In this month’s guest article, Stephen
Mendelsohn, a senior manager at US payment consultancy First
Annapolis, looks at how continental European card issuers can
increase portfolio profitability by taking the lessons learned from
the US and UK and placing more focus on the fundamentals of
portfolio management.

While credit and debit card issuers in
continental Europe have made great strides over the past several
years in increasing their numbers of cardholders, a great many of
these organisations have not yet been as successful at the basic
fundamentals of portfolio management – for example activation,
usage building and retention.

Such activities, staples of large issuers
in markets such as North America and the UK, are still uncommon, at
least in a systematic manner, at many issuers in Europe and
elsewhere, even at very large domestic players.

This points to a major opportunity for
such issuers as the sale of a new card account is only the first
step on the road to building a successful, and profitable,
long-term card relationship.


Sales of new card accounts is the area
which receives the most attention and marketing focus, with issuers
often paying hundreds of euros per new account for costs related to
direct mail, outbound call campaigns, advertisements and/or mobile
sales forces, and commissions to branch employees.

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However, the investment to sell a new
account is wasted if the new card is not activated – that is, if it
is never used at the point of sale to make a purchase (this is
known as initial activation, which is often confused with ongoing
activation, an area we describe later on).

In general, a card which has not been
activated within six months will never be used, so the window of
action for issuers is a tight one.

In the most extreme (though not uncommon)
case, issuers simply place a card in the hands of a customer (often
literally, as card distribution at branches is still a practice
used by many European issuers) without any form of explanation on
how or where the card can be used or how the amount spent on
purchases is to be repaid.

Other issuers practice more advanced
techniques of mailing cards to customers with welcome packs, though
these materials often lack detailed information on how the customer
can fully utilise their cards for purchases and cash withdrawals at
a wide variety of locations domestically and internationally and
how cards are safer than other forms of payment.

In general, however, most European issuers
do not systematically track the progress of new accounts as they
move from card delivery to activation on the system (by phone call
or other means to literally make the card capable of usage) to
activation at the merchant.

Best practices at very skilled issuers
show that customers who do not self-activate (that is, begin to use
their cards without any additional follow-up by the issuer) must be
contacted early and perhaps often to get as many new customers as
possible to use their cards for purchases. Depending on the
issuer’s specific market environment, differing tactics may be
utilised to produce the greatest activation rates using the least
amount of time, resources and costs.

For example, in markets where call centre
employees are relatively inexpensive, such as Eastern Europe, some
issuers have found that it is possible to call all new customers
with an initial ‘welcome call’ aimed at ensuring the customer has
received their card, understands how the product works and where it
can be used and in prompting activation.

These issuers often make additional calls
to customers who still have not activated their cards in the months
following the welcome call, with ever-increasing offers (for
example, cash rewards for initial usage) aimed at reducing the pool
of never-active cards to the bare minimum.

Of course, making phone calls to customers
is not always cost-effective (or possible in situations where the
customer is not available to take the call), so other contact
channels, ranging from e-mail (the lowest cost channel), to SMS
messages, to direct mail are often employed.

Issuers should track the results of their
activation efforts in a methodical and rigorous manner to measure
the varying effectiveness of timing, communications channel and
reward offer to fine-tune their activation and other portfolio
management efforts. This process is commonly known as ‘test and

Usage building

Once a card is active, the key goal for an
issuer should be to build continuous and ever-increasing usage. In
some countries, such as Spain, which have seen recent decreases in
interchange on both credit and debit card products, usage-building
is a key way to build stable revenues, especially in today’s
climate of higher losses on accounts carrying balances.

Regardless of the local interchange rates,
issuers should strive to increase usage to drive additional
revenues. Much like activation, many issuers in Europe and other
markets often neglect their cardholders once they have sold them a
card or provided them one as part of a new account opening.

Rather than tracking which cards are used
frequently per month, which are used lightly, which are used
sporadically over several months and which are never used and
taking appropriate action to treat each segment, issuers simply
move on to selling new cards – a costly activity and one which
neglects the ability to earn revenues from customers who have
already been costly for the organisation to acquire.

There are many potential activities that
issuers attempt to spur additional usage. These can involve ‘spend
and get’ offers which involve offering cardholders cash bonuses,
discounts, rewards points, gifts, entry into lotteries or other
compensation in exchange for general usage or usage at specific
merchant sites or categories (all activities which can be tested
and modified in a ‘test and learn’ environment that evaluates
factors such as communications channel and offer).

The most basic form of usage development,
however, is education – making sure the customer remembers they
have the card, understands its usefulness and where and how it can
be utilised.


Even more than for cards which are never
activated, the loss of an account represents the end of the line
for a customer relationship: an immediate cessation of revenues to
an issuer.

In markets such as the US, where annual
fees are now uncommon on non-rewards cards, annual fees are still a
large driver of revenues for continental European issuers. This is
a double-edged sword for issuers.

On the one hand, it is often the leading
cause of customer-driven account closure. On the other hand,
customer-initiated contact with their issuers to close an account
provides a unique opportunity for issuers to not only save an
account, but also to increase customer satisfaction, provide
product education and even cross-sell other bank products.

The most effective manner to retain
customers is via a bank-operated retention unit, staffed by an
experienced team of employees from within the bank’s card products
call centre. Currently, many European issuers allow cards to be
cancelled at their branches. However, this is not only a
distraction from more important branch tasks, it is also
ineffective, as most branch employees are not skilled at saving
card accounts, often preferring the ‘easy way out’ of simply
closing the account in the hopes of saving the overall account

Instead, issuers should mandate that
cardholders contact their call centres to close card accounts.
These calls should then be routed to the retention unit, which must
be equipped with both the technology to review an account – for
example, overview of lifetime account activity, view of overall
banking relationship, and knowledge of both card-level and
account-level profitability – as well as the authority to make
alterations to a customer’s product, for example one-time or
permanent reductions or waivers of annual fees, changes to interest
rates, product upgrades, and the like.

Like activities to activate cards and
increase usage, these product alterations should be rigorously
evaluated in a test and learn environment to maximise the benefits
from saved accounts with the costs in lower fee and interest

Of course, there will be instances where
the issuer will not be interested in saving the account, such as
situations where account use, demands on customer service, or other
activities have proven unprofitable to the issuer, but the
decisions for such actions should reside in a central location
rather than being disbursed across the bank’s retail network.

Management reporting

Quite often, issuers have little idea how
their portfolios perform with any of the areas above (nor, in many
cases, do they know the profitability of their card businesses) and
to do so often requires a long and difficult process of requesting
information from disparate IT systems.

So as important as it is for issuers to
put into place activities to drive increased activation, usage and
retention, it is equally important that they put in place the
tracking and reporting mechanisms necessary to measure the current
state of their portfolio. Such efforts can begin slowly and become
more sophisticated over time. The fact is, however, that without
some means of measuring the current level of performance, it is
impossible to measure the effect of any activity designed to
improve such performance and thus make changes to become more
effective over time.

Stephen Mendelsohn is a senior manager
at First Annapolis Consulting, a US and European-based payments
consulting and M&A Advisory firm. Contact him at