Transcript Credit Card Management
An Introduction to Cards Business
- A Complex Business of Many Moving Parts
Pradeep Pant Cards Business Director Citibank N.A., Taiwan
March 22, 2005
Note The data used in this presentation is indicative to explain the concepts of Card Business and may not be accurate.
“
As regulation falls away & competition intensifies, management talent & insight... will become critical success factors.”
- The McKinsey Quarterly, 1997
What is this session about?
• Cards market in Asia Pacific • Market Scenario in Taiwan market • Citibank Cards business • What is Cards business?
– P&L Dynamics of Cards Business?
• What are the Key Functions in Cards Business?
– What about kind of skills & people needed in this business?
• A Few Case Studies
Asian Economies are growing at a Fast pace 14.0% 13.1% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 7.4% 400 350 357
Gross National Income Growth
300 250 6.4% 5.9% 4.3% 3.0% 200 150 2.1% 100 1.5% 50 -0.4% -1.2% -3.2% 0 -2.0% 230
Consumer Credit Outstanding – US$ Bn
131 130 101 82 43 43 19 15 4 -4.0% -6.0% •
Expanding middle class and relatively young age structure
•
Visa reported 42% growth in purchase volumes for the Asia-Pacific regions in 2003 compared with 12% globally.
•
Cards to be a key component of the development of consumer credit markets as household incomes increase
•
Low penetration in key markets
There is a Large Potential for Usage PCE Penetration by Country
RSV/PCE % 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% US AP Average 0.4% 0.4% 1.0% 1.3% 1.6% Pak Ind Chn Indo Phil 3.1% 5.8% 8.0% 9.8% 10.5% Jpn Thld Msia Twn Sgp 12.3% NZ 15.4% HK 17.6% 18.7% Kor Aus
….And Penetration 3.00
2.78
2.50
2.00
1.50
1.00
0.50
1.84
1.53
1.06
Credit Card per Adult
0.71
0.33
0.07
0.07
0.04
0.02
0.01
US = 5.7 per Adult
Cash Dominates PCE spending 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
9 29 21 31 13 3 1 2 13 16 4 15 6
Cash Payments Check Payments Accelerate Migration from Cash to Cards Cards Other Payment Methods
Hyper Competitive Environment
Global Players • Similar Business model • • • Committed to deliver service, quality Strong expertise in Analytics Corporate hurdles for Credit & Profitability – Limited Pricing appetite • Focus on top-end- predictable & profitable segments Regional Players • Present in few countries – Strong market-specific alliances – Focus on building strong Cards business • Reasonably strong Brand image – Strong goodwill • Good delivery infrastructure but low expertise on Cards • Focus on building Cards business – Strong mid-segment presence – Resort to aggressive pricing Fragmented market- Future Opportunity for Consolidation
No. of Players AP - Top 10 Players - Share of Spend 56.3%
185 56.0% 180
54.8% 180
55.0% 175 54.0%
174
170 53.0% 165 52.0% 51.0% 50.0%
160 51.8%
160 155
Source Visa
2004 150 2002 2003 Single-Country Players • Strong presence, multi product player – Recognized, trusted brand • Relatively less experience in Cards business • • Considerably lower hurdles Highly focused on building market share – Willing to disrupt market structure – May resort to short term irrational pricing
What is this session about?
• Cards market in Asia Pacific • Market Scenario in Taiwan market • Citibank Cards business • What is Cards business?
– P&L Dynamics of Cards Business?
• What are the Key Functions in Cards Business?
– What about kind of skills & people needed in this business?
• A Few Case Studies
• • • • •
Taiwan Market
Strong economic recovery in 2004 led to GDP growth of 5.9% in 2004 (est) General improvement in Consumer Confidence- Private Consumption growth also picks up (3.0%) Some slowdown expected in 2005- GDP growth at 4.5% and PCE at 2.9% Taiwan dollar has appreciated significantly versus US$ over the last 12 months High Employment levels with 10.2MM labor force – Per Capita GNP- $14,961 – Unemployment rate at 4.5%
1999 2000 2001 2002 2003 2004 (forecast) GDP(%) 5.42
5.86
-2.18
3.59
3.33
PCE(NT$B) 5,641.31
5,981.27
6,042.63
6,149.51
6,155.95
5.93
6,426.60
Market Background- Regulatory
• Regulators very active with the goals of – – Consumer protections, – Stable credit environment & – Fair competition in Cards Industry • Also Bankers’ Association plays an active self regulatory role • Card Businesses need to report independent financial statement by 3Q05
• • • •
Market Scenario
Developed Credit Cards market with 90% of eligible population holding Cards 2.4 Cards/ person and 4.4 Cards in every eligible person’s wallet Penetration of Cards & Sales has grown aggressively PCE Penetration trends during 1999-2004 are below – Currently over 22% of PCE is on Cards 1999 2000 Card Sales/ PCE(%) 11.51% 13.37% 2001 2002 14.49% 16.36% 2003 19.12% Source: Directorate-General of Budget, Accounting & Statistics, Executive Yuan, FSC 2004 (Forecast) 22.72%
Market Growth - CIF
As of Dec. 2004, Taiwan Credit Card Market CIF: 44 MM, with growth rate of 17% 50,000,000 45,000,000 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0
48% 41% 39% 28% 35% 32% 31% 20% 17%
60% 50% 40% 30% 20% 10% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2005 CIF Taiwan MKT Growth Rate
Market Growth - Sales
As of Dec. 2004, Sales for all credit card brands in Taiwan: NT$1,460BN ， with growth rate of : 24% 1,600,000 60% 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 51.00% 39.00% 33.00% 22.00% 23.00% 10.00% 14.90% 16.62% 50% 40% 24.03% 30% 20% 10% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 Total Sales Taiwan MKT Growth Rate Focus shifting from Issuance to Usage
•
Competitive Environment
Over 60 Card Issuers, many may be unprofitable • “Free-for-Life Platinum” Market • Intense competition for Place-in-wallet and Share-of-wallet – High Advertising spend – Regular usage promotions – Large number of Cobrands • Citibank is #2 in Market Share Card Sales in Taiwan
What is this session about?
• Cards market in Asia Pacific • Market Scenario in Taiwan market • Citibank Cards business • What is Cards business?
– P&L Dynamics of Cards Business?
• What are the Key Functions in Cards Business?
– What about kind of skills & people needed in this business?
• A Few Case Studies
Citi Cards- Asia Pacific
Geographic Reach
Current Countries Future Flags China India Korea Thailand Malaysia Singapore Taiwan Hong Kong Guam Philippines Vietnam Indonesia Australia
Strong Leadership in Marketplace, Consistent Financial Performance
Citibank Card- The Main Card in Wallet 8000 7000 6000 5000 4000 3000 2000 1000 0 Industry Citibank
Spend per Card (US $)
#1 Pan-region Card Issuer in AP • Over 13 MM Cards in 11 countries – #1 or #2 in 9 markets – China- recently launched 12th market • Award for the best Internet website in 4 countries (2003) – Singapore website rated the best in Asia for 3 consecutive years- 2002, 03 & 04 – Rated best in Korea, Indonesia, Malaysia, Thailand, Philippines & Guam in 2004 • Card businesses in all markets recognized for outstanding products & service – Several external Awards, e.g., India (2002), Indonesia (2003), Thailand (2004), Singapore (2004)
Mission
• Leadership in Payment Products category in Asia Pacific through – The best products, Customer Service & technology – Maximizing Risk-Reward balance by using Credit and Analytical tools • And make a significant contribution – To the bottom line of the corporation – To the customer base of the corporation
What is this session about?
• Cards market in Asia Pacific • Market Scenario in Taiwan market • Citibank Cards business • What is Cards business?
– P&L Dynamics of Cards Business?
• What are the Key Functions in Cards Business?
– What about kind of skills & people needed in this business?
• A Few Case Studies
A Business of Many Moving Parts
Risk Management Market Leadership Financial Performance Market Knowledge Strong Product Data Management Customer Service
Consumer Credit Products
Open End SECURED Allows the use of property to secure an open-ended line of credit and enables the borrower to tap the line whenever desired and to repay it over time.
UNSECURED Open-ended credit in the form of a credit card is the most flexible type of consumer credit. Once the line is approved, the cardmember can choose when and how much to use it.
Closed End Usually a small down payment, has a signed contract spelling out schedule of payments, is secured by collateral and has a specific start and end date.
Same as Secured Closed-End except credit is granted on the strength of the borrower’s credit worthiness alone and does not include collateral.
Key Players
• Issuers: Financial institutions who issue credit cards • Consumers: Individuals who use the cards • Merchants: Points of sales where the cards are used • Acquirers: Financial institutions who process (acquire) transactions performed at the merchant sites • Associations: Organizations that provide networks to facilitate transactions between Acquirers and Issuers (Visa, MasterCard & Diners) • Others: Regulatory bodies, consumer right groups, third party service providers, credit agencies, etc.
Transaction Flow
1. Credit card 2. Goods or services
Merchants
3. Transaction Info 4. Settle transaction (Less discount) 8. Payment
Cardholder
7. Billing
Acquiring Bank Issuing Bank Visa or MasterCard
5. Credit acquiring bank and transfer information 6. Debit issuing bank and transfer information
Transaction Flow - Example
$100 Charge
MERCHANTS
$100 Charge $100 worth of merchandise Receives $97 Pay $100
CARDHOLDER
Bill $100
ACQUIRING $1 ISSUING $2 VISA or MasterCard
$100 Charge, Pays $97 $100 Charge, Pays $98
Cards P&L Structure
N
O
P
A B C D
E
F G
I
H
J
K
L
M INTEREST ADJUSTMENT INTEREST REVERSAL COST OF FUNDS
NRFF
INTERCHANGE ANNUAL FEES OTHER FEES
FEES CUSTOMER NET REVENUE
CREDIT COST (NCL/LLR)
NET CREDIT MARGIN
EXPENSES
EBIT
TAXES
NET INCOME = A - B - C - D = F + G + H = E + I = J – K = L - M = N - O
Revenue Components
NET REVENUE FROM FUNDS (NRFF)
Interest Revenues Interest Reversal (Cost of Funds)
FEES & COMMISSIONS
Interchange (Net of Settlement Fee) Annual Fee FX Fee Cash Advance Fee Over-Limit Fee Late Fee Insurance Fee (Reward Cost) (Acquisition Cost Amortization)
Revenue Components - Detail
NET REVENUE FROM FUNDS (NRFF) 1.
2.
Transactors: Revolvers:
ANR x Cost of funds ANR x (Gross interest - COF)
FEES & COMMISSIONS 1.
2.
3.
4.
5.
6.
7.
8.
9.
Interchange: Annual Fee: FX Fee: C/Advance Fee: Over-Limit Fee: Late Fee: Insurance Fee: Reward Cost: Acquisition Cost:
Credit Cost
MEASURED AS A PERCENTAGE OF:
Sales for a charge card product ANR for a credit card product
NET CREDIT LOSSES (NCL):
Gross Write-Off (GWO) - Interest & Fee Reversal = Gross Credit Loss - Recoveries = Net Credit Loss (NCL) GWO is a function of bucket-wise outstanding, flow rates and new cardholder spend Recoveries are a function of written-off volume and success rate on collection
Net Credit Margin Dynamics
External Environment
Economic Competitive Regulatory
Internal Triggers
APR Sales Payments Account Delinquencies
Stable Net Credit Margin Business Initiatives
NIM Fee Mgmt.
Portfolio Mgmt.
• Risk Adjusted Pricing Policies • Tiered Fees • Enhanced Funding Strategies • Revenue Services • Re-engineered Acq/ Balcon Offers • Sales Stimulation and Activation Programs • Enhanced Wallet Share Growth • Credit Line Increases • Portfolio Acquisitions • Segment Mgmt • New Initiatives • Product / Value Differentiation Customer Account Policies Risk Management • Customer Performance Data • Collections Strategies • Authorizations and Balance Control Techniques History/ Common Bureau • Business Leverage • Implicit Differentiation • Explicit Differentiation • Channel Product Optimization • Credit Line Management • Acquisition Strategies • Risk Tools & Infrastructure
Expenses
ACQUISITION:
Sales & marketing, credit initiation and card issuance. Driven by # of new accounts/channel mix and approval rate.
SERVICING:
Customer (citiphone, collection) & Non-Customer (payment/transaction processing, authorization, settlement). Driven by # of open accounts and level of automation/centralization.
MARKETING:
Advertising, product & portfolio management (activation, upgrades). Driven by scale and depth of communication/program.
TECHNOLOGY:
Telecommunication, data centre, enhancement, maintenance and production services. Driven by extent of functionality and level of centralization.
INFRASTRUCTURE:
Business management, support functions, fraud losses and corporate allocations. Driven by sales volume (fraud) and level of efficiency.
Business Drivers
Accounts • Cardholder fees • Acquisition costs • Servicing costs • New accounts • Attrition Sales • Interchange fees • Cash advance fees • Reward costs • Transaction costs • Usage ANR • Gross interest • Cost of funds • Net credit losses • Collections costs • Revolving
Vintage P&L
600 500 400 300 200 100 0 -100 -200 Vin=3 Vin=2 Vin=1 Vin<=0 Year 1 -71 445
EBIT (US$MM)
Year 2 -102 47 539 Year 3 -104 57 77 552
What is this session about?
• Cards market in Asia Pacific • Market Scenario in Taiwan market • Citibank Cards business • What is Cards business?
– P&L Dynamics of Cards Business?
• What are the Key Functions in Cards Business?
– What about kind of skills & people needed in this business?
• A Few Case Studies
Operational Framework
Marketing
• Cardholder Acquisition • Portfolio Management • Branding & Advertising • New Product Dev. & Partner Mgmt • Research & Planning
Risk Management
• MIS • Credit / Risk Management • Risk Policies • Collections • Fraud Security
Operations
• Credit Initiation/ Appl. Processing • Authorization • Transaction Service • Front End Collections • Customer Service
Technology
• Front end distribution System • Host System • System development & maintenance
Others
• Financial Control, Human Resources, Legal/Compliance, Treasury
The Marketing Cycle
Environmental Analysis Consumer research & target identification/ segmentation Product, program & channel developments Cardholder acquisition Portfolio management Customer retention management Customer, product, program & channel evaluation
Understanding Customers-
What are characteristics of Taiwan society?
• • • •
Highly Competitive
Fast Moving & Dynamic Entrepreneurial & Achievement / Goal Oriented Flexible to Changing Situations
Understanding Customers-
Major Consumer Segments 1. Identity Builders 2. Career Builders 3. Family Builders 4. New Life Builders
Target Groups ! !
Understanding Customers-
Where do Customers Spend?
•Coffee
Leisure Spending
•1,000 •Cigarette •KTV •Taxi •Shopping •Phone Bill •Night Life •Total •1,500 •4,000 •1,000 •10,500 •2,000 •2,000 •22,000
Implications
•Total spending on leisure is NT$ 22,000. Out of these, spending on dinning and entertainment is the highest, followed by shopping. Therefore, focus on these segments may be considerate, especially for promotion purpose.
The Credit Cycle
Write-Off
MIS Control & Policy Scoring Performance Measurement
Strategy & Program Development Program Implementation & Analysis Collections & Fraud Security Servicing the Customer
Application Processing
• Receive & process applications & credit-line increase requests, and related offers in a timely and cost efficient manner.
• Develop & maintain a rational, automated, consistent methodology for scoring the information.
• Review declines cases to determine if consolidation, credit-line reduction or “Down-Sell” will address the needs of the applicant.
Application Processing
• Key Volume Statistics – Total Applications Received/Processed – Total Month-end Pending – Total Expense – Total FTE • Effectiveness – Approval Rate
Application Processing
• Efficiency – Deviation rates – Incomplete Apps • Quality – Data Entry – Verification – Credit Decision
Authorization
• Crucial process in controlling delinquency and fraud while providing exceptional service and increasing sales • Good authorization process can – Prevent further credit exposure – Prevent use of lost or stolen cards – Provide opportunity to confiscate cards being used fraudulently – Detect patterns of card usage suggesting fraudulent use – Establish validity of the transaction – Managing portfolio through appropriate authorization policy
Authorization
• Criteria – Outstanding Balance / Available Limit – Delinquency – Length and Depth of relationship – Type of purchase – Validation of purchase – Behavior Score
Collections
• Collection is a Balancing act – Cost vs. Return – Customer relationship (retention) vs. Asset Protection • Customer contact is important – “If you don’t make contact, you don’t collect” • People – Training & performance coaching & monitoring – Collection agency • Process & System – Technology – Performance MIS
Collections Strategy
Balance Control Front End Mid Range Hard Core Charge Off Recovery Bankruptcy / Deceased
Fraud - Mission
• Protect the franchise against fraudulent activities while maintaining customer convenience & service
Fraud - Types
• Traditional Types – Lost / Stolen – Never Receive Issuance (NRI) – Fraudulent Application – Mail / Telephone Order (MOTO) – Account Take Over (ATO) • Emerging Types – Manual Counterfeit (White Plastic, Altered, etc) – Electronic Counterfeit (Skimming) – Merchant Fraud – Internet / E-Commerce
What is this session about?
• Cards market in Asia Pacific • Market Scenario in Taiwan market • Citibank Cards business • What is Cards business?
– P&L Dynamics of Cards Business?
• What are the Key Functions in Cards Business?
– What about kind of skills & people needed in this business?
• A Few Case Studies
Case Study #1 Leveraging Citibank’s Global Presence
Citibank World Privileges
Lift, differentiate, and sustain the brand
• • • 25,000 Merchants In over 30 Countries Flagship partners include • • Raffles Starwood • Banyan Tree • Ascott • ClubMed • Angsana Spa • • • Apple • O2 Davidoff Europcar / Hertz
Case Study #2 Building “Premium”
Thailand Gold Card Re-launch
Platinum Gold Silver / Clear
• •
Background & Opportunities No issuer segment.
focusing on There are over 1.1
MM premium eligible customers available nationwide with high incomes and purchasing power.
2004
Gold Card Re-launch - Own the Segment
• • •
Launched with strong new benefits Expanded market by qualifying more customers- reduce income criteria Strong Advertising support
Case Study #3 - Creating Value for Money
“
Cash for Customers”
Cash Back Card
Objectives
Own a strong ‘Value’ proposition from card users stand point
Strategy
Cash-back to be positioned as stronger value versus Rewards Annual fee- should be higher than Vanilla (metals) cards.
Summary
• • • • • Cards is a universal product with mass appeal Industry continuous to grow- both due to economic growth and cash-to card shift; specially in Asia Effective marketing requires understanding different segment dynamics and support with right product/channel strategy Cards is a complex business requiring significant local/ international infrastructure, and good understanding of risk management, analytics, and profitability dynamics.
It’s a fun & challenging business to work in…
“
As regulation falls away & competition intensifies, management talent & insight... will become critical success factors.”
- The McKinsey Quarterly, 1997