Card issuers must take care of their top clients
By Edmund Lin and Jim Hildebrandt (Business Weekly)
Updated: 2004-07-28 15:55

The opening salvos of a looming credit card war have been fired in China -- the world's hottest economy.

With gross domestic product (GDP) expanding at a sizzling 9 per cent, China's regulators have given American Express (Amex) the green light to offer revolving credit cards to the country's growing middle-class.

Meanwhile, Citibank has declared it has big plans for China, leveraging its joint venture investment in Shanghai Pudong Bank.

Asian financial institutions have tended to focus, understandably, on the competitive threats posed by these developments.

Amex is poised to expand its mammoth scale, reducing regional costs in order to attract new card users. MBNA, which wrote the book on issuing affinity -- group cards -- to, say, graduates of the same university -- can be expected to roll out these techniques in the Chinese mainland, and then more broadly across Asia.

But there's countervailing good news: Asia's credit card companies have acquired millions of cardholders, and learnt a lot about them -- sometimes the hard way.

Over the past few years, Hong Kong and South Korean issuers have written off massive amounts from overexuberant card lending.

Yet, this painful process has also revealed better ways of identifying their best customers, a group that can help them grow in the face of new competition.

Research by Bain & Company indicates retaining and deepening an existing customer relationship can be five to 10 times more profitable than acquiring a new one.

To build loyalty among this base of existing customers, financial institutions must manage risk more prudently to prevent the kind of massive write-offs they have previously experienced.

Asian lenders still lack an infrastructure of well-established credit bureaux on the ground in China, for instance.

But they can improve risk management by expanding selectively among China's booming urban centres, targetting specific customer segments and developing early warning data on their customers' spending behaviour and borrowing patterns.

Issuers must also continue lowering costs -- and pass cost savings on to customers. That is a critical step to making themselves more competitive.

Those with multinational operations are rapidly combining their Asian processing operations into a few key centres, and, in some cases, looking to add US and European volume.

Having operations in multiple countries also gives financial services firms the ability to shift costs and technology to the most favourable region.

Ultimately, however, the winners in the battle for Asian credit card holders will be determined by who has the most loyal customers. For most lenders, that shift in focus requires a fundamental change in strategy.

Many Asian credit card companies still spend more than 80 per cent of their budgets on finding new local customers.

Such spending is often misguided. It usually takes between two and three years to recoup the cost of acquiring a customer. Typically, up to half of these new customers will not linger long enough to justify the cost of their acquisition.

By contrast, our analysis indicates turning a new customer into an active one generates two to three times as much in profits as simply acquiring the average customer.

In order to take good care of your top customers, you first have to know who they are.

Typically, just 30 to 40 per cent of customers generate 100 per cent of profits in the credit card business.

Asian lenders need to quickly identify their most profitable customers, and then protect them, particularly bill-paying types who spend large amounts, those maintaining steady revolving balances or frequent travellers with high volumes of overseas transactions.

Another important step to loyalty is providing incentives for new customers to use the card early and often. People who use their new cards immediately tend to become the best customers over the long term, indicates Bain analysis.

Generally, between 5-20 per cent of active customers voluntarily cancel their cards in the first 12 months.

In comparison, inactive customers have cancellation rates as high as 80 per cent.

While Asian issuers are spending money hand over fist on new customer acquisition, most are underinvesting where it counts most -- activating and deepening the accounts they have already opened.

To run any successful financial services operation, it is critical to know which sales teams and which marketing efforts bring in the right kind of customers, and convince them to use the card regularly.

The powerhouses in credit cards have developed innovative ways to use customer relationship management tools to gauge their own effectiveness, by measuring how each customer stacks up in terms of receivables, revenues and profits and tying that data back to marketing initiatives.

In the United States, MBNA posts customer-oriented performance metrics on public notice boards and funds employee bonuses on days when the company as a whole hits more than 90 per cent of its targets.

At Bank of America, performance-based pay is measured by the extent to which customers use its products, rather than just how many products are sold.

China's burgeoning market will be the testing ground for Asian credit card companies as they adapt these competitive tools to Chinese consumers.

Even as China opens up, however, the region's credit card issuers can expect dramatic consolidation.

The importance of scale in credit card lending is reflected in the rapid consolidation of the US market, where the top 10 credit card issuers now hold 90 per cent of the market, compared with 45 per cent in 1990.

That makes it all the more vital for Asian card companies to hold on to key customers -- they represent a lender's most valuable assets.

[The author, Edmund Lin and Jim Hildebrandt, are partners in Bain & Company, an international financial services firm. They lead the company's operations in Southeast Asia and Greater China.]

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