A range of senior card and payment industry executives from major issuing institutions gathered in Hong Kong during March for VRL KnowledgeBank’s Cards and Payments Asia-Pacific conference, at which delegates were given a comprehensive overview of the current state of the market in the region. Delegates were also treated to a robust exchange of views over how to maximise growth and profitability at a time when some industry players are licking their wounds over failed product launches.
There were vocal critics of the state of the Asia-Pacific cards industry, such as Alistair Scarff, senior director and head of Asia-Pacific financial institutions research for Merrill Lynch. In his opening presentation, he highlighted that “the credit cards industry has had a chequered history”.
Scarff said: “It is staggering how banks have not learned from each other and follow product after product, failure after failure. What was once a golden child is now going through a difficult time. In the market share grab, profitability of the cards market has been eroded. How are you making money if acquisition costs are so high?”
He stressed that the cards market is a scale game – a point echoed by Ridha Wirakusumah, regional business head for consumer finance at global financial services group AIG, in his closing presentation.
Farhad Irani, global product head for personal loans in Standard Chartered, pointed out that there is a “need to re-examine the business as the card industry has come of age. It is time to move from market building to business building and from account growth to profitability growth.”
Irani’s strategies focused on the customer and a granular understanding of the customer experience and needs. For example, issuers “need to understand the fully loaded cost of a new acquisition” to appreciate the importance of customer retention. The first 100 days is crucial in a new relationship but retention means higher profitability associated with the customer in the longer term. The key to this is to “lend at the right price”, which incorporates the riskiness of the portfolio and builds customer loyalty across products.
A number of speakers also touched on the need to consider the customer experience in launching a product. Antony Morris, executive manager of strategic development and risk management for Hong Kong’s contactless payment and transport card body, Octopus Cards, highlighted that the rapid adoption of Octopus cards – 3 million cards in the first three months after its launch – was largely due to the simple customer interface. Octopus cardholders and front-line staff did not need to know the complexities of the business or the technology, but had to be convinced that the card was “simple, consistent, fast and reliable”, said Morris.
“In the payments industry, we get so wrapped up in the processing that we lose sight of the human dimension – what is the customer experience, how to manage the relationship. We should think about who is buying the product in order to develop a successful product,” said Scott Gallit, senior vice-president, global prepaid products for MasterCard Worldwide.
For example, card activation is an area that has been underutilised. In his presentation, Howard Davidson, managing director of Card Protection Plan, said: “Card activation through the interactive voice response system is the biggest marketing opportunity that has not been used by banks. That is when customers are engaged with the bank.”
The customer experience also extended to marketing activities. Nick Reade, Australian banking group ANZ’s general manager for consumer cards, shared his bank’s strategy of communicating to the customer by adopting a friendly and humorous tone in advertisements. According to Reade: “People do not do banking in their dreams, they do it in their nightmares. We addressed the customers’ issues of security and service through our marketing campaigns.”
The other main theme that ran through the different sessions was the necessity of innovation in the cards and payment industry to grow profitability for issuers in the current environment. TS Anil, Citibank’s regional head of card products and marketing, urged card issuers to look for fresh areas to innovate. “It is fine to look at investing in sustainable innovation but disruptive innovation is where the money is,” he said.
Innovation is not just in the card design but also in different aspects of the card which have been previously ignored. Citing his experience at US issuer Capital One, Anil said: “The amount of value that pricing innovation can generate has been so enormous that it required a whole team just focused on pricing. In addition, innovation in underwriting is fantastic because it goes straight to the bottom line. The entire ethos of the company was about testing and learning.”
Distribution has also moved beyond the traditional channels of branches, call centres and the internet into insurance agents. Issuers were urged to partner with telecommunication providers as mobile phones are now more ubiquitous than credit cards.
Product innovation went beyond credit cards into new product areas such as debit, prepaid and commercial cards. Ken Howes, director of payment strategy company Edgar, Dunn & Company, drew the delegates’ attention to profitability in debit. Howes stressed that debit cards will “continue to change the payments landscape in the Asia-Pacific region” with the growth of international network-branded cards and establishment of a pan-Asian debit scheme. However, he pointed out that debit card profitability “has not been the key objective for most banks” and “in many markets, debit cards have been issued free of charge to the consumer as part of the current account proposition”. The card is also viewed as a commodity in many markets.
Though debit card profitability is more complex than credit card profitability, revenue growth can be attained through better segmentation, tariffs on a cost-plus basis and active product development such as payroll debit cards or linking with other applications such as transport.
Keen interest in prepaid
Prepaid cards is an area on which a large number of the Asian card issuers are keen. Delegates heard that many prepaid card programmes in the region had failed to take off in the way that they had in other markets.
“Identify low-hanging fruits. I am a great believer in starting small – it is better to start with a small success than a big failure. There are prepaid products that are easy to understand and implement such as gift and travel cards,” said MasterCard’s Gallit.
He cited a MasterCard survey that “nine out of ten respondents would prefer to get a MasterCard gift card than a store card, and eight out of ten would prefer to receive gift cards than a present of similar value”.
Thomas Beck, managing director of Swiss Bankers Travel Cash, a prepaid travel card, shared his experience in launching a prepaid travel card in the Swiss market. The card has seen exponential growth in loading volume from $28 million in 2003 to $470 million in 2006, and is distributed through bank branches and exchange officers. Beck said: “Travel Cash is not a new product. It is another form of the travellers’ cheque with a proven track record spanning a century. The key benefit of safety while travelling remains unchanged. The switch from paper to card, however, makes it much more user-friendly and attractive. The product positioning is simple and clear. It addresses the needs of the customer, not necessarily those of the bank.”
According to Gallit, issuers considering prepaid should “look for leveraged sales and distribution opportunities, particularly in replacement products, and assess what customers you serve that manage significant numbers of disbursements or consumer relationships”.
As consumer lending margins are getting thinner by the minute in many markets in Asia, delegates and speakers explored a previously ignored segment – the corporate customer base.
Grant Halverson, managing director of consulting company McLean Roche, highlighted that commercial cards do not have the regulatory scrutiny or competitive intensity that consumer cards have to bear. Commercial cards interchange rates, for example, have not been regulated even in markets where consumer cards interchange has been driven down. Hence, issuers will have a freer hand in setting fees and rates, making the profit margins highly attractive. Halverson estimates the size of the Asian commercial cards market to be at $1.45 billion, with significant potential given the number of small businesses in the region.
Small businesses have been rejected for business loans and are running their businesses on consumer loans – a development that the speakers in the commercial cards session noted. It is thus better, they reasoned, to understand the cardholder from a small business perspective and price accordingly, rather than a consumer credit perspective.
However, Halverson cautioned that it is a sales-driven product and not marketing-driven, as are consumer cards. The issuer would thus need to be skilled in making business-to-business sales.
Strategies for entering emerging and developing markets in Asia were also discussed. While Scarff pointed out that “the credit card is a great arsenal in entering the market”, he was sceptical of importing foreign market practices into Asia’s emerging markets. He asked: “How can you build learning from the likes of MBNA and Providian, that are extremely data-intensive, into markets where you are lucky if the local credit bureau gets your name and city right?”
Trevor Laight, HSBC’s senior vice-president for consumer credit risk Asia-Pacific, advocated a proactive approach to regulators in these markets. “For example, in Indonesia there is no consumer protection, but it will not be long before the regulators look at other markets and put a cap on card pricing, for example. The way to handle that is for us to initiate the process by establishing customer protection laws and start pricing according to risk. If you don’t act proactively in emerging markets, there will be a bigger repercussion.”
The developments in the Australian market could also be used as a guide for the path of progress in other Asian markets. Stephen Karpin, head of cards for Australian banking group Westpac Banking Corporation, said that the regulatory policies in Australia have been a catalyst for change, as issuers are forced to revisit their profitability strategies as the interchange regulation “exposed the unprofitability of the transactors”. He stated: “Analytics and information will determine who will succeed.”