Retention strategies have become an increasingly
important part of strategy in the wake of the financial crisis in
the cards and payments industry. In this extract from the VRL
report Credit Card Retention Strategies, Ray Cain and Will
Cain look at the impact of the events of 2008-09 on credit card
The financial crisis
and subsequent recession put additional pressure on credit card
profitability. Many consumers are now loathe to add more debt and
are cutting back on purchases.
Credit card debt in the US climbed
at a steady rate of 5% annually for the first three quarters of
2008 but fell significantly in the final quarter, leaving the
nation’s top four issuers with year-on-year growth of just
Purchase volume in the fourth
quarter fell strongly – down 17.2% year-on-year for Bank of
America, 15.2% for Citigroup, and 7.6% for JPMorgan Chase. Analysts
predict that credit card usage will continue to slow in 2009.
In the UK, credit card balances
fell by £570m ($848m) in March 2009, to stand at £64.7bn, the same
level as a year earlier according to data from the British Bankers’
Asian markets, while continuing to
grow, have also been impacted by the downturn. Korea saw an overall
growth rate on new cards of 13% in 2008 despite a significant drop
in the fourth quarter, according to Arirang News.
Reserve Bank of India data shows
that between April 2008 and January 2009, cards in circulation fell
8.62% and purchase volume fell from $1.13bn to $1.04bn in the same
Credit card transactions in
Indonesia grew by 45% in 2008 according to Bank Indonesia figures –
although this growth rate is expected to slow in 2009 as slower
economic growth weakens consumer spending. The Chinese credit card
market grew 62.5% from 80m to 130m cards in 2008. This is expected
to drop to about 15% in 2009 with the addition of some 15m to 20m
cards according to COFIDIS.
Credit card growth has also been
hampered by the difficulties faced by some issuers in funding their
portfolios through the securitisation of credit card receivables.
US credit card issuers rely on securitisation to provide over 50%
of their capital needs, according to the FDIC. Rising delinquency
rates are also taking a toll. Studies show that the growth in
credit card balances tends to fall in response to higher
delinquencies (see chart).
US credit card defaults rose in
February 2009 to their highest level in at least 20 years. Analysts
estimate that charge-offs could climb to between 9% to 10% in 2009
from 6% to 7% at the end of 2008. In that scenario, such losses
could total up to $75bn in 2009, according to Reuters.
Banks are responding to or
pre-empting these losses by tightening lending standards, cutting
borrowers’ limits, closing inactive accounts, scaling back card
offers, and in some cases raising fees and other charges.
Prominent banking analyst Meredith
Whitney estimates that Americans’ credit card lines will be cut by
$2.7trn, or 50% by the end of 2010. As banks are scaling back new
customer acquisition and reducing credit lines of risk customers
they are shifting attention to retaining their good customers and
growing wallet share.
In the US, a shift toward
emphasising retention could already be observed in the midst of the
sub-prime crisis in 2007. Data shows that credit card solicitations
to non-customers decreased by 11% from 2006 to 2007, but
loyalty-based offers sent to current customers increased by
Direct mail offers dropped 26% in
2008 with the volume of 7.4bn being the lowest the firm has
reported since 2000. The data indicates a strong shift to targeting
lower -risk customers.
Households making more than
$100,000 a year received only 1% fewer credit card offers in 2008,
while those making $50,000 or less saw a 42% drop in new mail
“It makes sense to turn inwards and
increase levels of engagement with existing customers”, Mintel
Comperemedia Senior Analyst Lisa Hronek said.
“The issuers are going to look
internally and try to find the most stable, reliable customers.
Those cardholders are the ones likely to receive offers encouraging
them to charge more and more often – such as ‘spend and get
Dennis Moroney, a research director
for TowerGroup, added that banks know the customers they have
better than potential customers they may take on.
“Right now, you want to hold on to
your best credit risk customers,” he said. “The decision to make
more retention mailings makes tremendous sense.”
In addition to targeting the more
desirable borrowers, card issuers are also putting more resources
into nurturing the at-risk borrowers through difficult times to
ensure that payments are kept up and accounts do not have to be
*This article is
an edited extract from an updated VRL Financial News report
Credit Card Retention Strategies. The report looks in detail at
the fast-developing global m-banking and m-payments markets, and
contains case studies, statistics and interviews. For further
information, contact Kinnor Bhattacharya on +44 (0)20 7563 5638 or