Credit Card Issuers Must Keep an Eye on the 'Spend'
More states have introduced bills that would prohibit retailers from adding surcharges to credit card transactions. Few, if any, actually do so, but an outright ban could further weaken their negotiating power with Visa and MasterCard.March 28
Baseball players are told from an early age to keep our eye on the ball. In credit card banking, we should be told to keep our eye on the "spend." Monitoring the activity of your cardholders provides valuable insights that should not be ignored. Unfortunately, most banks don’t give this crucial aspect of their business the attention it deserves.
Given the challenging economic climate, it's tough to fault banks for putting their efforts into generating revenue via acquisition, fees and interest on revolving balances. But making spend assessment a low priority is as short-sighted as taking your eyes off the ball.
Examining trends in spend activity provides a clear indication of customer engagement, which gives you a keen sense of the overall health of the business. It allows you to identify — and address —potential long-term problems and helps guide you toward solutions.
In examining your customer spending trends, start with the most basic question: Are your customers increasing or decreasing their spend volumes with you? Don't make the mistake of letting new acquisition mask spend trends.
You must also consider three other key questions: Are customers increasing or decreasing their purchase frequency? Are they spending in broad categories or using their cards for very category-specific purchases? How do changes in their spend correlate to your share of wallet?
By developing answers to these critical questions, you will be able to better manage your portfolio as well as remedy problems before they become too big to handle. Particularly, in cards with no annual fee, inactivity is an indicator of attrition. By proactively monitoring spend and taking decisive actions to target issues and opportunities, you can improve the stickiness of the relationship and improve your customers' engagement with your cards.
While analyzing patterns, the data may reveal that some of your high-value customers are spending less. Primarily, you need to determine why these customers are decreasing spend, and whether the change is connected to a shift in their perception of the card.
Cardholder spend can decline for a variety of reasons, including seasonality, change in cardholder lifestyle or change in financial situation. Those reasons certainly invite further exploration, but aren't necessarily a cause for alarm.
However, in other cases the card has lost enough relevance to drift from its primary position in a customer's wallet. These situations call for more aggressive analysis and decisive action.
When customers shift spend to another card, that's a high-priority alert.
When cardholders reach their comfort limit on the line of credit and don't want to exceed it, treat that as an opportunity to examine your credit line policies.
If you begin to spot trends in decline, especially with high-value customers, then it's time to examine whether there are problems with engagement, and take a proactive approach to solving the problem.
Like the baseball player mired in a hitting slump, the first step is to determine what's driving the decline and then develop a strategy to reverse the trend.
You've got to take stock of your marketing. Have you continued to remind your customers about your value proposition through relevant marketing? Perhaps their lack of engagement isn't due to the value proposition but to a failure to sustain excitement about it.
Are you using acquisition channels and strategies that don't drive profitable behavior? Evaluate the channels and strategies you're using currently with an eye toward the type of customers you're drawing. Are they the high-value cardholders that will keep your program healthy, or ones perpetually hunting for the next new deal?
Finally, are customer service issues driving dissatisfaction? Engagement is a two-way street. How often are you talking to your customers and determining their level of satisfaction?
By assessing your cardholder spend patterns, you'll gain a new, sharper understanding of your business, one you will not get from focusing too much on other short-term areas. By keeping your eye on the right ball, you can strategically manage risk and more productively engage your customers, who will respond with renewed card activity. And in the world of banking, that's a home run.
Stephanie Cohen leads the financial services consulting practice for LoyaltyOne Consulting.