectiveness of their investments. They must also quickly adapt and respond to relentlessly changing competitor tactics. In addition, they must cope with the compounding challenge of rapidly fluctuating costs over short time periods, as competing bidders come and go. For all these reasons, SEM is likely best suited to the largest or most technologically-driven banks that can make the necessary investments (e.g. create dedicated teams with appropriate levels of quantitative expertise, to focus on SEM). Digital channels bring some advantages over traditional channels in reaching a wider audience, as borne out by a recent study conducted by MasterCard Advisors. The study included large North American card issuers and found that card customers acquired through digital channels were most often new to the bank or issuer, and not an existing customer that was cross-sold a credit card. In fact, across all survey participants, up to 80% of card customers acquired through digital channels (except email marketing) were new to the institution (see Exhibit 1). By contrast, banks often use traditional channels primarily to cross-sell to consumers they already know: existing customers to the bank. In less mature markets, too, digital channels may provide a means for banks and others to reach new audiences and acquire customers previously unknown to them. This will be particularly relevant to banks with a more limited geographic footprint, operating in markets where non-digital alternatives such as direct mail are less of an option. EXHIBIT 1. THE PERCENT OF CREDIT CARD CUSTOMERS ACQUIRED THAT ARE NEW-TO-THE-BANK IS TYPICALLY HIGHEST WITH DIGITAL CHANNELS DISPLAY ARKETING BRANCH TELEMARKETING DIRECT MAIL email SEM ISSUER WEBSITE DISPLAY MARKETING 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 2

While digital channels hold the promise of lower acquisition costs and efficiencies in reaching a wider audience compared to traditional marketing methods, they are not without their own unique challenges, given how they are deployed currently: Low Approval Rates: Based on research by MasterCard Advisors, digital channels tend to be at the low end in terms of approval rates for credit card applicants, with approval rates as low as 20-30% not at all uncommon (see Exhibit 2). A possible explanation is the relative anonymity afforded applicants through digital channels, which some believe encourages greater self-selection among candidates perceiving themselves as marginal. Higher volume digital channels may also lend themselves more easily to fraudulent applications, in contrast to the more individualized scrutiny that is likely at a bank branch or call center. In our previously mentioned study, applications through the primary non-digital channels ( Direct Mail and In-Branch ) have the highest approval rates (80% or higher at some issuers) likely a simple reflection of prescreening of Direct Mail recipients and the fact that both channels are often used to cross-sell to existing (i.e. known) customers that are likely to meet the bank s lending criteria. Increasingly common branch staff goals and incentives to acquire new card customers for the bank may be a factor in ensuring that customers are matched with a card that best suits them. Low Response Rate: Defining response rate as the percent of leads resulting in a card application (e.g. for direct mail: completed applications/mailings), there abundant room for improvement in response rates for certain digital channels (see Exhibit 2). Some card issuers view response rates in several of the more costly digital channels e.g. Display Marketing and Search Engine Marketing as too low to justify continued current levels of investment. EXHIBIT 2. APPROVAL RATES FOR DIGITAL CHANNEL APPLICANTS CAN APPEAR LOW RELATIVE TO THOSE OF APPLICANTS THROUGH TRADITIONAL CHANNELS HIGHEST RESPONSE RATE LOWEST LOWEST APPROVAL RATE HIGHEST Source: MasterCard Advisors analysis Rapid Change: In traditional channels such as Direct Mail, change, if any, is slow and easily discernible. However, change can be rapid and unexpected in digital channels, bringing unique challenges (and opportunities) to banks and other issuers, as a result. For example, bid prices in the SEM channel can fluctuate enormously over short time periods, as competitors come and go. Likewise, maintaining a Display Marketing audience likely means regular content refreshment and on-going listening (to the audience) to ensure content relevancy. 3

Upfront Investment: There is a learning curve for all the digital channels and an associated investment, as banks deploy and fine tune to improve channel effectiveness. For example, our study suggests that the early marketing cost per account (CPA) of Display Marketing can be particularly high (as much as $1,000+ for premium card accounts) a reflection of low response or approval rates that are currently not uncommon across digital channels. Incremental costs of bringing a new customer onboard can be lowered over time as banks improve their channel deployment and execution strategies. MAKING THE MOST OF DIGITAL CHANNELS REQUIRES BANKS TO CHOOSE THE CHANNELS THAT BEST MATCH THE TARGET CUSTOMER SEGMENT With low response volumes, lower-than-expected quality of applicants and often high costs of acquisition, digital channels have yet to reach their potential. However, these challenges may be addressed in two steps: (i) The development of a channel strategy that matches specific channels to consumer preferences, needs and behaviors in the targeted consumer segments, followed by (ii) A tactical execution of the strategy that enables the issuer to distinguish itself through a superior customer experience. In other words, to make the most of their investment in digital channels, card issuers will need to become smarter about how they use them. By doing so, the CPA per channel can be expected to diminish as channels are used more effectively. Developing the Strategy: To achieve this improvement, issuers will need to do better at matching the channel(s) they use traditional or digital with the customer segment that is being targeted. How they can accomplish this will vary by bank and the markets they serve and target. However, a first step should be to develop a channel strategy that best fits the bank one that reflects an understanding of consumer behaviors, preferences and needs among the bank s target new card customer segments. The channel strategy should differentiate between existing customers and those which would be new to the bank. For instance, we do not recommend using email for new-to-the-bank prospects. It should also take into account the bank s desired customer-type. For instance, the bank may benefit from analyzing its portfolios to identify the channels through which its most profitable customers originate and adapt its acquisition strategy accordingly. Ultimately, there is an element of supply and demand with the approach of matching the digital channel(s) to the customer segment: banks can supply a certain customer experience through channels they choose, but consumers must provide the demand for it or the bank s efforts will not be fully successful. Understanding the target customer should therefore be paramount to the bank s efforts and core to its channel strategy. Across different card issuers operating in disparate markets and geographies, the optimal match between channel and segment will vary, but Exhibit 3 provides an example of a framework to aid channel selection for a given situation. While illustrative, Exhibit 3 reflects some of the learnings from our study. It is a simple rendition of a mapping of channels to consumer segments that could form part of a channel strategy assessment. Banks that wish to serve the younger demographic, for instance, will likely find that Direct Mail (a traditional channel) is quite ineffective, as response rates through this channel are so low for younger audiences a finding of our North America study, mentioned earlier. Similarly, this segment is highly disinclined to visit a branch or store, to conduct their financial business. Our study suggests that reaching this cohort through digital channels such as Display Marketing may have the greatest impact (as indicated in the exhibit), provided the messaging or content is tailored to them, relevant to their needs and interests and refreshed sufficiently often to maintain their attention. Similarly, a student may be receptive to a targeted online offer delivered via email from their bank or through a student-specific offer on the bank s website, but less responsive to an approach through a traditional channel. Targeting an affluent customer, on the other hand, may be best achieved according to some of our study participants through more traditional routes, such as direct mail or in-branch encounters with the customer, as an issuer may find that the affluent customer is simply too difficult (or costly) to identify through digital channels. 4 AUGUST, 2015

Banks that wish to serve the younger demographic, for instance, will likely find that Direct Mail (a traditional channel) is quite ineffective, as response rates through this channel are so low for younger audiences a finding of our North America study, mentioned earlier. Similarly, this segment is highly disinclined to visit a branch or store, to conduct their financial business. Our study suggests that reaching this cohort through digital channels such as Display Marketing may have the greatest impact (as indicated in the exhibit), provided the messaging or content is tailored to them, relevant to their needs and interests and refreshed sufficiently often to maintain their attention. Similarly, a student may be receptive to a targeted online offer delivered via email from their bank or through a student-specific offer on the bank s website, but less responsive to an approach through a traditional channel. Targeting an affluent customer, on the other hand, may be best achieved according to some of our study participants through more traditional routes, such as direct mail or in-branch encounters with the customer, as an issuer may find that the affluent customer is simply too difficult (or costly) to identify through digital channels. EXHIBIT 3. TO IMPROVE EFFICIENCY AND EFFECTIVENESS IN ACQUIRING NEW CUSTOMERS THROUGH DIGITAL CHANNELS, ISSUERS NEED TO DO BETTER AT MATCHING THE CHANNEL WITH THE TARGETED SEGMENT CUSTOMER PROSPECT TRADITIONAL CHANNELS email MARKETING DISPLAY MARKETING SEM BRAND SEM NON-BRAND ISSUER WEBSITE CURRENT STATUS Existing Customer of the Bank/Issuer New-tothe-Bank Customer Student/Youth DEMOGRAPHIC Older Demographic Affluent Mass Market Source: MasterCard Advisors analysis Less Impactful More Impactful 5

Differentiation Through Execution: While the development of the bank s channel strategy is critical, execution is also key for eventual success. The impactful-ness of a channel will be dependent on the quality of the customer experience an issuer can provide through that channel. Some industry executives believe that success at Display Marketing, for instance, requires issuers to frequently refresh online collaterals and tailor the content to the target audience, to maintain both audience and response rates. For the nascent mobile channel (as a channel for accepting credit applications), success will likely require issuers to deploy imaging technology, or equivalent, as a means of minimizing data entry by the customer seeking to apply for a credit card. While different channels have their own unique customer experience challenges, improving the customer experience for a given channel (i.e. the execution of the strategy) can be expected to intensify its effectiveness for acquiring new customers (hence impacting the assessments depicted in Exhibit 3 above). Overall, with banks having more channels to choose from than ever before, aligning channel strategy with consumer preferences is critical, but increasingly decisive in the more competitive environment of the future will be the implementation of that strategy for both marketing effectiveness and success in acquiring new customers. For more information, contact michael_mcevoy@mastercard.com or margot_vaughan@mastercard.com, or please visit www.mastercardadvisors.com 6