Tag Archives: loyalty program

CARD Act – Did the World As We Know It End?

By: Jonathan Gelfand

The Credit Card Accountability Responsibility and Disclosure Act of 2009 shook the credit card market to its core.  It was the first major legislation that profoundly impacted credit card regulation in recent memory.  There were significant doom and gloom predictions at the time as to the impact of the act on customers, banks, and also partners in the co-brand market.  To compound the complexity, the Durbin Amendment impacted economic decisions at banks as debit cards became less profitable, reducing the relative negative expected impacts on credit card portfolios.  In October, the Consumer Financial Protection Board issued a report summarizing the results to date of CARD Act.  The impacts of the CARD Act are modest.


Impacts for Co-brand Credit Card Programs

When CARD Act was approved, most programs weren’t directly impacted from a contractual perspective, although a few were when their banks renegotiated their contract.  The overall economic environment impacted many more programs, but that can’t be directly attributed to CARD Act.


Indirectly almost all programs were impacted from a marketing budget perspective and an increased conservatism with respect to account approval and portfolio management.  Attribution of the exact changes to CARD Act is difficult because they overlapped with the economic downturn.  Although the cost of credit (fees and interest) were largely unchanged from before CARD Act, the availability of credit has declined substantially impacting the size of the market and hence the potential size for co-brand programs.


Cost of Credit

Leading up to CARD Act’s implementation in Q2 of 2010, the average retail annual percentage rate charged customers increased as banks pro-actively raised the cost of credit to customers.  With the exception of deep sub-prime customers, all other cohorts are subject to higher finance charge interest rates than they were before the CARD Act.  From this perspective, consumers didn’t do well with CARD Act’s intervention into the market.



For revolving accounts, the story is a little better with the average retail annual percentage rate remaining relatively constant, except for deep subprime customers the impact is largely moot or slightly negative.  It is interesting to note that there has been a slight downward trend in interest rates that probably reflects profit optimization within revolving customer segments.


When fees are combined with the effective interest rate the picture shows that the total cost of credit for revolving customers is largely unchanged compared to the period before CARD Act.  Net,  CARD Act doesn’t appear to have negatively impacted the cost of credit for customers or revenue for banks except in the subprime market.


Credit Availability

Due to a combination of the recession and CARD Act, there was a sharp decline in new credit card  accounts opened after 2007.  Over the same period Private Label credit cards were much more consistent.


 Part of the decline in new accounts is driven by a decrease in direct mail, the traditional work horse of credit card acquisition, but also by a decrease in approval rates across all levels of credit quality.  This decrease is a concern to co-brand programs since a declined customer will have some negative impression of the sponsoring organization.


In addition, once an account is approved, there is a lower line issued.  This is likely attributable mostly to the general economy.  Since accounts tend to go bad at the limit while good accounts tend to not use the full limit, high lines reflect significant exposure.


Future Focus

The CFPB has informed the public that they will be looking at deferred credit disclosures and rules as well as rewards disclosures in the future.  Both of these are important issues for co-brand program partners and should be tracked carefully to make sure that the programs maximize current contributions but are also  well positioned for the future.


For additional information on Partner Advisors, please visit our company website.

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.

Understanding How Banks Value Your Program Is Challenging, but Necessary for Growth -Jonathan Gelfand

How your bank crunches the numbers to determine the profitability of your credit card program is incredibly important to sponsors because the way that banks value programs directly influences their investment in the program and payments to their partners. It can add up to a mutually beneficial partnership or it could mean a marginally satisfactory relationship. It is well worth the time it takes to understand how they do it and how you can use those measurements to increase the value of your program.

 Factors that affect how banks count the profitability of credit cards include:

            •Credit loss profile of cardholders

            •Percentage of new accounts

            •Individual account performance

            •Performance of blended segments

Credit Loss Profile

Since they have had to write off high losses in recent years, banks have become more averse to taking risks. That means that it’s very likely that many “good” customers aren’t being approved, and your program may not be as valuable as it could be.

For example, although 30-day delinquent accounts are usually paid eventually and banks collect fees and higher interest rates on past-due accounts, they are also a harbinger of credit losses to come. It’s the first sign of trouble.

When banks decide that they really can’t collect from their customers, they write off the balance due as a loss. As a result, banks are being more cautious about issuing credit cards, and the percentage of cardholders who are 30-days delinquent in their payments is declining. According to an American Bankers Association report published in April this year, the number of cardholders who were 30 days late on their payments sank to 2.47%. It hasn’t been that low since 1994!  The record high was 5.01% in 2009.

As the number of 30-day delinquent accounts declines, credit card programs should become more profitable to banks. Here’s why. Accounting and banking rules require banks to reserve funds for future loan losses. So, even though losses haven’t actually occurred, these estimated losses affect the bottom line and are reflected on profit and loss statements.

The income generated by your program determines how much a bank is willing to invest in it. As your program increases in value, the bank may be willing to provide more incentives for customers, offer direct mail opportunities, invest in technology to improve customer acquisition or help you grow your program in other ways.

As a partner, asking about and understanding the credit performance of your portfolio will enable you to better maximize its value.  Your bank should be able to tell you the percentage of accounts that are 30-days delinquent and the trend, as well as the charge-off rate and trend. Many banks don’t like to share this information, but it is important and worth pushing for as it directly relates to future investment.

New Accounts

Measuring the value of a new account over time is also challenging.  It is very expensive for banks to acquire new accounts. The payoff, which is highly uncertain, occurs over many years.  Since credit cards tend to have a life span of over 10 years, it is important to understand that average metrics and profitability measured at a specific point in time are very poor indicators of a program’s value.

A new portfolio that is adding numerous new accounts will have sub-par measurements that hide its long term value.  It will also have disproportionate losses, such as estimated reserve funds, that will not look favorable. On the other hand, a vintage portfolio- one with only about 10 percent new accounts– will spin off significant value to the bank.  Portfolios become more valuable over time as cards are used and the number of delinquent accounts declines through attrition.

Although old accounts are more valuable than new accounts, you need to keep adding new cardholders. Their accounts will eventually become more valuable.  If you stop acquiring new customers, you won’t be able to increase the number of tenured accounts you will have in the future.

Understanding the lifecycle of accounts and not just its value at a given point in time is important to maximizing the value of your program. You may think that the banks are expert at this, but unfortunately in my experience there are significant gaps in managing and understanding this cycle.  Frequently like many organizations, banks are very short-term focused.

 Individual Account Performance

Looking occasionally at performance on a per account basis is another important tool that can be used to determine areas where performance can be improved, especially if you compare it to accounts in alternative segments or to a control offer.

Per account analysis can be performed at a point in time by vintage – accounts that were acquired at the same time by the same method — or based on a longer term measure using a tool like Net Present Value (NPV), which takes into account and discounts the future value of an account.

For example, if you sent prospective cardholders an email offer that said they would receive $100 if they spend at least $1,000 on an initial purchase, you can evaluate just the accounts that were acquired a year ago through that promotion to determine if the email offer did well enough to consider repeating.

Ideally, you should compare that vintage to another vintage to determine which offer is better, but just understanding the profitability of one vintage can be valuable.

If you also analyze those accounts using NPV, then you will learn if the costs associated with the promotion will create long term value and if it is a good investment.  You can determine the long term value of those accounts based on the expense of the promotion versus potential future revenues. That can be compared to the expected performance of a different promotion.

We encourage you to have your bank partner share with you the per account value for them, but also to calculate this value for you. This type of analysis will help you to prioritize and determine the opportunities your cobranded credit card offers so that it will attract more attention in different marketing situations online or inshore.

In many cases, especially if a program isn’t performing, it is hard to justify investing in new account acquisition because the scale isn’t profitable in the short term.  On the other hand, if you look at it from a per account basis, it may be a very profitable long term investment.

Performance of Different Segments

Another challenge with respect to determining profitability is the blending of different account types and segments together. Accounts are commonly segmented by current credit quality, credit quality at acquisition, spending behaviors with the program sponsor, spending behaviors overall, and balance behaviors to name a few. When these segments are viewed separately, you can identify how different segments are actually performing and which accounts are driving profitability. The sources of value become clear and the bank and partner can work to maximize future profitability.

For example, if you can identify who your best customers are, you can invest more money in efforts to get them to be even better customers. For instance, if a customer is purchasing shoes from your store, you may be able to convince them to also buy jackets by offering incentives such as discount offers mailed with their credit card statements. Or, if a customer is buying a limited amount of a product such as gasoline, you could provide an incentive to make them buy more using your card.

Synchronizing Bank and Sponsor Objectives

So, as a partner, what can you do to align your objectives with those of your bank? First, ensure you understand and are correctly valuing the profitability of the program for you in both the short and long-term.  Once you understand your profitability and what drives it, it is important to understand the bank’s profitability so that the value created can be shared more transparently.

Measuring profitability isn’t simple. In banking, it is very complex and will require an investment in time and energy to understand how it works, the different perspectives, and implications.  But it’s well worth it. When you are fully in sync with your bank partner, real growth can be unlocked.


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

A Peek into the Consumers’ Mind: The Search for a New Financial Product – Kerri Moriarty

Partner Advisors recently conducted market research in order to better understand consumers’ experience when searching for financial products and interacting with providers. The results were surprising and full of implications for provider marketing strategy.

The majority chose search engines as the primary resource when searching for financial products, like a new credit card or mortgage. Seeking advice from family and friends was identified overall as the secondary resource. While these findings alone may not surprise you, it was interesting to learn how these results differ between men and women. While men mirror the overall sample, women indicated that checking with family and friends is the vastly preferred information resource when shopping for financial products. Also while women are slightly less likely to open direct mail solicitations than men, overall 84%% of our sample claims to never or seldom open mail solicitations. This confirmed our hypothesis that direct mail is no longer very effective for many products.

With search engines so popular, we were curious to ascertain how search engines are being utilized from the shopping process through to purchase:

  • Approximately 70% use Google or other search engines primarily as a starting point to identify product options.
  • Only 29% use search engines to compare and evaluate products and providers and a minuscule 1% utilize search engines to select a provider when they are ready to purchase.
  • While 60% find search engines to be most helpful because they provide links to many different product options, many express frustration in trying to identify the next step.
  • 32% feel search engines provide too many options.
  • 26% dislike that search engines don’t provide links to products customized to consumers’ specific needs.
  • 20% wish search engines would direct them to independent third party review and comparison sites instead of product links.

Google reports that the finance industry spent over $4B on Google Advertising last year.  Considering these results from our research, it raises the question whether these advertising dollars are being spent in the most cost effective way to convert creditworthy households into customers.

A key implication for providers here is that customers are looking for fewer, customized, options that can be compared and reviewed independently of providers.

More than half of our sample does not trust marketing and product information from providers in addition to finding it unclear and confusing. An overwhelming 82% find the process of researching, selecting and applying for financial products to be a hassle. Based on our research, we believe that consumers are seeing providers’ information in search engine results and are choosing to other links to get to a decision about which product is best for their needs. While Google advertising certainly proves successful to a degree, it is important to consider other alternatives for product placement that reach consumers as they are comparing and evaluating, and ultimately applying. Lastly, as demand for customized recommendations increases, advertising through outlets supplying this need creates the opportunity for providers to reach and capture their target customer more than ever before.



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

Strong Preliminary Update on Caesars Total Rewards Program

Chairman and CEO Gary Loveman shared a few favorable results from the launch of the refreshed Total Rewards cobrand program on the Caesars’ quarterly earnings call. 

We’re so pleased to see such success from the program so far! 

“……Our recent investments to upgrade and refresh our marketing and analytics capabilities, I’m very excited about, are yielding results across the enterprise and we’re really just at the beginning. The early results of the new caesars.com are quite encouraging. The site, which has been rolled out for most of our properties, has helped generate double-digit revenue increases in key metrics, including direct bookings and cross-promotion. We launched the new Total Rewards credit card partnership with Alliance Data. This partnership provides Total Rewards members with another opportunity to earn reward credits, engendering further loyalty and functionality for the program and our guests. This card program has generated far more interest than past credit card offerings, resulting in the issuance of 15,000 cards in just the first 2 weeks of availability. We’re also seeing results from our investments to create a next generation analytics infrastructure. The Big Data capabilities that we’ve added are helping us to become more efficient, strategic and insightful in our marketing efforts, resulting in significantly enhanced customer segmentation and a higher a degree of intimacy and relevance in our offers to our guests.”


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