Look to Your Top Tier When Budgets Are Tight

Portfolio optimization is suddenly on every portfolio manager's mind — and for a good reason. Issuers are being forced to cut costs and minimize exposure as a result of:

• lower profitability;
• lower customer engagement due to reduced spending;
• high inactivity rates; and
  
• increased charge-offs and costs brought about by new regulations and legislation. 

Accordingly, issuers will need to apply a renewed focus on current customers. Future profits will largely grow out of strategies focused on retaining and optimizing relationships with customers who represent the lowest-risk, highest-value.

Back to Fundamentals

The path to success begins when issuers ask themselves two fundamental questions:

• What are your most profitable target segments? Only by identifying the right target segments can you map out the strategies that will drive top-of-wallet status with them.
• Do your card offerings resonate with your best customers? Issuers need to reevaluate every aspect of their products in terms of their appeal — everything from features, benefits, rewards, and service options to pricing, credit limits, and authorization criteria. Now, more than ever, being the primary card is critical because cardholders put 54 percent of their credit-card spending on it.

Reward Your Best Customers

Having conducted segmentation analysis for many issuers worldwide, MasterCard Advisors has found that the 80/20 rule of business — 80 percent of profits come from 20 percent of customers — is even more pertinent for issuers. Trying to stimulate and change behavior among marginal customer groups may incrementally improve portfolio performance, but it should not be done at the expense of more desirable customers. Yet, issuers often lack differentiated strategies that recognize and protect their position with key customers, even though the most profitable and credit-worthy customers are invariably ripe for poaching by competitors.

Preemptive customer recognition and retention strategies should receive funding priority. These do not need to be expensive and can include:

• prioritizing best customers in the call center queue;
• sending email and SMS appreciation messages;
• providing customers access to special offers; or
• promoting basic card benefits with tailored messaging.

A study conducted last fall by J.D. Power and Associates revealed that satisfaction increases by 53 percent when customers understand card benefits, particularly fraud protection.

It's important to maintain rewards for customers who use them. The same J.D. Power study reported that satisfaction is 117 percent higher for redeemers than for non-redeemers — demonstrating that encouraging and managing rewards redemptions can help drive top-of-wallet status.

Issuers should look for ways to reduce rewards costs without alienating their best customers. For the majority of cardholders, access to affordable credit may be reason enough to use their cards. By restructuring rewards programs, issuers can reduce "earn" rates, as well as discontinue underutilized, vanilla programs that are costly without contributing to cardholder satisfaction. At the same time, issuers should continue to remind their best customers of the value inherent in their rewards programs. 

Trim with a Scalpel, Not an Axe

When looking at accounts that have been inactive for a while, how do you identify the accounts that are worth saving?

Based on prior behavior and current banking relationships, issuers can carefully analyze and segment dormant populations. Account inactivity, for example, may be a sign that a customer's card is no longer relevant to her. If so — and provided there is sufficient behavioral or other predictive data — issuers can use analytics and propensity models to migrate some of these customers to products with more compelling value propositions.

Analytical tools help assess the likelihood of future behavior so that issuers can identify which accounts have profit potential and which do not. In doing so, issuers can determine which accounts should be closed. The findings can then be translated into communications strategies and messages that enhance or reinvigorate customer relationships.

A New Lens on Issuer Profitability

Rather than manage their credit cards as a distinct product offering with its own profit and loss (P&L), it is time United States issuers returned to a more profitable model: Measure the lifetime value of your customers across all product lines and keep your eye on relationships, not products.

In Spain, La Caixa offered customers a wide range of tailored product and service offerings — even non-financial ones such as tickets to theater, film, and music — through its branches, as well as the Internet, ATMs, and telephone. From 2004 to 2006, La Caixa added nearly half a million new customers and saw net business income rise 12.3 percent.

With fewer resources, all issuers today need to stop investing in marginal cardholders. Closely examining your portfolio to identify customers who deliver the greatest long term value and invest in them is a far more cost-effective strategy. If customers with the lowest risk and greatest potential make your offering their primary card, you can expect revenues, profits, and cross-sales to rise — not to mention, loyalty.  

About the Author

Please note that the Viewpoints listed in CRM magazine and appearing on destinationCRM.com represent the perspective of the authors, and not necessarily those of the magazine or its editors. You may leave a public comment regarding this article by clicking on "Comments" at the top.
To contact the editors, please email editor@destinationCRM.com. 
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If you would like to submit a Viewpoint for consideration on a topic related to customer relationship management, please email viewpoints@destinationCRM.com.

For the rest of the December 2009 issue of CRM magazine please click here.

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