By now, commercial bank credit card issuers are familiar with the industry's current themes:
The market is oversaturated; direct mail is ineffective as a solicitation tool; consumer credit is at an all-time and dangerously high level; the monoline issuers are proceeding toward dominance of the industry; and so on.
Indeed, announcements of pulling back or holding the course have been issued in recent months by a number of major commercial bank card programs. By contrast, monolines such as MBNA, Capital One, and First USA announce double-digit profit gains.
What distinguishes the former group from the latter? What strategies must issuers adopt to help ensure sustainable growth and profits?
Issuers face decisions far more complex than stay or go. Today's reality is that many programs have not kept pace with the industry leaders and need substantial investment to catch up.
KPMG has identified four business strategies for making essential improvements to achieve or restore competitive advantage.
Bank card executives must evaluate their programs' status in each of these strategies. The four required strategies, in recommended order, are to reengineer collections and loss-recovery operations, adopt a comprehensive enhanced risk management program, improve but continue customer solicitation and selection, and install a customer value management program.
As a first step, improving the revenue stream must take a back seat to survival. The levels of delinquency and losses recently experienced in many major portfolios are unprecedented and unexpected. Preventing or lessening the impact of surprises is an important second step, but immediate attention must focus on collections and recovery.
In these areas, many organizations continue to use antiquated processes, even while subpar and costly results ensue. For example, all customers are uniformly treated once entering collections, though the true risk levels among customers vary significantly.
Predictive techniques and computerized automatic telephoning of customers who appear to be in trouble are used primarily in the early stages of delinquency; banks often fail to leverage this technology throughout collection efforts.
The work force is managed by adding hours, bodies, or potentially by outsourcing, without benefit of predictive work load or staffing models.
Charged-off accounts are reviewed for "skimming" potential, if at all, then assigned to attorneys or agencies for collection.
In large part through the use of technology enablers, enhanced collection and recovery processes can not only achieve breakthrough effectiveness and productivity gains but also do this at reduced long-term cost.
Tools that give accounts priorities based on payment and other behaviors can substantially reduce work load without increasing overall risk.
Dialing and workstation technologies can optimize contacts and results by indicating when to call, where to call, to which collector the customer will be routed by matching customer difficulty with collector skill level, and what collection actions to take.
Outsourcing vendors should be selected not simply to relieve work load but-using a champion-challenger approach-to challenge the in-house operation.
The competition created through different, well-defined, and consistently measured collection and recovery strategies will identify and crown the overall approach that delivers the greatest value. That is, until it is dethroned by more effective challenger strategies.
The second step, risk management, consists nearly exclusively, for a multitude of issuers, of attention to credit scoring and underwriting. While the front end is without doubt a critical link in the risk management continuum, additional components are nonetheless vital to success.
The areas where we recommend expanded or enhanced techniques include: customer scoring, loss forecasting, programwide compliance.
The periodic risk scoring of all customer accounts, and particularly those that are delinquent, offers a number of benefits. But this front-end credit scoring and underwriting can be continually refined.
In place of analyzing two or three attributes for making decisions-for example, overlimit authorizations, line increases, and collections priority-a customer's entire behavior pattern since origination can be considered.
At many issuers, loss forecasting consists of forward-flow, or roll, analysis, manually adjusted based on management's knowledge or perception of underlying portfolio characteristics.
The forecasts are typically completed by the collections department, though in many cases it lacks needed skills in statistical and mathematical analysis.
Instead, the use of formalized vintage and time-series analysis can quantify distinct portfolio loss trends and/or segments moving with unpredictable characteristics (such as many of the direct mail vintages of the last two years). This would let management better assess expected losses and alternative counteractions.
With the number and magnitude of issues facing the credit card industry, issuers can ill afford to take their eyes off the ball in compliance.
As noted, the compliance facets of underwriting often get a high degree of attention, while other aspects of the program often do not. A "short list" of added review areas include annual percentage rate calculations; new products, particularly products made available as a result of membership in a group or organization; credit balances; and disputed items.
As a third step, bank consumer lenders must overcome their long history of slowing down new business generation when the current portfolio begins to underperform. This slowdown creates an ever-worsening spiral as products become less competitive and the risk of adverse selection grows greater.
Survivors must instead learn to balance control and growth, thereby creating the ability to capitalize quickly on market opportunities created by competitor slowdowns. However, this does not suggest reinvigorating acquisition programs that have proven ineffective.
A number of improvements can be adopted on a short-term basis.
For many programs, it would be beneficial to refocus on prospective customers with in-market, relationship-based characteristics. In recent years, many issuers have launched national acquisition programs on the theory that credit scoring and other quantitative selection methods made geography irrelevant. They've later discovered that the "local" portfolio far outperformed the "national" portfolio.
Particularly among commercial bank issuers, the value of in-market name recognition and the ability to expand existing relationships through credit card products should be given greater emphasis.
Introductory rate offerings, used strategically, can continue to be a valuable tool for customer acquisition. Once a marketing innovation, teaser rates ultimately became a "me too" feature of virtually all major issuance programs, resulting in consumers' rolling balances from issuer to issuer, often without even removing the credit card from the envelope in which it was mailed.
In addition to trying to offer the lowest teaser rate and/or the longest introductory period, issuers must focus as well on soliciting those customers who transact as well as revolve and build products motivating both behaviors.
Balance transfers are more effective when aimed at specific revolving debt the consumer currently holds rather than all-purpose transfers. Tiered rate structures can be effective in motivating the consumer to keep the account open and active beyond the end of the introductory period.
As a fourth step, generally wrapped around data warehousing and a number of decision-support tools, a management program can assess customer value throughout the relationship and maximize it by helping preserve higher- value customers and enhancing lower-value relationships.
A robust program touches all major aspects of an issuer's operation, making use of significantly enhanced customer profitability and risk analysis and additional internal and external data.
A notable example of customer-value-management-enabled capabilities is understanding customer profitability, including profit potential and profit at risk.
This analysis includes analyzing use patterns, the value of additional relationships both within and outside the issuing bank, and the likelihood of this customer receiving and responding to more attractive competitive offers.
Significant additional data and modeling capabilities are integral to such a program. Products and product features are continually tested using focus groups, market research, and pilot issuances. Results are rigorously managed, including determination of root causes moving customers who accept offers, decline offers, or switch to competitors.
Customer retention strategies must be predictive and preemptive. Customer credit limits should be reviewed and potentially adjusted a number of times each year. Annual percentage rates should be periodically reviewed in light of customer risk and profit at risk.
Analysis of buying habits can give indications of marriage, home purchase, the birth of a child, and other significant life events that alter a customer's use of and need for credit.
The four strategies embody, on one hand, a lengthy process requiring potentially significant investment. On the other hand, programs failing to embrace and act upon the need for change will ultimately fail to enable effective competition with the industry leaders who continue to adopt and refine these strategies.
