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Integrating Credit Cards into Your Overall Payments Strategy

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The economic, regulatory and competitive environment has created consumers that are more conservative and considerably “choosier” in their selection of financial products. Products that address......

The economic, regulatory and competitive environment has created consumers that are more conservative and considerably “choosier” in their selection of financial products. Products that address consumer and credit union member needs in innovative ways, and that are delivered to them in ways that are convenient to them will be the success stories in the future. In this presentation from the 2011 NAFCU Strategic Growth Conference, you will learn about strategies that issuers have been using post-CARD Act and potential strategies that could help credit unions compete and win against their bank competitors, especially the mega banks! To be successful in the future, credit unions will need to have an integrated strategy leveraging credit, debit, on-line banking, mobile, and other alternative payment options together, to acquire new member relationships, and generate the most return and create long term member loyalty.

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  • Many national issuers consider credit cards as part of an overall customer relationship and a key component of household profitability.
  • IN THE NEWS: - CUs Must Act Now to Prepare for Durbin Amendment , CU Times, January 26, 2011Re-evaluate Debit Rewards Programs. If interchange revenues fall, you may want to look at your current rewards program structure to determine if it is cost-effective to continue it as is or whether an overhaul is required. Many credit unions are looking at migrating to merchant-funded reward programs that cost the credit union little but provide great value to cardholders. Examine Fee Structure. Credit unions should consider the current fee structure of their checking accounts, including monthly and annual fees, per check, electronic transactions and fees for paper statement delivery. Large national issuers are already proposing new fee structures, such as the elimination of free checking. Build PIN Debit Volume. Credit unions should identify which type of debit transaction provides the most value. With signature and PIN debit interchange converging, PIN debit may provide more net value taking into consideration cost to process, fraud and interchange income.Initiate Programs to Drive Growth. Continuing to grow your portfolio through penetration, activation and usage campaigns is vital to profitability. Before these changes take effect, CUs should be active in getting more cards into the market, focus on campaigns to activate both new and inactive cards and increase usage on active cards. An active debit card portfolio can soften the effects of reduced interchange.
  • Record delinquencies, debit and prepay cards, recessionary stress and new regulations are damaging credit card profitability. Issuers are reevaluating every aspect of their card operation, business model and strategies, in order to hold onto portfolio profitability. The key to success is precision. By replacing the blunt instrument of conventional methods with sharper predictions and decision strategies, card issuers can adjust successfully to profound market changes—many of which will not go away even when the economy improves."Issuers that do not adapt to the new realities will fall behind more innovative issuers. Those that begin strategic adaptive efforts while the industry is still in crisis will position their business on firmer ground in anticipation of the eventual economic recovery."—Brian Riley, TowerGroup: After Boom and Bust: Navigating the Credit Card Industry into the Next Economic Cycle FICO has developed a program for Reengineering Card Profitability that can help issuers prosper in this new era of card management. The Reengineering Card Profitability program can help lenders in three critical ways:1. Managing Portfolio Performance relative to new market dynamics 2. Rebuild portfolio strength 3. Segmentation helps reduce losses

Transcript

  • 1. Integrating Credit Cards into Your Payments Strategy
    Presented by:Stephanie PolenVice President, Client Portfolio Management, FTPS
  • 2. Our Focus Today
    The Changing Payments Landscape
    • Recent regulatory changes
    The Post-CARD Act Environment
    • Issuer changes
    Maintaining a Successful Card Program
    • Keys to success
    • 3. Segmentation and Loyalty
    • 4. Risk Segmentation
    • 5. The Credit Union Advantage
  • The Post-CARD Act Environment
    Many Issuers Made Significant Changes to Card Programs
    Increased Fees
    • Annual fees are reappearing, but not as often as anticipated
    • 6. Balance transfer fees also reappearing
    • 7. Fees may be positioned to encourage the use of lower cost channels
    “Against Expectations, Issuers Nix Some Fees After CARD Act”, American Banker, January 5, 2011
    Evolving Pricing Strategies
    • Majority of issuers moved to variable rate products linked to the Prime Rate
    • 8. Fixed rate products are virtually extinct
    • 9. Relationship rewards driven by good payment behaviors or multi-product relationships
    Source: http://www.creditunion.coop/ratedex.php. Averages displayed are straight averages of all institutions within the Informa Research Services database for the selected region as of Monday, January 31, 2011.
  • 10. The Post-CARD Act Environment
    Many Issuers Made Significant Changes to Card Programs
    Risk Strategies
    • Increased analytics to identify someone’s ability to pay
    • 11. Line management becomes more important
    • 12. Strict underwriting standards slowing starting to improve overall credit quality and extend credit
    Fourth Quarter 2010 Data, Federal Reserve Board survey released January 31, 2011, www.paymentsource.com
  • 13. The Changing Payments Landscape
    And Along Comes the Durbin Amendment…
    • Potential impact on financial institutions’ revenue (over/under $10B in revenue)
    • 14. Uncertainty in marketplace may continue the tumultuous shift in consumer payment behavior
    • 15. Opportunities for credit unions to capitalize on core member benefits and capture market share
    Credit Unions Need a Full Payments Perspective to Target Members
    In preparation for these potential impacts, many credit unions are:
    • Re-evaluating Debit Rewards programs
    • 16. Examining Fee Structures
    • 17. Building PIN Debit Volume
    • 18. Initiating Programs to Generate Growth
    - CUs Must Act Now to Prepare for Durbin Amendment, CU Times, January 26, 2011
    What Does It Mean for Credit?
  • 19. Evolving Credit Products
    Growth in debit has not purely been at the expense of credit
    • Only 11.4% of debit volume growth can be attributed to purchases that would have gone to credit in 2009
    • 20. MasterCard Research, Reported in American Banker, January 20, 2011
    Credit products and positioning need a “face lift”
    • Shift from a focus on penalty fees to positive image
    • 21. Products designed to help consumers rebuild their credit history
    • 22. Changing rewards programs
    • 23. Purchases of basic goods
    • 24. Premium rewards for high-income members
    • 25. Multi-tier rewards structures
    “As consumers’ demand for greater control has evolved, so too has the way they use credit cards, resulting in a shift back to bank cards roots as a tool for cash flow management. No other tool provides the same level of control, choice, and flexibility.”
    – Tim Murphy, Chief Product Officer, MasterCard, American Banker, January 20, 2011
  • 26. The Post-CARD Act Environment
    National Issuers Narrow Their Focus…
  • 27. The Changing Payments Landscape
    …and your best members are the target!
    Credit card solicitations rose to 2.73B in 2010 from 1.39B in 2009
    www.cardweb.com, Credit Card Solicitations are on the Rise, February 2, 2011
    “The proverbial wheels of the credit engine are being greased once again.”
    –AnujShahani, Director of Competitive Tracking Services for Synovate’s Mail Monitor
  • 28. The Credit Union Advantage
    Brand name was a key factor in the choices of 29% of U.S. online adults who opened a credit card in the prior 12 months.
    - “How U.S. Consumers Choose a Credit Card Provider.” Forrester Research. November 2009
    Credit unions may present fewer options, such as smaller ATM networks, but what they do offer is generally a better deal than at banks. – Suze Orman
    I haven’t done business with big banks for years, primarily because of the awful customer service you get at most of them. I like local, community banks, and I believe whole-heartedly in credit unions. As a rule, these institutions practice excellent customer service. – Dave Ramsey
    NOW is the time!
  • 29. The Key to Success: PRECISION
    Precision Leads to Profitability
    • Development of underwriting and risk standards that fit the needs of your
    members – giving credit when credit worthy
    • Segment your members to provide the specific set of product attributes
    they are interested in – driving behavior and engagement
    • Ongoing management of the product – balancing servicing and collections
    “Issuers that do not adapt to the new realities will fall behind more innovative issuers. Those that begin strategic adaptive efforts while the industry is still in crisis will position their business on firmer ground in anticipation of the eventual economic recovery."—Brian Riley, TowerGroup: After Boom and Bust: Navigating the Credit Card Industry into the Next Economic Cycle
  • 30. Maintaining a Successful Card Program
    Segmentation and Loyalty
    Portfolio Performance
    Risk Management
  • 31. Maintaining a Successful Card Program
    Manage Portfolio Performance to Maintain Margins
    Review portfolio strength
    • Understand how the mix of performance, segmentation and strategies impact the program
    • 32. Work with peer group credit unions to understand program variences and how others may be improving performance
    Don’t be afraid of change
    • Periodic reviews of cardmembers is critical to your program success – if a cardmember’s risk profile has changed, don’t hesitate to make the necessary adjustments
    • 33. Changing risk in the portfolio requires action
    Portfolio Performance
  • 34. Maintaining a Successful Card Program
    Segmentation and Loyalty are Critical
    Actionable segmentation and targeting strategies
    • Line management is critical in today’s environment
    • 35. Unused lines limit your ability to maximize revenue
    Member loyalty leads to increase margins
    • Propensity models help identify those most like to make a positive contribution to the card program
    • 36. Increase activation efforts or eliminate dormant accounts
    Card Acquisition among qualified members is important
    • Easy cross-sell when you approve a member for any valid loan product – mortgage, home equity, auto loan
    • 37. Make the card product central to your high quality credit members offering
    Segmentation and Loyalty
  • 38. Maintaining a Successful Card Program
    Balancing Servicing and Risk
    Optimize value, not minimize risk
    • Analyze Net Present Value of potential cardmembers
    • 39. Active line management of riskier, but more lucrative members
    Next generation targeting
    • More than score based only review
    • 40. Use internal credit behaviors to determine less “risky” behavior
    Member level management
    • Review internal credit quality over time
    • 41. Internal data analytics can identify less risky credit union members
    Risk Management
  • 42. Take Action to Drive Results
    Targeting and Segmentation
    Rewards
    Programs
    Acquisition Strategies
    Activation Strategies
    Risk Management
    Revenue
    Optimization
    Usage and Retention Strategies
  • 43. Targeting and Segmentation
    • Review your member database for potential cardholders
    • 44. Indirect loans
    • 45. Share draft or DDA
    • 46. Refer to existing relationship as lead in for communication
    Targeting and Segmentation
    Rewards
    Programs
    Acquisition Strategies
    Activation Strategies
    Risk Management
    Revenue
    Optimization
    Usage and Retention Strategies
  • 47. Segmentation = Strong Results
    Case Study
    • 7 Segments, 1 Control
    • 48. 60,000 pieces mailed
    • 49. Mentioned existing relationship
    • 50. 2.5% response rate – compared to 0.7% industry response
    • 51. Highest responding cell had 3 products, including deposit account
    • 52. Focus on relationship and product benefits
  • Acquisition Strategies
    • Direct Mail is still an effective channel
    • 53. In branch is even more effective
    • 54. Lower cost per card
    • 55. High touch = stronger relationship
    Targeting and Segmentation
    Rewards
    Programs
    Acquisition Strategies
    Activation Strategies
    Risk Management
    Revenue
    Optimization
    30% of consumers earning $75k – $150kcompare the card offers they receive in the mail according to a Mintel online survey
    Usage and Retention Strategies
  • 56. In Branch Promotion
    Branches Provide the Personal Touch
    • Preferred location to open new accounts
    • 57. 86% of U.S. customers surveyed visit a branch once per month
    • 58. 49% of adults researched new accounts by visiting a branch1
    • 59. Most cost effective method of acquiring new accounts
    • 60. $25 - $50 in branch vs. $103 - $154 direct mail2
    1. North American Technographics Financial Services Online Survey Q3 2008
    2. Visa 2008 Consumer Credit Card Issuer Benchmark Study
  • 61. In Branch Promotion
  • 62. Activation Strategies
    Targeting and Segmentation
    Rewards
    Programs
    Acquisition Strategies
    Activation Strategies
    Risk Management
    • First 30, 60, 90 day touch points are critical
    • 63. Engage early for long term loyalty
    Revenue
    Optimization
    Usage and Retention Strategies
  • 64. Engage Early
    “Waterfall” Activation Campaign
    Case Study
    New account rolling campaign (6 months)
    • Educational Postcard – sent to 387 new accounts
    • 65. 86.3% used account within 30 days of receiving postcard
    • 66. Outbound Call with Offer – called 53 inactive accounts
    • 67. 47.2% used account within 30 days of receiving call
    • 68. 9.4% qualified for bonus point offer
    • 69. Postcard with Offer– sent to 28 inactive accounts
    • 70. Obtained 3 more active accounts
    • 71. Qualified for bonus point offer within 30 days of receiving postcard
    94% Activation Rate on New Accounts!
  • 72. Usage and Retention Strategies
    Targeting and Segmentation
    Rewards
    Programs
    Acquisition Strategies
    Activation Strategies
    Risk Management
    Revenue
    Optimization
    • Provide clear, customized offers to encourage ongoing and increased activity
    • 73. Focus on best members
    Usage and Retention Strategies
  • 74. Targeted Messaging
    • Target Audience:
    • 75. Include 90 days inactive & never active to optimize results
    • 76. Incentive:
    • 77. Sweepstakes
    • 78. Balance Transfer
    • 79. Bonus Points or
    Account Credit
  • Rewards Programs
    Targeting and Segmentation
    Rewards
    Programs
    Acquisition Strategies
    Activation Strategies
    Risk Management
    Revenue
    Optimization
    • Rewards are still an important part of the credit card product
    • 86. Programs need to adapt to the changing consumer behavior
    Usage and Retention Strategies
  • 87. Revisiting Rewards
    Rewards Remain Important to Card Acquisition
    • 80% of offers are for rewards cards, compared to 60% two years ago
    Cash Back Offers Remain Strong
    • 41% of programs feature cash back. Examples:
    • 88. 5% Cash Back - JPMorgan Chase and Discover Financial Services, Citi Dividends
    • 89. 1% Cash Bank – Bank of America, Bank Americard
    Cash Back Drives Behavior
    • 11% of those who had not used their cards in the previous three months made purchases of at least $50
    • 90. Average increase in spending of $68 a month in a 1% cash rewards program
    • 91. Mintel Comperemedia, American Banker, December 22,2010
    • 92. Federal Reserve Bank of Chicago, “Why Do Banks Reward their Customers to Use their Credit Cards?”, December 20, 2010
  • Rewarding Everyday Purchases
    • As spending patterns change, cardholders are looking to be rewarded for everyday behavior, not big purchases
    • 93. More mailings focused on this behavior
    - Mintel Comperemedia, American Banker, December 22,2010
  • 94. Risk Management
    • Regular review of member credit quality is important
    • 95. Extend credit lines for high credit quality members
    Targeting and Segmentation
    Rewards
    Programs
    Acquisition Strategies
    Activation Strategies
    Risk Management
    Revenue
    Optimization
    Usage and Retention Strategies
  • 96. Track Credit Quality
    New Score
    Previous Score
    Original Score
  • 97. Manage Line Utilization
    • Compare product performance
    • 98. Review highly utilized products and cardholders for line increase opportunities
    • 99. Balance risk with marketing and member satisfaction!
  • Take Action to Drive Results
    Targeting and Segmentation
    Rewards
    Programs
    Acquisition Strategies
    Activation Strategies
    Risk Management
    Revenue
    Optimization
    Usage and Retention Strategies
  • 100. Summary
    • Industry changes require us to modify our product – whether it is regulated or not!
    • 101. Precision in all aspects of your card program from risk through marketing drives effectiveness
    • 102. Maximize every opportunity in the member lifecycle to deepen the relationship
  • Contact Information
    Thank you!
    Stephanie Polen
    Vice President, Client Portfolio Management
    812-647-9573
    Stephanie.polen@cmcone.com