An%20Introduction%20to%20Cards%20Business%20-%20A%20Complex%20Business%20of%20Many%20Moving%20Parts

1
An Introduction to Cards Business- A Complex
Business of Many Moving Parts

• Pradeep Pant
• Cards Business Director
• Citibank N.A., Taiwan
• March 22, 2005

2
Note-The data used in this presentation is
indicative to explain the concepts of Card
Business and may not be accurate.



3
As regulation falls away competition
intensifies, management talent insight...
will become critical success factors.


- The
McKinsey Quarterly, 1997
4
What is this session about?

• Cards market in Asia Pacific
• Market Scenario in Taiwan market
• Citibank Cards business
• What is Cards business?
• PL Dynamics of Cards Business?
• What are the Key Functions in Cards Business?
• What about kind of skills people needed in this
  business?
• A Few Case Studies

5
Asian Economies are growing at a Fast pace
Consumer Credit Outstanding US Bn
Gross National Income Growth

• Expanding middle class and relatively young age
  structure
• Visa reported 42 growth in purchase volumes for
  the Asia-Pacific regions in 2003 compared with
  12 globally.
• Cards to be a key component of the development
  of consumer credit markets as household incomes
  increase
• Low penetration in key markets

6
There is a Large Potential for Usage
PCE Penetration by Country
RSV/PCE
US
AP Average
7
.And Penetration
Credit Card per Adult
Credit Card per Adult
US 5.7 per Adult
8
Cash Dominates PCE spending
Accelerate Migration from Cash to Cards
9
Hyper Competitive Environment
Global Players
Fragmented market- Future Opportunity for
Consolidation

• Similar Business model
• Committed to deliver service, quality
• Strong expertise in Analytics
• Corporate hurdles for Credit Profitability
• Limited Pricing appetite
• Focus on top-end- predictable profitable
  segments

Source Visa
Regional Players
Single-Country Players

• Present in few countries
• Strong market-specific alliances
• Focus on building strong Cards business
• Reasonably strong Brand image
• Strong goodwill
• Good delivery infrastructure but low expertise on
  Cards
• Focus on building Cards business
• Strong mid-segment presence
• Resort to aggressive pricing

• Strong presence, multi product player
• Recognized, trusted brand
• Relatively less experience in Cards business
• Considerably lower hurdles
• Highly focused on building market share
• Willing to disrupt market structure
• May resort to short term irrational pricing

10
What is this session about?

• Cards market in Asia Pacific
• Market Scenario in Taiwan market
• Citibank Cards business
• What is Cards business?
• PL Dynamics of Cards Business?
• What are the Key Functions in Cards Business?
• What about kind of skills people needed in this
  business?
• A Few Case Studies

11
Taiwan Market

• Strong economic recovery in 2004 led to GDP
  growth of 5.9 in 2004 (est)
• General improvement in Consumer Confidence-
  Private Consumption growth also picks up (3.0)
• Some slowdown expected in 2005- GDP growth at
  4.5 and PCE at 2.9
• Taiwan dollar has appreciated significantly
  versus US over the last 12 months
• High Employment levels with 10.2MM labor force
• Per Capita GNP- 14,961
• Unemployment rate at 4.5

  GDP() PCE(NTB)
1999 5.42 5,641.31
2000 5.86 5,981.27
2001 -2.18 6,042.63
2002 3.59 6,149.51
2003 3.33 6,155.95
2004 (forecast) 5.93 6,426.60
12
Market Background- Regulatory

• Regulators very active with the goals of
• Consumer protections,
• Stable credit environment
• Fair competition in Cards Industry
• Also Bankers Association plays an active self
  regulatory role
• Card Businesses need to report independent
  financial statement by 3Q05

13
Market Scenario

• Developed Credit Cards market with 90 of
  eligible population holding Cards
• 2.4 Cards/ person and 4.4 Cards in every eligible
  persons wallet
• Penetration of Cards Sales has grown
  aggressively
• PCE Penetration trends during 1999-2004 are below
• Currently over 22 of PCE is on Cards

  Card Sales/ PCE()
1999 11.51
2000 13.37
2001 14.49
2002 16.36
2003   19.12
2004 (Forecast) 22.72
Source Directorate-General of Budget, Accounting
Statistics, Executive Yuan, FSC
14
Market Growth - CIF
As of Dec. 2004, Taiwan Credit Card Market CIF
44 MM, with growth rate of 17
15
Market Growth - Sales
As of Dec. 2004, Sales for all credit card brands
in Taiwan NT1,460BN,with growth rate of 24
Focus shifting from Issuance to Usage
16
Competitive Environment

• Over 60 Card Issuers, many may be unprofitable
• Free-for-Life Platinum Market
• Intense competition for Place-in-wallet and
  Share-of-wallet
• High Advertising spend
• Regular usage promotions
• Large number of Cobrands
• Citibank is 2 in Market Share Card Sales in
  Taiwan

17
What is this session about?

• Cards market in Asia Pacific
• Market Scenario in Taiwan market
• Citibank Cards business
• What is Cards business?
• PL Dynamics of Cards Business?
• What are the Key Functions in Cards Business?
• What about kind of skills people needed in this
  business?
• A Few Case Studies

18
Citi Cards- Asia Pacific
19
Strong Leadership in Marketplace, Consistent
Financial Performance
Citibank Card- The Main Card in Wallet
Spend per Card (US )
1 Pan-region Card Issuer in AP

• Over 13 MM Cards in 11 countries
• 1 or 2 in 9 markets
• China- recently launched 12th market
• Award for the best Internet website in 4
  countries (2003)
• Singapore website rated the best in Asia for 3
  consecutive years- 2002, 03 04
• Rated best in Korea, Indonesia, Malaysia,
  Thailand, Philippines Guam in 2004
• Card businesses in all markets recognized for
  outstanding products service
• Several external Awards, e.g., India (2002),
  Indonesia (2003), Thailand (2004), Singapore
  (2004)

20
Mission

• Leadership in Payment Products category in Asia
  Pacific through-
• The best products, Customer Service technology
• Maximizing Risk-Reward balance by using Credit
  and Analytical tools
• And make a significant contribution-
• To the bottom line of the corporation
• To the customer base of the corporation

21
What is this session about?

• Cards market in Asia Pacific
• Market Scenario in Taiwan market
• Citibank Cards business
• What is Cards business?
• PL Dynamics of Cards Business?
• What are the Key Functions in Cards Business?
• What about kind of skills people needed in this
  business?
• A Few Case Studies

22
A Business of Many Moving Parts
Market Leadership
Financial Performance
Market Knowledge
Risk Management
Customer Service
Strong Product
Data Management
23
Consumer Credit Products
24
Key Players

• Issuers Financial institutions who issue credit
  cards
• Consumers Individuals who use the cards
• Merchants Points of sales where the cards are
  used
• Acquirers Financial institutions who process
  (acquire) transactions performed at the merchant
  sites
• Associations Organizations that provide networks
  to facilitate transactions between Acquirers and
  Issuers (Visa, MasterCard Diners)
• Others Regulatory bodies, consumer right groups,
  third party service providers, credit agencies,
  etc.

25
Transaction Flow
1. Credit card
2. Goods or services
Merchants
Cardholder
8. Payment
3. Transaction Info
7. Billing
4. Settle transaction (Less discount)
Issuing Bank
Acquiring Bank
Visa or MasterCard
6. Debit issuing bank and transfer
information
5. Credit acquiring bank and transfer
information
26
Transaction Flow - Example
100 Charge
100 worth of merchandise
MERCHANTS
CARDHOLDER
Pay 100
Bill 100
Receives 97
100 Charge
ISSUING BANK
2
1
ACQUIRING BANK
VISA or MasterCard
100 Charge, Pays 97
100 Charge, Pays 98
27
Cards PL Structure
A INTEREST B ADJUSTMENT C INTEREST
REVERSAL D COST OF FUNDS E NRFF A - B - C -
D F INTERCHANGE G ANNUAL FEES H OTHER
FEES I FEES F G H J CUSTOMER NET REVENUE
E I K CREDIT COST (NCL/LLR) L NET CREDIT
MARGIN J K M EXPENSES N EBIT L -
M O TAXES P NET INCOME N - O
28
Revenue Components

• NET REVENUE FROM FUNDS (NRFF)
• Interest Revenues
• Interest Reversal
• (Cost of Funds)

• FEES COMMISSIONS
• Interchange (Net of Settlement Fee)
• Annual Fee
• FX Fee
• Cash Advance Fee
• Over-Limit Fee
• Late Fee
• Insurance Fee
• (Reward Cost)
• (Acquisition Cost Amortization)

29
Revenue Components - Detail

• NET REVENUE FROM FUNDS (NRFF)
• Transactors ANR x Cost of funds
• Revolvers ANR x (Gross interest -
  COF)

• FEES COMMISSIONS
• Interchange
• Annual Fee
• FX Fee
• C/Advance Fee
• Over-Limit Fee
• Late Fee
• Insurance Fee
• Reward Cost
• Acquisition Cost

30
Credit Cost

• MEASURED AS A PERCENTAGE OF
• Sales for a charge card product
• ANR for a credit card product

• NET CREDIT LOSSES (NCL)
• Gross Write-Off (GWO) - Interest Fee
  Reversal
• Gross Credit Loss - Recoveries
• Net Credit Loss (NCL)
• GWO is a function of bucket-wise outstanding,
  flow rates and new cardholder spend
• Recoveries are a function of written-off
  volume and success rate on collection

31
Net Credit Margin Dynamics
Competitive
Regulatory
Economic
External Environment
Restraining Forces
Sales
APR
Payments
Account Delinquencies
Internal Triggers
Stable Net Credit Margin
Risk Management
Portfolio Mgmt.
NIM Fee Mgmt.
Customer Account Policies

• Sales Stimulation and Activation Programs
• Enhanced Wallet Share Growth
• Credit Line Increases
• Portfolio Acquisitions
• Segment Mgmt
• New Initiatives
• Product / Value Differentiation

Business Initiatives

• Risk Adjusted Pricing Policies
• Tiered Fees
• Enhanced Funding Strategies
• Revenue Services
• Re-engineered Acq/ Balcon Offers

• Customer Performance Data
• Seamless Customer Identification
• Data Enhancement / Promotional History/ Common
  Bureau
• Business Leverage
• Implicit Differentiation
• Explicit Differentiation
• Channel Product Optimization

Driving Forces

• Collections Strategies
• Authorizations and Balance Control Techniques
• Credit Line Management
• Acquisition Strategies
• Risk Tools Infrastructure

32
Expenses

• ACQUISITION Sales marketing, credit
  initiation and card issuance. Driven by of new
  accounts/channel mix and approval rate.

• SERVICING Customer (citiphone, collection)
  Non-Customer (payment/transaction processing,
  authorization, settlement). Driven by of open
  accounts and level of automation/centralization.

• MARKETING Advertising, product portfolio
  management (activation, upgrades). Driven by
  scale and depth of communication/program.

• TECHNOLOGY Telecommunication, data centre,
  enhancement, maintenance and production services.
  Driven by extent of functionality and level of
  centralization.

• INFRASTRUCTURE Business management, support
  functions, fraud losses and corporate
  allocations. Driven by sales volume (fraud) and
  level of efficiency.

33
Business Drivers
34
Vintage PL
EBIT (USMM)
600
500
400
300
200
100
0
-100
-200
Year 1
Year 2
Year 3
Vin3
-104
-102
57
Vin2
-71
47
77
Vin1
445
539
552
Vinlt0
35
What is this session about?

• Cards market in Asia Pacific
• Market Scenario in Taiwan market
• Citibank Cards business
• What is Cards business?
• PL Dynamics of Cards Business?
• What are the Key Functions in Cards Business?
• What about kind of skills people needed in this
  business?
• A Few Case Studies

36
Operational Framework

• Risk Management
• MIS
• Credit / Risk Management
• Risk Policies
• Collections
• Fraud Security

• Marketing
• Cardholder Acquisition
• Portfolio Management
• Branding Advertising
• New Product Dev. Partner Mgmt
• Research Planning

• Technology
• Front end distribution System
• Host System
• System development maintenance

• Operations
• Credit Initiation/ Appl. Processing
• Authorization
• Transaction Service
• Front End Collections
• Customer Service

• Others
• Financial Control, Human Resources,
  Legal/Compliance, Treasury

37
The Marketing Cycle
Environmental Analysis
Consumer research target identification/
segmentation
Branding Advertising
Product, program channel developments
Cardholder acquisition
Portfolio management
Customer retention management
Customer, product, program channel evaluation
38
Understanding Customers-- What are
characteristics of Taiwan society?

• Highly Competitive
• Fast Moving Dynamic
• Entrepreneurial Achievement / Goal Oriented
• Flexible to Changing Situations

39
Understanding Customers-- Major Consumer Segments

• Identity Builders
• Career Builders
• 3. Family Builders
• 4. New Life Builders

Target Groups ! !

40
Understanding Customers-- Where do Customers
Spend?
Leisure Spending
Implications

• Coffee
• Cigarette
• KTV
• Taxi
• Shopping
• Phone Bill
• Night Life
• Total

• 1,000
• 1,500
• 4,000
• 1,000
• 10,500
• 2,000
• 2,000
• 22,000

• Total spending on leisure is NT 22,000. Out of
  these, spending on dinning and entertainment is
  the highest, followed by shopping. Therefore,
  focus on these segments may be considerate,
  especially for promotion purpose.

41
The Credit Cycle
Strategy Program Development
Write-Off
Program Implementation Analysis
MIS Control Policy Scoring Performance Measureme
nt
Collections Fraud Security
Servicing the Customer
42
Application Processing

• Receive process applications credit-line
  increase requests, and related offers in a timely
  and cost-efficient manner.
• Develop maintain a rational, automated,
  consistent methodology for scoring the
  information.
• Review declines cases to determine if
  consolidation, credit-line reduction or
  Down-Sell will address the needs of the
  applicant.

43
Application Processing

• Key Volume Statistics
• Total Applications Received/Processed
• Total Month-end Pending
• Total Expense
• Total FTE
• Effectiveness
• Approval Rate

44
Application Processing

• Efficiency
• Deviation rates
• Incomplete Apps
• Quality
• Data Entry
• Verification
• Credit Decision

45
Authorization

• Crucial process in controlling delinquency and
  fraud while providing exceptional service and
  increasing sales
• Good authorization process can
• Prevent further credit exposure
• Prevent use of lost or stolen cards
• Provide opportunity to confiscate cards being
  used fraudulently
• Detect patterns of card usage suggesting
  fraudulent use
• Establish validity of the transaction
• Managing portfolio through appropriate
  authorization policy

46
Authorization

• Criteria
• Outstanding Balance / Available Limit
• Delinquency
• Length and Depth of relationship
• Type of purchase
• Validation of purchase
• Behavior Score

47
Collections

• Collection is a Balancing act
• Cost vs. Return
• Customer relationship (retention) vs. Asset
  Protection
• Customer contact is important
• If you dont make contact, you dont collect
• People
• Training performance coaching monitoring
• Collection agency
• Process System
• Technology
• Performance MIS

48
Collections Strategy
Front End
Mid Range
Hard Core
Charge Off
Balance Control
Recovery
Bankruptcy / Deceased
49
Fraud - Mission

• Protect the franchise against fraudulent
  activities while maintaining customer convenience
  service

50
Fraud - Types

• Traditional Types
• Lost / Stolen
• Never Receive Issuance (NRI)
• Fraudulent Application
• Mail / Telephone Order (MOTO)
• Account Take Over (ATO)
• Emerging Types
• Manual Counterfeit (White Plastic, Altered, etc)
• Electronic Counterfeit (Skimming)
• Merchant Fraud
• Internet / E-Commerce

51
What is this session about?

• Cards market in Asia Pacific
• Market Scenario in Taiwan market
• Citibank Cards business
• What is Cards business?
• PL Dynamics of Cards Business?
• What are the Key Functions in Cards Business?
• What about kind of skills people needed in this
  business?
• A Few Case Studies

52
Case Study 1- Leveraging Citibanks Global
Presence
53
Citibank World Privileges
Lift, differentiate, and sustain the brand

• 25,000 Merchants
• In over 30 Countries
• Flagship partners include-
• Raffles
• Starwood
• Banyan Tree
• Ascott
• ClubMed
• Angsana Spa
• Apple
• O2
• Davidoff
• Europcar / Hertz

54
Case Study 2- Building Premium
55
Thailand Gold Card Re-launch

• Background Opportunities
• No issuer focusing on premium segment.
• There are over 1.1 MM eligible customers
  available nationwide with high incomes and
  purchasing power.

56
Gold Card Re-launch - Own the Segment

• Launched with strong new benefits
• Expanded market by qualifying more customers-
  reduce income criteria
• Strong Advertising support

57
Case Study 3- Creating Value for Money
Cash for Customers
58
Cash Back Card
59
Summary

• Cards is a universal product with mass appeal
• Industry continuous to grow- both due to economic
  growth and cash-to-card shift specially in Asia
• Effective marketing requires understanding
  different segment dynamics and support with right
  product/channel strategy
• Cards is a complex business requiring significant
  local/ international infrastructure, and good
  understanding of risk management, analytics, and
  profitability dynamics.
• Its a fun challenging business to work in

60
As regulation falls away competition
intensifies, management talent insight...
will become critical success factors.


- The
McKinsey Quarterly, 1997
61
Thank you
Questions?
62
(No Transcript)