In my previous articles, I covered major trends in credit card cobrand profitability and how banks calculate the profitability of your credit card program as well as the key drivers of revenue and expenses. In this article I will discuss the credit card product.
A quick and accurate rule of thumb is that everyone who is eligible for your co-brand credit card program has a credit card already. It is bad news that there aren’t any “green fields” any more for new account acquisition. Therefore, to win with your co-brand program you need to have a product that displaces the incumbent credit card. That of course sounds easier said than done.
This article will address a few hurdles from the customer perspective:
- Are the rewards or benefits material – is it worth switching?
- Is the new card special use or first in wallet?
- Are there short term and long term benefits to switching?
- Is it worth overcoming inertia?
The key is whether or not you can attract the “right” people to apply for your credit card program. These hurdles aren’t answered once for everyone, but need to change and evolve over time.
Are Rewards and Benefits Real?
From a customer’s perspective, the question is whether the rewards are material. This is a difficult question because the value comes from three places; the earn side (how rewards are accrued), burn side (how you use rewards), and rewards tiers. Your offer has to be better, not just sufficient, to generate success.
- Rewards Earning – This is what most consumers usually focus on -how many points or percent back do they receive as a part of the rewards program. Unfortunately, the value is often obscured by currency (what is a “point” really worth?) and earning schedules with rotating categories and opt-in requirements. You can’t expect consumers to give your credit card program much share of mind, so you need to make it easy for them to understand. The Fidelity American Express card with a straight 2% back fulfilled as a deposit to their Fidelity cash management or brokerage account is a great example of fantastic value that is also simple. On the other hand, cards that are based on obscure points values that customers don’t understand can make it difficult for customers to value the true offer. A tender neutral frequent shopper program offers no alternatives, so customers take what they can get, but credit cards have alternatives, many with valuable earning structures.
- Rewards Redemption – Some programs have rewards redemption structures that are murky and difficult to understand while others are simple and straight forward. Statement credits and automatic redemptions are favorites among customers because they don’t have to take an active role, but this tends to reduce breakage and is more expensive for the program economics. Many retail and cash back programs generate a reward or statement credit based on a threshold. Programs that require the cardholder to take a positive action to redeem the reward have the benefit of lower redemption expense and more customer control. Discover is an interesting case in point because you can redeem dollar denominated “points” for more value than a dollar. This is very different than the original Discover value proposition where Discover sent a check each year. Blue Cash has also moved more to the Discover model. Balancing customer preference with economic drivers is an important balancing act. Another interesting case in point is the Starwood Preferred Guest credit card where the redemption side is more valuable than the earning schedule. Devotees understand the value of the card and love it, but less engaged members may not understand its unique value.
- Rewards Tiers – Blue Cash and Fidelity Visa Signature both have rewards tiers to drive incremental spend. Discover has eliminated the tiers on Discover It, but still has the rotating categories. Tiers are a great way to reward more engagement and encourage customers to spend more. The trade-off is complexity. It is hard to explain and if customers don’t see a path to rewards, then the Tiers can be demotivating. They are an excellent way to manage rewards expense and provide incentives for engagement, but only if used with a high level of skill.
- Implications – Developing the rewards structure is a complex and very important task. Understanding how customers value the earn, burn, and tier components of a program are essential to creating a program that resonates with customers at favorable economics. There isn’t one “right” answer, but rather answers that work for specific groups of customers at specific times. Matching the right rewards to the right customers is essential to a thriving program. The rewards need to “feel” valuable and worth the effort.
Special Use or “First in Wallet”?
When a customer applies for a credit card, the key question they are looking to answer is whether the card is used for special purposes or intended to be a “first in wallet” credit card. Private label cards are designed to be used for special purposes at the retailer in order sometimes to provide a rewards platform (i.e. Target) and usually more importantly to provide purchase financing (i.e. Gap, Appliance Stores). Knowing when to use co-brand vs. private label products is a subject for a future article. For a co-brand program, it is important to provide reasons to make the card a first in wallet card. The first in wallet card generates more profitability (interest, lower loss rate, etc.) as well as more engaged customers at the retailer.
Three key traits of first in wallet cards:
- Annual fees are the Holy Grail. If you can get customers to pay them, they have an incentive to use the card. If you have a unique hook or benefit that can be tied to an annual fee, the power of the fee is key to engagement; without the hook it is one of the fastest ways to kill a card program. Traditionally airline programs have been the bastion of sponsored annual fee cards. Over the last few years the armor has begun to chink with the introduction of First Year Free Annual Fee cards that widen the appeal of airline cards beyond those traditionally willing to pay an annual fee.
- Low interest rates are also important. Even transactors who don’t usually pay interest are sensitive to the rate charged. A high interest rate is important with risk based pricing or where the goal is only to get accidental revolve, usually not the case for most programs and what they aspire to achieve.
- Strong rewards is not only about earning at the merchant, but also in other categories that helps the card gain usage for everyday purchases. Capturing items like gas, groceries, and restaurants are important to gaining first in wallet position. Although these can be expensive categories, they also are the path to overall profitable behavior.
Are there short term and long term benefits to switching?
Up front incentives have become a major motivator to encourage credit card switching. Whether it is 75,000 membership rewards points (with an American Express OPEN Card) or $100 with some Bank of America Programs, these incentives are key to gaining attention of prospects and getting them over the hurdle to use the card. However, they don’t necessarily generate long term behavior. Developing the right hurdles so that they create ongoing behavior without being confusing or onerous is the challenge. Since these are usually upfront costs and much larger than the behavioral benefit, they can easily turn a program unprofitable.
When designing a program, it is important to use this tool carefully. It can generate accounts, but profitable accounts are the true measure. Research is useful, but the best way to assess if customer incentives are working is to develop a marketing test that evaluates the impact of more accounts compared to the total cost. It is the only way to measure whether you are attracting just “gamers” or are meeting the objective of gaining trial from customers who really will become committed to your program.
At the end of the day the improved credit card value proposition won’t make a big difference in your customers’ lives. That is the unfortunate truth. A 2% or even 5% reward won’t transform their purchasing power. A lower interest rate can make a bigger difference, but it doesn’t usually have the scale of savings that a lower mortgage interest rate provides.
Given that gloomy reality, it might be hard to believe that people switch cards, but they do in droves. Credit cards are an impulse decision for the most part. By creating a simple, clear, and valuable credit card you can generate both trial and usage. However, it’s important to note that this is a major project and needs to be addressed as such.
The contextual relevance of the offer (i.e. Amazon in checkout), linked with a valuable offer (Amazon shows the cost after the incentive), and speed (can easily apply) can generate all important trial. In retail as well as online channels, the speed, relevance, and upfront value can help to overcome inertia.
What should you do?
When developing or refreshing you co-brand program make sure you understand your customer, their alternatives, and what behaviors you are trying to drive. With these in mind it is possible to develop the product to win with your target cardholders and become first in wallet. This isn’t a simple process, but all important.
Many people ask what credit card I use. For most of my purchasing I use the Fidelity American Express Card (2% back) and the Fidelity Visa Signature Card (1.5% up to $15,000 and then 2%). While I must disclose that Fidelity is a Partner Advisors client, the value proposition we helped create drove the decision. It was striking when I did the math to see how much the value of the spend is in real dollars, but also how small the 0.5% difference in rewards is.
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