Rebuilding Credit Card Profitability post COVID-19
The current pandemic is having far reaching consequences across all aspects of society. Compared to other industries the impact on the credit card industry is relatively mild and from a customer perspective the value of on-demand liquidity is now clearer than ever. However, there will be significant impacts on industry profitability. Reduced international travel will severely impact foreign currency fees, a major revenue driver for credit card issuers. Likewise, stresses on borrowers will drive marked increases in bad debt. Both issues are likely to be with us for some time so what steps should issuers take to adjust to the new normal?
With customers in distress revenue levers are going to be hard to pull, so cost management strategies will need to come to the fore. No doubt tough decisions will need to be made, but care should be taken not to cut too deep and damage future prospects. Wherever possible sustainable efficiency savings should be prioritized over blunt “quick-fix” cuts in areas such as staffing and marketing.
Let’s be clear; efficiency savings are harder to achieve than quick-fix cuts, and may require expert advice. The upside is that they make the organization fitter, more competitive and more robust on an ongoing basis. They are “no-regret” actions.
So how can these savings be obtained? Here we’ll focus on two of the industry’s largest variable cost lines:
- Reward program costs.
- Card scheme fees.
Points based reward programs are an important part of the overall credit card proposition. They are used to attract/retain customers and also to incentivise spend. Cost-reduction efforts in this area typically focus on reducing earn rates or increasing the number of points needed to redeem rewards. Whilst both aspects do need to be properly calibrated, these adjustments represent dis-investment in the customer proposition and risk a negative impact in the longer term.
Efficiency gains should be prioritized ahead of cuts and can be achieved in a number of areas including:
- Better aligning reward program economics with underlying financial drivers.
- Better targeting of incentives and offers.
- Reducing customer gaming and other value destructive behavior.
- Conducting cost-assurance and optimization exercises on program/system set-up.
A well-executed efficiency program can often reduce cost by 10-15% without impacting the customer proposition or market competitiveness. The chart below illustrates the sources of cost savings from a recent engagement with a major card issuer where savings worth circa 13% of total reward costs were identified.
Card Scheme Fees
Every time a credit, debit or prepaid card is used both the issuing bank and acquiring bank pay a small fee to the card scheme with which the card is associated (typically Visa or Mastercard). With huge numbers of transactions these fees quickly mount up to significant values and it is no surprise that both Visa and Mastercard are highly profitable organisations. So what can be done to contain or reduce these costs?
Leading banks in North America, Europe and Australia have taken steps to reduce these costs and have achieved significant savings. In general Asian and African banks have not been as active in managing this aspect of their businesses, so what can they learn from their Western counterparts?
Generally the banks that have made progress in this area have focused on the following:
- Understand what you are paying forand identify quick-win savings. This is an area where expert help and forensic analysis can be invaluable. Billing arrangements are highly complex and often poorly understood. Typically clients find out that they are paying for services they do not need, or are shocked when they understand how much they are paying for certain items. Addressing these issues can create immediate savings.
- Create an organisational centre-of-excellence. Scheme fees are paid by multiple business units including credit cards, current/transactional accounts and merchant acquiring. They also span consumer and business segments and may span multiple geographies. Pulling specific responsibilities into a single centre-of-excellence allows greater understanding and control – the first step to better management.
- Negotiate improved terms. The largest savings have been achieved by banks negotiating enhanced terms with the card schemes. Negotiated outcomes can be improved through a series of steps:
- Obtain an expert-level understanding of financial drivers and potential outcomes
- Align the organisation across divisions and geographies.
- Put in place a structured procurement process.
- Be willing to enter into win-win agreements that offer value to both parties.
In summary, issuers can act now to increase cost efficiency in ways that do not involve reducing staffing levels. Doing so is a “no-regret” action and should be considered before reducing investment in growth or customer service initiatives. Both areas are highly technical and obtaining expert advice, especially at the start of an initiative is likely to yield better results.