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Adding Value to Your Card Products - Building a Business Case for Rewards. Dan Thompson JHA Payment Processing Solutions. Agenda. Defining Rewards Competition Research Successful Program Components Cost/Benefit Analysis Case Study Q&A. Defining Rewards.

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adding value to your card products building a business case for rewards

Adding Value to Your Card Products- Building a Business Case for Rewards

Dan Thompson

JHA Payment Processing Solutions

agenda
Agenda
  • Defining Rewards
  • Competition
  • Research
  • Successful Program Components
  • Cost/Benefit Analysis
  • Case Study
  • Q&A
defining rewards
Defining Rewards

A permanent or long-term incentive offered to participating cardholders in order to achieve commitment and primary-card usage status

Loyalty points represents the second-largest currency in issue, behind the US dollar. More than 100 million consumers receive promotional currencies (i.e. points)

defining rewards4
Defining Rewards
  • Reward types:
    • Points-based
      • Cash rebate
      • Travel
      • Gift/gift certificate
      • Discounts
    • Cash back
    • Co-brand/partner-based
    • Other
competition
Competition
  • Top Bank Issuers
    • All offer a rewards card
    • All offer cash back or cash rebate
  • Non-bank Issuers
  • High Performing Credit Unions
    • 9 of 10 top credit unions by asset size offer a rewards card
    • 7 of 10 top credit unions in credit card penetration offer a rewards card
    • 6 of 10 top credit unions in growth in outstanding credit card balances offer a rewards card
    • 5 of 10 top credit unions in average credit card balance offer a rewards card
  • Relationship Strategy
competition6
Competition
  • 1.4 billion card solicitations in 2nd quarter 2004, 52% were rebate/reward offers
    • 53% cash back
    • 37% non co-brand cards
  • Rewards cards are growing faster than co-branded cards

Synovate/CCM

competition7
Competition
  • AMEX Everyday Promotion gives double and triple points – non-travel purchases account for 2/3 volume
  • Providian allows cardholders to “buy-down” APR or waive fees with points
  • Discover offers up to 5% cash back at supermarkets, drug stores and gas stations
  • Chase offers 3% cash back on all gasoline purchases
  • Citi offers a full 5% cash back or 5 points per dollar spent at supermarkets, drug stores and gas stations
competition debit
Competition - Debit
  • ¾ of debit cards carry no incentives
  • Debit rewards issuers charge an annual fee ranging between $19-$65 per year
opportunity
Opportunity

50% of credit card used in 2004 were not in the cardholder’s wallets a year ago

  • The average monthly new charges in the first quarter for a rewards card were $943 compared to $360 for a non-rewards card – Synovate Inside Track
  • 2004 TNS Global Study

Reasons for opening a new account

    • Rewards ranked 2ND for all reasons listed
    • Rewards ranked 1st for “most important” reason

Most important reasons for making card primary

    • Rewards ranked 1st – 27%
research
Research
  • Visa Credit Card Commitment Study
    • Committed
    • Open
    • Unavailable
    • Uncommitted
      • Offer most potential
        • The cost to acquire a new customer is six times the cost of maintaining existing ones.
        • A 5% increase in customer retention yields a 75% increase in customer value.
      • Young 18-24
      • Rewards is trigger
credit card commitment research
Credit Card Commitment Research
  • Individual card commitment
    • “First card” ever owned
    • Tenure
    • Innovative/Unique Features
    • Cross-relationship
    • Rewards
    • Communication
    • Multi-card accounts
    • Incentive for everyday purchases
    • Superior service
    • Internet access
    • Higher credit limits
    • Bill payment
    • Member focus

Visa USA

research12
Research
  • 2/3 of consumers say they’d prefer to have all their financial needs met by one institution
  • 77% use a credit card issued from another FI
    • #1 reason cited -> lack of incentives offered by their primary institution
  • 50% of debit cardholders surveyed said they would spend more on cards with rewards - Edgar, Dunn & Co.
research13
Research
  • Rewarded cardholders are more profitable
    • 80% of reward participants do more business as a result of the program
    • Membership in a rewards program makes these groups more likely to do more business with that company:
      • 89% of consumers 18-24 years old
      • 86% of consumers w/ income $75k-$100k
      • 86% of consumers w/ income over $100k
    • 60% of American Express cardholders are enrolled in one or more Membership Rewards programs, up 30% from 1998
      • 54% lower attrition
      • Spend 40% more in 1st year
      • Have ½ credit loss rates
      • Pay bills faster
      • Average profitability is 5-times that of non-rewards
research14
Research
  • 60% of consumers said that a rewards program influences their decision of which credit card to use
  • 75% of redeemers indicate a rewards program influences their decision
  • ½ of all adults participate in some type of rewards program
    • 4 of 10 have opted out of a program
    • 74% of the drop outs do less business with the company
successful program components
Successful Program Components
  • Uncomplicated & Clear
  • Relevant
  • Affordable
  • Attainable
  • Value perception
  • Credit limit
  • Marketing
successful program components16
Successful Program Components
  • Uncomplicated & Clear
    • Rules and Regulations
      • 22% don’t know all the rules
      • 58% understand them somewhat
      • 19% understand them very well
        • 89% more likely to do business
    • 4 out of 10 have opted out of a program
      • #4 – rules kept changing (or unclear)
    • Internet impact
successful program components17
Successful Program Components
  • Uncomplicated & Clear
  • Relevant
    • 27% of affluent travelers carry a air miles card, compared to 7% of non-affluent
    • 69% of affluent use a rewards card, compared to 37% of non-affluent
    • 4 out of 10 have opted out of a program
      • #3 – rewards weren’t relevant
    • 90% of rewards card offers have a cash back or cash rebate component
successful program components18
Successful Program Components
  • Uncomplicated & Clear
  • Relevant
  • Affordable
    • 4 out of 10 have opted out of a program
        • #1 – high fees
      • 74% of the drop outs do less business with the company
    • 80% of rewards card offers fell under 9.99% APR in 1st quarter 2004
    • 90% of rewards card offers had no annual fee
successful program components19
Successful Program Components
  • Uncomplicated & Clear
  • Relevant
  • Affordable
  • Attainable
    • Maritz: Length of time it takes to build up point is primary reason consumers leave a rewards program
    • 4 out of 10 have opted out of a program
      • #2 – inability to redeem
    • Redeemers outspend non-redeemers by as much as 355% - ESC
      • The average monthly new charges in the first quarter for a redeemer were $943 compared to $360 for a non-redeemer
successful program components20
Successful Program Components
  • Uncomplicated & Clear
  • Relevant
  • Affordable
  • Attainable
  • Value perception
loyalty programs consumer preferences
Preference

Discounts

Cash

Merchandise

Gift certificates

Travel

Behavior

Gift certificates

Cash

Discounts

Merchandise

Travel

Loyalty Programs -Consumer Preferences

Source: Maritz

successful program components23
Successful Program Components
  • Uncomplicated & Clear
  • Relevant
  • Affordable
  • Attainable
  • Value perception
  • Credit limit
    • Average credit line = $7,699
    • Balance rises by 13% relative to credit line increase
rewards case study
Rewards – Case Study
  • Is a rewards program affordable?

Card Program Profile

    • Premium credit card
    • Full selection of reward types
    • Competitive award levels
    • Mature program 5+ years
    • Over 100 million points
cost benefit considerations
Cost/Benefit Considerations
  • Pts-based rewards programs yield between 10 to 25 transactions per active account each month
  • Cash-back rebate cards average between 10 to 18 transactions per active account each month
  • Premium card w/ rewards exceeds 75% active
cost analysis case study
Average Rewards

11.8 trans

$80 ticket

75.8% active (3306)

Average Non-rewards

7.25 trans

$80 ticket size

63% active (2748)

Cost Analysis – Case Study
cost analysis case study27
Average Gold Card

$1,593,840 sales

X .0175 interchange rate

$27,892 interchange income

Awards

$0

Adjusted interchange

$27,892

$10.15 per active account

Rewards Card

$3,120,864 sales

X .0175 interchange rate

$54,615 interchange

Awards

$687 admin fees

$20,215 redemption

Adjusted interchange

$33,713

$10.20 per active account

Cost Analysis – Case Study
cash back case study
1% Cash Rebate Card

18.22 trans/active

591 active accounts (83%)

$73 average ticket

Interchange

$13,756

($7,860) cash back

-------------

$5,896

No Cash Rebate Card

7.5 trans/active

435 active accounts (61%)

$82 average ticket

Interchange

$4,681

Cash Back Case Study
marketing success
Marketing Success

Balance Transfer

Program summary:

Product use: Visa Gold credit card

Value: 9.6% APR

Appeal: 1% cash back on minimum $1000 balance transfer

Promotion period: 11/20/2002 offered for a *limited time (ended January 1)

Acceptance options: return completed self-mailer, calling the service center, or visiting

Web site.

Results

Response rate: 3.09% (new and existing cardholders)

227 transfers

Cost: $2.84 per piece including 1% pay out

$1,274,201 million new balances

marketing success30
Marketing Success

Incentives

Program summary:

Product use: Visa Gold credit card

Value: 10.9% APR

Appeal: Lowered interest rate and double reward points when use card for 12 or more purchases each month

Promotion period: July and August

Acceptance options: Use the card

Results

Response rate: 852/833

Average spending per qualifying account: $1900+

$1.6 million in sales each month

Recorded 2nd and 3rd highest total purchase volume, active accounts and total

transactions (9/02)

7% increase each month in interchange income (compared to 6/03)

final words
Final Words
  • 6 of 10 cardholders polled said they chose a card with rewards as their preferred card
  • 90% stated they would not reduce usage or cancel their preferred card

- Edgar, Dunn & Co.