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This story appears in the January 2009 issue of Cards&Payments.
Not in the last 80 years has the financial industry and the economy at large been under such pressure and turmoil. As much of the world suffers from the collapse and strains in financial markets, credit card issuers must act now to analyze and fine-tune their portfolios to maximize performance and minimize risk.
Preparation and a keen understanding of what actions to take will never be more important for issuers given the critical market conditions facing the industry.
Factors such as the current credit crisis, unemployment and weakened confidence, rising delinquencies and charge-offs, single-digit growth in the number of credit cards and receivables, and the potential wave of regulatory and legislative initiatives that could significantly alter issuer economics have created a perfect financial storm–one that will require unprecedented business-management vigilance, analytical rigor and account-by-account planning.
Despite what may be the toughest environment yet to manage card payment programs profitably, issuers can improve the performance of their card portfolios using data intelligence and strategically sharpened account-management practices. They can learn a lot from other markets where significant changes to card-payment economics have required specific issuer responses.
For example, in Australia when the Reserve Bank mandated a reduction in credit card interchange, banks faced challenges to keep the credit card business performing well. Issuers in Australia were forced to look at their portfolios in new and different ways.
They segmented portfolios carefully and put strategies in place to recover lost revenues and reduce expenses. Card fees, interest rates, loyalty programs, customer service and collection strategies all were closely scrutinized and recast in many instances based on the profitability of the cardholder, or cardholder segment. Consumers came to terms with the changes, or changed their payment behavior accordingly.
With significant changes in place, credit cards remain an important part of the product set offered by banks and credit unions in Australia.
This experience is instructive for the United States. In the midst of a financial storm, issuers must analyze cardholder and transaction behaviors to identify different customer segments and their contribution levels.
Issuers then can evaluate segment-specific actions to understand where good performance is coming from and set alternative pricing and risk management strategies to address portfolio performance issues.
Once issuers better understand the consumer segments in their portfolios, they also can cross-sell additional products and provide additional services for target segments that can enhance fee-based revenues–in essence, changing the revenue mix.
To increase loyalty, issuers should evaluate reward programs to increase effectiveness at acceptable levels of cost for participating merchants and cardholders. Merchant-funded rewards are showing promise as a game-changing way to look at rewards programs and manage cost.
Issuers should also closely monitor the performance of each portfolio segment and periodically compare that performance to industry benchmarks. And issuers should not be afraid to discontinue or modify card-product offerings based on their findings.
Above all, issuers should prepare now, given the stormy economic climate anticipated in 2009, particularly since there are many unknowns in the regulatory and legislative landscape, as well as credit and portfolio performance already under pressure.
Reassess and reinvent segment by segment and card by card. Innovation has always been U.S. card issuers' strength. The time for action is now. CP
Ann Schmitt is a director at Edgar, Dunn & Co., an independent global consultancy for the financial services and payments industries. She can be reached at ann.schmitt@edgardunn.com.
