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Adding Value to Your Card Products - Building a Business Case for Rewards

Adding Value to Your Card Products - Building a Business Case for Rewards. Dan Thompson JHA Payment Processing Solutions. Agenda. Defining Rewards Competition Research Successful Program Components Cost/Benefit Analysis Case Study Q&A. Defining Rewards.

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Adding Value to Your Card Products - Building a Business Case for Rewards

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  1. Adding Value to Your Card Products- Building a Business Case for Rewards Dan Thompson JHA Payment Processing Solutions

  2. Agenda • Defining Rewards • Competition • Research • Successful Program Components • Cost/Benefit Analysis • Case Study • Q&A

  3. Defining Rewards A permanent or long-term incentive offered to participating cardholders in order to achieve commitment and primary-card usage status Loyalty points represents the second-largest currency in issue, behind the US dollar. More than 100 million consumers receive promotional currencies (i.e. points)

  4. Defining Rewards • Reward types: • Points-based • Cash rebate • Travel • Gift/gift certificate • Discounts • Cash back • Co-brand/partner-based • Other

  5. Competition • Top Bank Issuers • All offer a rewards card • All offer cash back or cash rebate • Non-bank Issuers • High Performing Credit Unions • 9 of 10 top credit unions by asset size offer a rewards card • 7 of 10 top credit unions in credit card penetration offer a rewards card • 6 of 10 top credit unions in growth in outstanding credit card balances offer a rewards card • 5 of 10 top credit unions in average credit card balance offer a rewards card • Relationship Strategy

  6. Competition • 1.4 billion card solicitations in 2nd quarter 2004, 52% were rebate/reward offers • 53% cash back • 37% non co-brand cards • Rewards cards are growing faster than co-branded cards Synovate/CCM

  7. Competition • AMEX Everyday Promotion gives double and triple points – non-travel purchases account for 2/3 volume • Providian allows cardholders to “buy-down” APR or waive fees with points • Discover offers up to 5% cash back at supermarkets, drug stores and gas stations • Chase offers 3% cash back on all gasoline purchases • Citi offers a full 5% cash back or 5 points per dollar spent at supermarkets, drug stores and gas stations

  8. Competition - Debit • ¾ of debit cards carry no incentives • Debit rewards issuers charge an annual fee ranging between $19-$65 per year

  9. Opportunity 50% of credit card used in 2004 were not in the cardholder’s wallets a year ago • The average monthly new charges in the first quarter for a rewards card were $943 compared to $360 for a non-rewards card – Synovate Inside Track • 2004 TNS Global Study Reasons for opening a new account • Rewards ranked 2ND for all reasons listed • Rewards ranked 1st for “most important” reason Most important reasons for making card primary • Rewards ranked 1st – 27%

  10. Research • Visa Credit Card Commitment Study • Committed • Open • Unavailable • Uncommitted • Offer most potential • The cost to acquire a new customer is six times the cost of maintaining existing ones. • A 5% increase in customer retention yields a 75% increase in customer value. • Young 18-24 • Rewards is trigger

  11. Credit Card Commitment Research • Individual card commitment • “First card” ever owned • Tenure • Innovative/Unique Features • Cross-relationship • Rewards • Communication • Multi-card accounts • Incentive for everyday purchases • Superior service • Internet access • Higher credit limits • Bill payment • Member focus Visa USA

  12. Research • 2/3 of consumers say they’d prefer to have all their financial needs met by one institution • 77% use a credit card issued from another FI • #1 reason cited -> lack of incentives offered by their primary institution • 50% of debit cardholders surveyed said they would spend more on cards with rewards - Edgar, Dunn & Co.

  13. Research • Rewarded cardholders are more profitable • 80% of reward participants do more business as a result of the program • Membership in a rewards program makes these groups more likely to do more business with that company: • 89% of consumers 18-24 years old • 86% of consumers w/ income $75k-$100k • 86% of consumers w/ income over $100k • 60% of American Express cardholders are enrolled in one or more Membership Rewards programs, up 30% from 1998 • 54% lower attrition • Spend 40% more in 1st year • Have ½ credit loss rates • Pay bills faster • Average profitability is 5-times that of non-rewards

  14. Research • 60% of consumers said that a rewards program influences their decision of which credit card to use • 75% of redeemers indicate a rewards program influences their decision • ½ of all adults participate in some type of rewards program • 4 of 10 have opted out of a program • 74% of the drop outs do less business with the company

  15. Successful Program Components • Uncomplicated & Clear • Relevant • Affordable • Attainable • Value perception • Credit limit • Marketing

  16. Successful Program Components • Uncomplicated & Clear • Rules and Regulations • 22% don’t know all the rules • 58% understand them somewhat • 19% understand them very well • 89% more likely to do business • 4 out of 10 have opted out of a program • #4 – rules kept changing (or unclear) • Internet impact

  17. Successful Program Components • Uncomplicated & Clear • Relevant • 27% of affluent travelers carry a air miles card, compared to 7% of non-affluent • 69% of affluent use a rewards card, compared to 37% of non-affluent • 4 out of 10 have opted out of a program • #3 – rewards weren’t relevant • 90% of rewards card offers have a cash back or cash rebate component

  18. Successful Program Components • Uncomplicated & Clear • Relevant • Affordable • 4 out of 10 have opted out of a program • #1 – high fees • 74% of the drop outs do less business with the company • 80% of rewards card offers fell under 9.99% APR in 1st quarter 2004 • 90% of rewards card offers had no annual fee

  19. Successful Program Components • Uncomplicated & Clear • Relevant • Affordable • Attainable • Maritz: Length of time it takes to build up point is primary reason consumers leave a rewards program • 4 out of 10 have opted out of a program • #2 – inability to redeem • Redeemers outspend non-redeemers by as much as 355% - ESC • The average monthly new charges in the first quarter for a redeemer were $943 compared to $360 for a non-redeemer

  20. Successful Program Components • Uncomplicated & Clear • Relevant • Affordable • Attainable • Value perception

  21. Preference Discounts Cash Merchandise Gift certificates Travel Behavior Gift certificates Cash Discounts Merchandise Travel Loyalty Programs -Consumer Preferences Source: Maritz

  22. Card Rewards – Payment Processing Solutions Experience

  23. Successful Program Components • Uncomplicated & Clear • Relevant • Affordable • Attainable • Value perception • Credit limit • Average credit line = $7,699 • Balance rises by 13% relative to credit line increase

  24. Rewards – Case Study • Is a rewards program affordable? Card Program Profile • Premium credit card • Full selection of reward types • Competitive award levels • Mature program 5+ years • Over 100 million points

  25. Cost/Benefit Considerations • Pts-based rewards programs yield between 10 to 25 transactions per active account each month • Cash-back rebate cards average between 10 to 18 transactions per active account each month • Premium card w/ rewards exceeds 75% active

  26. Average Rewards 11.8 trans $80 ticket 75.8% active (3306) Average Non-rewards 7.25 trans $80 ticket size 63% active (2748) Cost Analysis – Case Study

  27. Average Gold Card $1,593,840 sales X .0175 interchange rate $27,892 interchange income Awards $0 Adjusted interchange $27,892 $10.15 per active account Rewards Card $3,120,864 sales X .0175 interchange rate $54,615 interchange Awards $687 admin fees $20,215 redemption Adjusted interchange $33,713 $10.20 per active account Cost Analysis – Case Study

  28. 1% Cash Rebate Card 18.22 trans/active 591 active accounts (83%) $73 average ticket Interchange $13,756 ($7,860) cash back ------------- $5,896 No Cash Rebate Card 7.5 trans/active 435 active accounts (61%) $82 average ticket Interchange $4,681 Cash Back Case Study

  29. Marketing Success Balance Transfer Program summary: Product use: Visa Gold credit card Value: 9.6% APR Appeal: 1% cash back on minimum $1000 balance transfer Promotion period: 11/20/2002 offered for a *limited time (ended January 1) Acceptance options: return completed self-mailer, calling the service center, or visiting Web site. Results Response rate: 3.09% (new and existing cardholders) 227 transfers Cost: $2.84 per piece including 1% pay out $1,274,201 million new balances

  30. Marketing Success Incentives Program summary: Product use: Visa Gold credit card Value: 10.9% APR Appeal: Lowered interest rate and double reward points when use card for 12 or more purchases each month Promotion period: July and August Acceptance options: Use the card Results Response rate: 852/833 Average spending per qualifying account: $1900+ $1.6 million in sales each month Recorded 2nd and 3rd highest total purchase volume, active accounts and total transactions (9/02) 7% increase each month in interchange income (compared to 6/03)

  31. Final Words • 6 of 10 cardholders polled said they chose a card with rewards as their preferred card • 90% stated they would not reduce usage or cancel their preferred card - Edgar, Dunn & Co.

  32. Questions

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