The Business Times

Good business to give credit where it's due

Good business to give credit where it's due

The opening salvos of a looming credit card war have been fired in China, the world's hottest economy.

  • min read


Good business to give credit where it's due

The opening salvos of a looming credit card war have been fired in China, the world's hottest economy.

With gross domestic product (GDP) expanding at a sizzling pace of 9 per cent, China's regulators have given American Express the green light to offer revolving credit cards to the country's growing middle class.

Meantime, Citibank has declared that it has big plans for China as well, leveraging on its joint-venture investment in Shanghai Pudong Bank.

Asian financial institutions have tended to focus, understandably, on the competitive threats posed by these developments.

Amex is poised to expand its mammoth scale, reducing regional costs in order to attract new card users. MBNA Corp, which wrote the book on issuing affinity-group cards to, say, graduates of the same university, can be expected to roll out these techniques in mainland China and then more broadly across Asia.

But there's countervailing good news: Asia's credit card companies have acquired millions of cardholders, and learned a lot about them sometimes the hard way.

Over the past few years, Hong Kong and Korean issuers have written off massive amounts from overexuberant card lending. Yet this painful process has also revealed better ways to identify their best customers—a group that can help them grow in the face of new competition.

Research by Bain & Company shows that retaining and deepening an existing customer relationship can be 5-10 times more profitable than acquiring a new one.

To build loyalty among this base of existing customers, financial institutions will need to manage risk more prudently to prevent the kind of massive write-offs that they experienced earlier.

Asian lenders still lack an infrastructure of well-established credit bureaus on the ground in China, for instance.

But they can improve risk management by expanding selectively among China's booming urban centres, targeting specific customer segments and developing early-warning data on their customers' spending behaviour and borrowing patterns.

Issuers must also continue to lower their costs—passing cost savings on to customers is a critical step to making themselves more competitive. Those with multinational operations are rapidly combining their Asian processing operations into a few key centres, and in some cases looking to add US and European volume.

Having operations in multiple countries also gives financial services firms the ability to shift costs and technology to the most favourable region.

Ultimately, however, the winners in the battle for Asian credit card holders will be determined by who has the most loyal customers.

For most lenders, that shift in focus requires a fundamental change in strategy. Many Asian credit card companies still spend more than 80 per cent of their budgets on finding new local customers. But such spending is often misguided. It usually takes between two and three years to recoup the cost of acquiring a customer.

Typically, up to half of these new customers will not linger long enough to justify the cost of their acquisition. By contrast, our analysis indicates that turning a new customer into an active one generates 2-3 times as much in profits as simply acquiring the average customer.

In order to take good care of your top customers, you first have to know who they are. Typically, just 30-40 per cent of customers generate 100 per cent of profits in the credit card business.

Asian lenders need to quickly identify their most profitable customers, and then protect them, particularly bill-paying types who spend large amounts, those maintaining steady revolving balances or frequent travellers with high volumes of overseas transactions.

Another important step to loyalty is providing incentives for new customers to use the card early and often. People who use their new cards immediately tend to become the best customers over the long term, according to Bain analysis.

Generally, between 5 and 20 per cent of active customers voluntarily cancel their card in the first twelve months. By comparison, inactive customers have cancellation rates as high as 80 per cent.

While Asian issuers are spending money hand over fist on new customer acquisition, most are underinvesting where it counts most: activating and deepening the accounts they've already opened.

To run any successful financial services operation, it's critical to know which sales teams and which marketing efforts bring in the right kind of customers and convince them to use the card regularly.

The powerhouses in credit cards have developed innovative ways to use customer relationship management tools to gauge their own effectiveness, by measuring how each customer stacks up in terms of receivables, revenues and profits, and tying that data back to marketing initiatives.

In the United States, MBNA posts customer-oriented performance metrics on public notice boards and funds employee bonuses on days when the company as a whole hits more than 90 per cent of its targets.

At Bank of America, performance-based pay is measured by the extent to which customers use its products, rather than just how many products are sold.

China's burgeoning market will be the testing ground for Asian credit card companies as they adapt these competitive tools to Chinese consumers. Even as China opens up, however, the region's credit card issuers can expect dramatic consolidation.

The importance of scale in credit card lending is reflected in the rapid consolidation of the US market, where the top 10 credit card issuers now hold 90 per cent of the market, compared with 45 per cent in 1990.

That makes it all the more vital for Asian card companies to hold on to key customers—they represent a lender's most valuable assets.

Edmund Lin and Jim Hildebrandt are Bain & Company partners based in Singapore and Hong Kong, leading Bain's financial services practice in Southeast Asia and Greater China

Copyright © 2004 Singapore Press Holdings Ltd. All rights reserved.


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