Increased competition and uncertainty force banks to better understand their customers and what drives profitable card behavior. Card performance optimization will likely be a key European payment trend in 2011-2012.
Card Performance Optimization (CPO) is a common name for statistical methods for maximizing credit card profitability based on behavioral analysis and risk policies. CPO allows issuers to reduce credit loss ratios, reactivate inactive accounts, approve more customer applications, and help build revolving balances - in essence to stimulate profitable card behavior. The methods can also be used to cross-sell credit cards to customers with existing prepaid, charge and debit card accounts.
While highly developed in the US and UK, the rest of Europe is still in an early stage of CPO adoption. Interestingly, even European branches of US and UK banks have only to limited extent adopted the successful measures of their parent banks. The players leading the way in Europe are typically niche banks whose core competencies are in credit card issuing.
One of the key components of CPO is behavior scoring – basically speaking a risk scoring method based on customer behavior after the customer has been issued a credit card. Behavioral scoring based on actual card behavior supplements application credit scoring, allowing issuers to approve more credit applications and to dynamically reassess credit limits – and interest rates – based on the risk pattern the customer exhibits.
Depending on the card issuer’s objectives, CPO can be used to optimize card program features and card pricing structure to drive the desired card behavior needed to achieve set goals. For example, a card issuer that wishes to generate higher revolving balances on existing accounts can optimize fees and interest rates to stimulate cash withdrawals, which have a higher tendency to revolve than purchases. For an issuer that wishes to activate inactive cards, other measures are more suitable. The exact measures should be tailored to the desired objectives – or to maximize overall profitability for the portfolio. Interestingly, cardholders are far from rational, which can yield different results than first anticipated. This represents both a challenge and an opportunity – mostly the latter.
With increased competition and macro level uncertainties in many countries, there is a growing need for card players to understand what drives profitable behavior, how to better manage risk, and how to capture new and profitable customer segments. Different banks will have different priorities, but banks that do not implement CPO will likely ultimately lose market share. Even a sub-optimized card portfolio can be highly profitable compared to other banking products, but the difference in returns on an average compared to a great portfolio is substantial. Credit cards are a volume and data-driven business, and as the market saturates, performance optimization will increase in importance.
To learn more about Card Performance Optimization, and receive a FREE assessment of your card portfolio's optimization potential, please contact sales@macawresearch.com.
