Introduction • Citibank’s branch banking business conducted operations in 15 countries throughout Asia Pacific and the Middle East in 1989 • Citibank’s branch banking business was projected as a prestigious, consumer-oriented international bank and the undisputed leader in the marketplace • Financial services were targeted to affluent upper and middle income market segment • Citibank’s Asia Pacific branch banking business was challenged with increasing earnings from $69.7MM to $100MM by 1990
Citibank’s Challenges • Increase earnings in Citibank’s Asia Pacific bank business through the launch of a credit card product • Obstacles: • Mixed opinion from the Asia-Pacific country managers that a successful credit card launch was possible • Questions abound regarding Citibank’s ability to adopt mass-market positioning to acquire credit card customer and maintain its up-market positioning with its current upscale branch banking customers • Differing customer attitudes and usage patters across the Asia Pacific region • High level of market uncertainty across the region with regulations, branch limitations, talent, poor infrastructure, etc.
Acquisition Costs Break Even Analysis Break Even - Sensitivity Analysis
Market Entry – Game Theory Citibank AMEX Source: Demisch, McGarry, Mukhtar, Rajbansi; Feb 2008
Conjoint Analysis Build ideal mix of product attributes Determine customer segmentation Identify cannibalization & competitive response
Cross-Selling Success selling auto loans through car dealers Greater potential with Citi cardholders Opportunity for cross-sell of products such as Auto Loans, Ready Credit, Deposits, Mortgages Enables virtual presence in countries restricting number of foreign bank branches Bundle with bank services for lower combined fees How calculate cross-sell value? Take Hong Kong Citibank example where 6% of account holders also have Citi credit card and assume same opportunity in reverse…
Cross-Sell Value CalculationRelative Year 1 (phased launch) Total Relative Yr 1 value for all 9 Asia markets would be $29M Assumes 1.7 cards per customer and 6% of card holders will purchase 2nd Citi product as result of cross-sell efforts. Percentage based on 6% of Hong Kong’s Citibank customers also owning Citi card.
Arbitrage Opportunities Sample Exchange Rates US $1 = HK $1.13 US $1 = Australian $1.33 HK $1 = Australian $1.18 Buy HK $11.3M with US $10M Buy Aus $13.334M with HK $11.3M Buy US $10.025M with Aus $13.334M Triangular Arbitrage Example = US $25K Profit! Across Citibank’s Asia-Pacific customer accounts = $1.5M+ per turn.
Market Segmentation Low Risk, Safe Return - Australia, Singapore, Taiwan Moderate Risk, Moderate Return- Thailand, Malaysia High Risk, High Return - India, Indonesia, Philippines
Customer Lifetime Value (CLV) Source: CLV Calculator- HBR http://hbswk.hbs.edu/archive/1436.html
Long Run Effects of Risk on Marketing Policies Coordinate finance & marketing functions to select appropriate discount rate, marketing policies and resource allocations after analyzing the risks and returns from different marketing policies. Reference: Sharan Jagpal (2008) “Fusion for Profit” pp 26
EV of Entering a Test Market in Singapore Using Real Options
Country Managers • Risk-averse and reluctant to handle card product • Tie compensation to product • Compensate for long term vision • Local currency (Jagpal, NB chapter 23) • 4 Component Parts of Compensation • Base wage • Share of NPV of after tax operating cash flow • Share of NPV of tax shield • Share of real options of product • Above mix changes per country and per period!
Compensation - Period 1 • Australia vs. India example
Australia vs. India example Compensation - Period 2
Recommendations • Use a staged roll out plan introducing each of three groups at 6-9 month intervals (Australia, Singapore, Taiwan first). • Opt for a test market initially, followed by multi-country entry. • The presence of cost and demand dynamics must be considered when formulating pricing strategy, and Citibank may choose to learn from first movers errors. • For uncertain marketplaces, use Real Option Valuation model. • Build centralized data processing center before entering test market. (Citi absorbsinitial $35 MM investment) • Establish specific credit card business independent from other business units in each country • Charge country managers usage fee based on either computational usage, dollar usage, or user (per merchant/cardholder) & continue to charge until investment recouped • Allow country managers to set join fee
Recommendations (cont’d) • Features of credit card program should match the brand positioning and corporate image. Include gold features for premium clients and regular/base features for others. • In saturated markets grow through acquisition, and use green field approach in emerging countries. • Capitalize on cross-selling and foreign currency exchange arbitrage opportunities. • Structure flexible country manager compensation to encourage elements of shared risk and long term focus on available marketing options. • Compensate country managers in local currency.