competitive pressure from the increasing number of issuers entering
the field, attracted by its profitable business model. But will
diluted product offerings both tarnish the prestige and erode the
margins of these status symbols? Ann Tierney
reports.
Premium branding is a central plank of card issuers’ marketing
strategy, primarily for customer segmentation purposes, but also as
a means of acquisition and retention. Premium cards enable issuers
to develop and price profitable card programmes for the mass
affluent, high net worth (HNW) and ultra high net worth (UHNW)
segments on the basis of their differing needs, product
requirements and risk profiles. Definitions of these segments vary,
but a broad categorisation is that mass affluent individuals have a
minimum of £50,000 ($100,000) in liquid investable assets;
HNW customers have a minimum of £500,000, while the UHNW
individual has at least £5 million.
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Issuers create differentiated product offerings to fit the needs
and requirements of these segments. They include mass premium
programmes (designed or positioned as superior to a standard
product, but with limited differentiating factors – for example,
many current gold/platinum programmes), cards designed to include
significant value-added features (eg, concierge and travel
services) and rewards programmes that are offered to a mid-premium
segment (such as Visa Signature and American Express Platinum), and
super-premium offerings such as American Express Centurion and the
Coutts World card, which offer luxury benefits coupled with
exclusivity and prestige that are available only to the top
few.
Premium branding, premium benefits
There are also significant benefits from premium branding in
terms of customer acquisition and retention, as it creates an
aspirational product structure that reflects increasing wealth and
status. New customers may be attracted by the higher status
conferred by a platinum as opposed to a gold card at the mass end,
or by the prestige of joining the ‘invitation-only’ elite at the
super-premium end. And, as long as issuers keep these customers
satisfied in terms of rewards and service, they will be able both
to retain them and incentivise further card spend by promoting them
up the product hierarchy.
Recently, one of the key drivers of focus on premium card
marketing has been the higher interchange that these cards attract
in most markets. This is certainly the case in the US,
where many issuers are converting qualified consumers to super
premium cards. Most of these cardholders are high spenders
but do not revolve balances, thereby restricting the profit
potential from interest income.
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By GlobalDataThese customers are potentially highly profitable. The provision
of high service levels and appropriate and attractive rewards
programmes results in both increased card spend and strong customer
loyalty. Premium card transaction values are higher, driving
increasing issuer revenue, at least at the mid- and super-premium
levels, and therefore generating higher interchange revenue.
Coupled with market growth, the business case for premium cards is
therefore strong, as long as the programme can be delivered
cost-effectively. Costs are higher for issuers to service these
cards and rich loyalty programmes can be very expensive to
maintain.
However, with such attractive benefits for issuers in terms of
high returns from low-risk, long-term customers, premium branding
has gone mainstream as issuers extend the offerings through
reducing the qualification criteria. As markets reach maturity and
competition becomes tougher, the gold and platinum card value
proposition has become diluted as issuers push them to lower income
segments.
In the UK and the US, the two most developed markets for premium
offerings, there is now little exclusivity attached to gold and
platinum cards, which are routinely offered to customers with
relatively low income levels (£10,000 to
£15,000). However, in continental Europe, a gold or a
platinum card retains, for now, its exclusivity and prestige.
The two main drivers of the change are rate of adoption (how
quickly the card payment market grows to the point that product
diversification is required to acquire and retain cardholders) and
competitive pressure. The dilution of premium card offerings
becomes rapid as markets reach saturation; in such circumstances,
issuers tend to push higher positioned cards to lower market
segments very quickly as they fight over cardholders in order to
and attract and retain spend on their cards. The marque becomes
devalued, and new offerings are developed to fill the gap; the
unique selling point of exclusivity is therefore time-limited.
Market prospects
As the number of mass affluent and wealthy individuals rises and
the premium qualification barrier is lowered, the size of the
segment naturally increases. In Europe, analysis from industry
consultancy Capco records an average compound annual growth rate
(CAGR) of 6.2 percent in the total number of mass affluent/HNW
individuals from 2001 to 2005; within that, the fastest-growing
segment at 9.4 percent CAGR is the €150,000 ($200,000) to €300,000
in liquid assets bracket.
Profitability
The premium cards revenue model is quite different to standard
cards, being based on higher usage and cardholder loyalty over
time. It relies more on high annual fees (often very high for
super-premium products) and interchange revenue, and much less on
interest, as the propensity to revolve decreases as wealth
increases. In some markets, the fees that are charged for various
premium services can be very lucrative for an issuer.
In a competitive market, this more diversified revenue flow
offers issuers some protection against both interchange reduction
and price-based competition at the mass end. Mid- and super-premium
cardholders are much less sensitive to price than to the quality of
the services and rewards provided by the card, and high annual fees
do not meet resistance. Premium cards are also used for higher
travel and entertainment spend compared to standard cards and this
drives foreign currency transaction fees for issuers.
By comparison, at the mass end of the market, the revenue models
of diluted premium offerings are not dissimilar to those of
standard cards, in that interest revenues are more important than
interchange.
The cost of servicing rewards programmes is an important
consideration. Although luxury rewards are important drivers for
increased usage and spend, they can be costly to run if economies
of scale cannot be achieved.
Francesco Burelli, Principal consultant at Capco, notes:
“Three-party schemes (eg, American Express and Diners) have the
advantage here, but bank issuers leveraging four-party schemes have
had the issue of acquiring rewards programmes that in some cases
have proved expensive and difficult to maintain, especially in the
case of a small card portfolio.”
Visa and MasterCard have developed standardised premium services
to be added to four-party schemes that have reduced considerably
the overall setup and maintenance costs of a premium product for an
issuer.
Interchange wars
Higher interchange revenue does not come without risks, however.
There could be a potential backlash from merchants, as they
perceive that they are paying more to finance issuer’s rewards and
loyalty programmes, yet are not in a position to refuse a payment
method that accounts for an ever-increasing share of purchases.
Premium cards in the UK
The UK is one of the most sophisticated markets in the world for
premium cards; this is why American Express (Amex) chose to launch
its super-premium Centurion card in the UK. There is a plethora of
products at every level.
As already noted, at the mass end, gold and platinum cards have
become a devalued offering. Premium card products from high-street
banks include the Lloyds TSB Amex and the NatWest Black Card.
The Lloyds TSB Amex is targeted at the mass premium segment. The
card carries a monthly fee for use of £4.95, but offers
several benefits including reward points that are awarded for
spending on luxury items. The card is viewed as a hybrid offering
rather than a fully fledged prestige card.
The NatWest Black Card is aimed squarely at the top end of the
mid-premium segment: with a minimum income requirement of
£75,000, it labels itself as “a card that few people will
ever own”. It offers a minimum credit limit of £15,000 and
charges an annual fee of £250. Its benefits include 24/7
personal assistance (a concierge-type service), insurance cover,
travel services, roadside assistance and access to exclusive
events, such as the Ryder Cup. The card does not offer a loyalty
programme.
Aimed at the same market is Morgan Stanley’s i24 card, which the
company claims offers “some of the most compelling benefits
available”. It has an annual fee of £275 and a minimum
income requirement of £70,000. The card offers a concierge
service, but its main selling point is its functional benefits: it
is the only card in this market to offer 1 percent cashback on all
purchases, and the only card that does not charge a foreign
exchange fee – a levy that costs Britons up to £344
million a year.
For the really heavy hitters, there is, of course, the Centurion
card from Amex, the most expensive card in the world. Also known as
the Black card, this invitation-only card for the seriously wealthy
carries an annual fee in the UK of £650 (less than the US
fee of $2,500). Available as both a personal and a business card,
it offers numerous exclusive privileges, but perhaps the most
attractive feature to this segment is its legendary
exclusivity.
Again at the super-premium end, private banks and wealth
management firms also offer exclusivity as a definitive feature of
their card offerings. There is an increasing competition from the
wealth management industry, where there is a growing trend for
financial institutions that focus on private client services to
HNW, UHNW and family office clients to provide premium cards as a
convenience factor as part of overall client wealth management
product set.
Cards reviewed
A study of wealth management firms by UK consultancy the Scorpio
Partnership has revealed that, within the UK, approximately 25
percent of institutions have been reviewing their card offerings to
private clients. The reviews are focused on meeting client demand
for a card to satisfy their cash management (card banking) and
lifestyle requirements. Around 10 percent intend to launch new
prestige card solutions. Over 70 percent viewed cards as
representing a strong branding opportunity for their institution,
and smaller wealth management firms in particular were willing to
pursue co-branding with a prestige brand. Strategically, these
wealth managers viewed an alliance with a prestige third party as
an important competitive differentiator.
Scorpio senior consultant Ted Wilson told CI:
“Crucially, clients and management identify the offer based on the
payment associate. The card provider has to be of sufficiently high
calibre and have a strong awareness of private banking in order to
associate well with wealth manager’s client needs.”
Value-added services that were rated by respondents include
loyalty rewards programmes and concierge services, though there was
little enthusiasm for standard offerings such as insurance: most
firms commented that this is standard to most cards in the UK, as
well as integrated into other financial products. Cards are
increasingly being used by the wealthy for cash management
purposes. A particular requirement expressed by over 50 percent of
the firms surveyed was a multi-currency option.
