A robust customer retention strategy is an essential part of managing a credit card business, but it has to start with the bottom line, according to a new report available from Research and Markets.
The report, entitled Credit Card Retention Strategies: Managing the Life Cycle for Profit, suggests that the best starting point for such a retention strategy is to address the bottom line: "Well-managed credit card businesses are almost unbelievably profitable - typically returning three to four times the cost of equity in markets such as the UK and the US."
Growth rates - even in the US, arguably the world's most mature credit card market - are well ahead of nominal GDP (gross domestic product), the report says.
Revenue comes mainly from revolving credit extended to cardholders. Other revenue comes from commission fees paid by retailers, interchange and fees charged to cardholders. Global estimates put the profit pool for credit cards at US$26 billion in 2006, with pre-tax return on assets (ROA) at 4.1% and a 14% share of total consumer lending - including mortgages. This figure is expected to double to US$54 billion (29%) in the next 10 years; however, margins are under attack from a variety of directions.
But customer retention should no longer be a simple tactical response within a credit card provider's marketing plan, the report argues. Instead, it must be an organisation-wide response, including the key areas of customer service, marketing, credit and risk, service quality, as well as all aspects of company operations and IT strategy.
Among the key findings and conclusions of the report:
- Credit card organisations need to develop their understanding of retention and loyalty theory before trying to develop a retention strategy.
- A successful retention strategy should take a holistic view of the cardholder relationship and seek to identify key actions that will improve the relationship, expressed as customer satisfaction, loyalty and profit.
- An important challenge in developing a successful retention strategy is gaining organisational commitment. This also requires an understanding that retention management will take time to develop.
- The retention strategy should not be seen as simply an activation and attrition programme. Successful retention strategies require actions at all levels. This includes acquisition, customer service, collections, credit, activation and attrition.
- A retention strategy can be expected to have limited success if it is positioned purely as a marketing tactic. The most successful retention strategies to-date have involved developing an organisational vision. This vision needs to encompass a set of goals to which all components of the credit card organisation agree - including segmentation, profit and loyalty.
The report also identified a number of significant trends and expectations within the credit card industry, including:
- Annual growth for credit cards is forecast (globally) to exceed 10% per annum by 2010.
- The rise of global bank issuers will increase.
- The trends observed in the US market will continue to be dominant.
- Key skills required to run a successful credit card operation will need to be developed.
- An increase in regulation will challenge the global brands.
- Markets will continue to evolve with more of them developing 'mature' status.
- Consumer finance - both bank and non-bank - is an increasing focus for industry players.
- Technology and direct distribution is playing an increased role in the development of products and services.
- Consumer lending has increased but not at the expense of mortgages.
- Consumer write-offs have largely remained low in line with growth and the economic cycle.
- Regulations including privacy and lending requirements have become major initiatives in many markets.
- Personal loans and car lending have not kept pace with credit card lending.
- Developed credit card markets (such as the US, UK and Canada) have different issues than non credit card markets (such as Germany, Spain, Italy and other EU markets).