Refining Portfolio Management

In this month’s guest article, Stephen Mendelsohn, a senior manager at US payment consultancy First Annapolis, looks at how continental European card issuers can increase portfolio profitability by taking the lessons learned from the US and UK and placing more focus on the fundamentals of portfolio management.

While credit and debit card issuers in continental Europe have made great strides over the past several years in increasing their numbers of cardholders, a great many of these organisations have not yet been as successful at the basic fundamentals of portfolio management – for example activation, usage building and retention. Such activities, staples of large issuers in markets such as North America and the UK, are still uncommon, at least in a systematic manner, at many issuers in Europe and elsewhere, even at very large domestic players.

This points to a major opportunity for such issuers as the sale of a new card account is only the first step on the road to building a successful, and profitable, long-term card relationship.

Activation

Sales of new card accounts is the area which receives the most attention and marketing focus, with issuers often paying hundreds of euros per new account for costs related to direct mail, outbound call campaigns, advertisements and/or mobile sales forces, and commissions to branch employees.

However, the investment to sell a new account is wasted if the new card is not activated – that is, if it is never used at the point of sale to make a purchase (this is known as initial activation, which is often confused with ongoing activation, an area we describe later on). In general, a card which has not been activated within six months will never be used, so the window of action for issuers is a tight one. In the most extreme (though not uncommon) case, issuers simply place a card in the hands of a customer (often literally, as card distribution at branches is still a practice used by many European issuers) without any form of explanation on how or where the card can be used or how the amount spent on purchases is to be repaid.

Other issuers practice more advanced techniques of mailing cards to customers with welcome packs, though these materials often lack detailed information on how the customer can fully utilise their cards for purchases and cash withdrawals at a wide variety of locations domestically and internationally and how cards are safer than other forms of payment.

In general, however, most European issuers do not systematically track the progress of new accounts as they move from card delivery to activation on the system (by phone call or other means to literally make the card capable of usage) to activation at the merchant. Best practices at very skilled issuers show that customers who do not self-activate (that is, begin to use their cards without any additional follow-up by the issuer) must be contacted early and perhaps often to get as many new customers as possible to use their cards for purchases. Depending on the issuer’s specific market environment, differing tactics may be utilised to produce the greatest activation rates using the least amount of time, resources and costs.

For example, in markets where call centre employees are relatively inexpensive, such as Eastern Europe, some issuers have found that it is possible to call all new customers with an initial ‘welcome call’ aimed at ensuring the customer has received their card, understands how the product works and where it can be used and in prompting activation.

These issuers often make additional calls to customers who still have not activated their cards in the months following the welcome call, with ever-increasing offers (for example, cash rewards for initial usage) aimed at reducing the pool of never-active cards to the bare minimum.

Of course, making phone calls to customers is not always costeffective (or possible in situations where the customer is not available to take the call), so other contact channels, ranging from e-mail (the lowest cost channel), to SMS messages, to direct mail are often employed.

Issuers should track the results of their activation efforts in a methodical and rigorous manner to measure the varying effectiveness of timing, communications channel and reward offer to fine-tune their activation and other portfolio management efforts. This process is commonly known as ‘test and learn’.

Usage Building

Once a card is active, the key goal for an issuer should be to build continuous and ever-increasing usage. In some countries, such as Spain, which have seen recent decreases in interchange on both credit and debit card products, usage-building is a key way to build stable revenues, especially in today’s climate of higher losses on accounts carrying balances.

Regardless of the local interchange rates, issuers should strive to increase usage to drive additional revenues. Much like activation, many issuers in Europe and other markets often neglect their cardholders once they have sold them a card or provided them one as part of a new account opening.

Rather than tracking which cards are used frequently per month, which are used lightly, which are used sporadically over several months and which are never used and taking appropriate action to treat each segment, issuers simply move on to selling new cards – a costly activity and one which neglects the ability to earn revenues from customers who have already been costly for the organisation to acquire.

There are many potential activities that issuers attempt to spur additional usage. These can involve ‘spend and get’ offers which involve offering cardholders cash bonuses, discounts, rewards points, gifts, entry into lotteries or other compensation in exchange for general usage or usage at specific merchant sites or categories (all activities which can be tested and modified in a ‘test and learn’ environment that evaluates factors such as communications channel and offer). The most basic form of usage development, however, is education – making sure the customer remembers they have the card, understands its usefulness and where and how it can be utilised.

Retention

Even more than for cards which are never activated, the loss of an account represents the end of the line for a customer relationship: an immediate cessation of revenues to an issuer. In markets such as the US, where annual fees are now uncommon on non-rewards cards, annual fees are still a large driver of revenues for continental European issuers. This is a double-edged sword for issuers.

On the one hand, it is often the leading cause of customer-driven account closure. On the other hand, customer-initiated contact with their issuers to close an account provides a unique opportunity for issuers to not only save an account, but also to increase customer satisfaction, provide product education and even cross-sell other bank products.

Originally Appeared in the January 12, 2009 Issue of Cards International The most effective manner to retain customers is via a bankoperated retention unit, staffed by an experienced team of employees from within the bank’s card products call centre. Currently, many European issuers allow cards to be cancelled at their branches. However, this is not only a distraction from more important branch tasks, it is also ineffective, as most branch employees are not skilled at saving card accounts, often preferring the ‘easy way out’ of simply closing the account in the hopes of saving the overall account relationship.

Instead, issuers should mandate that cardholders contact their call centres to close card accounts. These calls should then be routed to the retention unit, which must be equipped with both the technology to review an account – for example, overview of lifetime account activity, view of overall banking relationship, and knowledge of both card-level and account-level profitability – as well as the authority to make alterations to a customer’s product, for example one-time or permanent reductions or waivers of annual fees, changes to interest rates, product upgrades, and the like.

Like activities to activate cards and increase usage, these product alterations should be rigorously evaluated in a test and learn environment to maximise the benefits from saved accounts with the costs in lower fee and interest revenues.

Of course, there will be instances where the issuer will not be interested in saving the account, such as situations where account use, demands on customer service, or other activities have proven unprofitable to the issuer, but the decisions for such actions should reside in a central location rather than being disbursed across the bank’s retail network.

Management Reporting

Quite often, issuers have little idea how their portfolios perform with any of the areas above (nor, in many cases, do they know the profitability of their card businesses) and to do so often requires a long and difficult process of requesting information from disparate IT systems.

So as important as it is for issuers to put into place activities to drive increased activation, usage and retention, it is equally important that they put in place the tracking and reporting mechanisms necessary to measure the current state of their portfolio. Such efforts can begin slowly and become more sophisticated over time. The fact is, however, that without some means of measuring the current level of performance, it is impossible to measure the effect of any activity designed to improve such performance and thus make changes to become more effective over time.