Tag Archives: credit card

Understanding Customer Needs — Change Is Hard

By: Jonathan Gelfand

Change is hard.  It is true across almost every aspect of life.  Convincing your customer to switch from their first in wallet credit card to yours is difficult at best.  Your customers are invested in their rewards program and understand what they are earning, although probably not in detail.  Even if it isn’t the richest option, the incremental benefit from a change is likely to be relatively small.  Given this hurdle, it is important to really understand your customer and how to overcome inertia through a combination of product, promotion, and channel.

When you’re trying to understand your customer, there are many research tools that can help provide insight into both realized and unrealized needs.  Selecting the right tool is necessary to getting the job done correctly and efficiently.  The converse is not benign, but rather can create disastrous results by developing a product or campaign that isn’t relevant and hence isn’t accepted in the market.

There are three key customer feedback areas that you should focus on as part of the process:

  • Understanding the incumbent credit card behavior
  • Determining compelling value propositions
  • Measuring whether behavior changes are compelling

Incumbent Credit Card Behavior

Almost all, if not all, of your prospective cardholders will have a credit card account already.  You can ask customers from today until tomorrow what they prefer, but at the end of the day their current preferred credit card is probably the best indicator of preferences.  In addition, understanding their incumbent card will enable you to identify the hurdle your offer needs to meet, but it is important to remember that you are competing with their perception of their card, not the actual card.  Many credit card customers only have a cursory understanding of their credit card terms and rewards.

For example, if your customer is using Fidelity’s 2% cash back card, offering 2% for your purchases and 1% for everything else just won’t work.  On the other hand, if they have a World Points card from Bank of America, then the 2% value proposition might work.  Your customers will have a mix of different accounts; you just need to make sure that you are realistic with respect to the opportunity and feedback.  You aren’t likely to get 100% adoption, 5% – 25% is more likely and you need to identify the relevant competitive set for your target, if you can.  In future research you might want to consider looking more carefully at feedback from World Points customers vs. Fidelity customers.  This is only possible if you have sufficient sample size, which is often difficult to gather, but you can aggregate similar types of cards.

It is also important to understand the currency that your customers value in their incumbent card, although it might be different from their preferences in a future card.  Some customers really like points while other like dollar denominated rewards.  This is a key insight.

In many cases your non-credit card loyalty program doesn’t have competition.  If they are buying from you, then they can participate in your loyalty program and double dip with their credit card rewards.  With your credit card, you need to displace the incumbent credit card and that additional rewards currency.  Even if your members love your non-credit loyalty program, the decision to switch to your credit card involves a trade-off that you need to consider.

This interaction between non-credit and credit loyalty from a new account acquisition perspective is central to customer preferences and research can be helpful in understanding.  Many airline programs use miles across both credit and non-credit loyalty offers. In contrast, Ace Rewards uses points for their non-credit card loyalty program and % back for credit card although it is one rewards bank.

Survey research is the best tool for understanding incumbent credit cards.  Focus groups can provide some insight, but they tend not to be representative enough of customer behavior. Also, it’s important to capture the specific details of the card, not merely payment network or issuer, to fully understand the real value proposition. For example, Chase has many varied card offers like Southwest, Chase Freedom, and Sapphire with very different customer value stories.

It is more helpful to provide an open ended question around product name and put in the work to code the products from the responses.  There are always gaps around what a customer thinks their card value proposition is and the actual value proposition.  For example, Chase Freedom isn’t a 5% card despite the fact many customers would describe it that way.  If you ask what they receive in rewards without knowing the product, you can end up with inaccurate information.

Determining Compelling Value Propositions

If you ask someone what they want, they will ask for everything.  To get the best results, it is important to provide your research respondents with trade-offs between reasonable items in the potential offer mix.  Here comes the rub: you need to make sure that you provide reasonable choices, but also choices that push the limits.  If you don’t push the limits and provide trade-offs that push expectations, then you will end up with pedestrian feedback.

Make sure that you have enough permutations to create some variation within the results.  If you don’t test enough different variations, then the results won’t accurately tell you preferences and trade-offs, since there just aren’t enough to work with.

The first type of variation is making sure you have the right categories which include rewards earning, rewards redemption, benefits, features, interest rate, and fees.  In some cases they might be combined or broken into multiple categories.

Within each of these categories you also need to determine the right variants for testing that include enough options, but not too many options, so that you can create meaningful trade-offs.  In some cases, it is possible to extrapolate between different values, but be careful since not all responses are linear.

There are many conjoint tools as well as optimization engines that can help you to do this exercise.  The actual trade-off is best done using a survey instrument.

Not all providers use the same tools or have the same capabilities.  Selecting the right partner, for the right project, is very important.  For example, the sophistication and flexibility of business rules about which items can be shown with other items vary widely by provider.

The cardinal rule of research:  If you don’t put in the right questions, you won’t get the right answers.  Make sure you do this carefully and correctly.  No shortcuts here.


The trade-off exercise helps to provide insights into the relative preferences between different constructs, but doesn’t answer the question of how well it works.  It isn’t possible to assess all permutations, so either as part of the same survey or an additional survey it is important to get feedback around whether the preferred or representative product constructs would appeal to respondents.  This data can be matched with the trade-off analysis to better understand alternate responses.

The measurement phase needs to really get feedback around application as well as usage intention.  In most cases, the goal is to gain the first in wallet position.  Open ended questions provide important insight into the why customers have certain preferences and many help give context to why concepts are working or not.

A survey tool is the preferred methodology to gain enough scale to determine statistically representative feedback.  Although a focus group can provide some interesting perspective from responders, generally the feedback isn’t representative enough to provide significant value and I don’t recommend using focus groups.

Is There Only One Solution?

Often we like to believe there is only one right answer, yet the world we live in often has many right answers.  Sometimes the best answer is a single product, but in other cases we need to use a mix of products to drive the right business results.  Different products can meet different business needs or different credit card needs.  With multiple products there is also complexity.  Balancing these can help to drive strong business results.

It is All About the Customer

At the end of the day you will only have success if you create an offering that appeals to prospective cardholders.  It is essential not to market to yourself, but rather understand your customers.  Research, if executed well, is a great tool and poorly executed research can quickly send you into a quagmire of failure.

Getting the right feedback is the solution. Don’t short shrift the process.

In the next article, I will discuss different types of promotions for acquisition and ongoing engagement. If you have any questions, please don’t hesitate to contact me at jgelfand@partneradvisors.com.

Following the Money – Jonathan Gelfand

Often retailers and other organizations don’t understand how banks make money on credit products offered to their customers (like private label and cobrand cards tied to loyalty programs) and how value is created.  This gap in understanding limits the value partners can realize over the short and long term.  In this series of articles, I will explain some of key drivers of profitability, and how to use performance metrics to assess if your program is working as hard as it can to support your objectives.  The articles will provide information about how banks make money on payment products and best practices to increase program value.    In this column, I will discuss the profitability of credit card programs and how bank economics affect retailers and other partners to banks.

Over the last twenty years, the credit card market has changed drastically.  In the early 1990’s, several entrepreneurs realized that credit cards were the most profitable part of banking and started the credit-card only banks (i.e. MBNA, First USA, Advanta, CapitalOne, First Deposit).  As traditional economic theory dictates, the market became more competitive and with more players in the industry, profits decreased.   At the same time legal changes occurred, driving overall profitability of credit cards down further and the credit card banks were absorbed back into the large retail banks like Bank of America and Chase/JP Morgan.

Since the great recession, banks have become very concerned with the credit quality of their customers in order to manage future loss rates.  Banks don’t share their credit information unless they are required to by law.  Credit information is viewed as one of a bank’s crown jewels.  Therefore, it is rare to get insight into how banks manage the extension of credit.  Recently American Banker (Thursday, February 14, 2013, page 16) published a summary of the credit profiles at major issuers for their securitized portfolios.  Since the banks lump together a portion of the credit portfolios into a tradable security that investors can buy, there are reporting requirements about the included accounts that is very useful in understanding the different bank strategies.    A note of caution is that banks selectively include accounts in the securitized portfolios so these accounts may not be representative of any single bank’s credit strategy.    With that caveat, there is significant value in interpreting and understanding this rich information as insight into both industry and individual bank strategies.

The headline is that banks are increasingly moving up market in their credit strategies.  A couple of examples:

Bank of America increased the share of balances in their securitized portfolios with FICO scores over 720 to 50% in 2012 from 35% in 2007.  This change has come entirely from a reduction in the proportion of balances held with account FICO scores less than 660.  Between Q1 2008 and Q4 2012 the new accounts opened have dropped from 2.5MM a quarter to just under 1.0 MM.  This drop is the result of acquiring only very high FICO score customers as well as customers with low FICO scores exiting from the portfolio via attrition.  We have observed an increase in Bank of America acquisition during Q1 2013, but the increase is small and on a very low base compared to historical performance.  They continue to be very selective in acquisition.  The upshot to partners is that Bank of America is a potentially great partner to cobrand partners that can aggregate high credit score, or “positively selected”, prospects for the program.

Another very large issuer, Citi, has a similar shift from just over 40% of the portfolio with FICO scores above 720 in 2007 to 55% of the portfolio balances having FICO scores over 720 in 2012.  This is a big concern for potential partners and makes the move of the BestBuy portfolio from Capital One to Citi especially interesting.  Capital One has relatively stable share of the portfolio at 45% over a 720 FICO and 25% below 660.  Citi is now at about 12% below 660.  For a partner like BestBuy, with a broad customer base, what might be a more stringent set of credit requirements might be offset by better POS retail acquisition capabilities when compared to Capital One.  The key point is that when evaluating the right issuing partner, it is important to consider the credit quality of the customer base and to avoid any misalignment.

The flip side of the bias towards higher credit quality customers comes with a price, however.  These customers are expensive to acquire and may not be profitable because they tend to revolve (i.e. borrow) less, and when they revolve, it is at lower interest rates.  Also, the rewards expense required to attract these customers can be very high, hurting profitability.  So while these customers may not create credit losses for the issuers, they may be marginally profitable.

So, as a partner, what can you do to align your objectives with those of the issuer?  First, ensure you are fully in sync on the served credit spectrum.  If you are misaligned around the kind of customers you want to serve, the program will suffer.   Also, make sure you are doing all you can to acquire new card customers at a favorable cost per account.  This may be the single most important way you can create value.  All three partners – the issuer, the cobrand partner, and the actual customer – need to come out ahead in a balanced way.  The next set of articles will dive more into the detail around how banks make money, and best practices for creating a thriving program.


For additional information on Partner Advisors and the way we serve our clients, please visit our company website.