Six characteristics of highly profitable card business
Thursday, 9 August 2007
Mr. Iqbal Hossain
ELECTRONIC payment industry is stepping into maturity in Bangladesh. Banks are now more focused on investing in card business either in the form of debit card and/or credit card; independent processing or processing though third party. In whatever way it is, business is growing with a positive trend.
It is expected that within next two to three years, Bangladesh will experience a 100% growth in card industry especially in debit card. More banks are becoming on-line and started issuing debit card. On the other hand, lifting of AIT from credit card bill will augment card usage. But return from this high profile business does not show expected results as of now. It always remains blurred to most of the local banks how to ensure substantial profit from card business.
There are a number of ways to look at profitability in the card business and each in turn may be the most relevant depending on the purpose of the financial analysis. The following is a list of ways which one may consider the economics of card business.
Transactional level: Banks must focus on profitability per transaction. This approach is useful when considering how to encourage certain types of customer behaviour, including the role of loss-making transactions, play in the overall mix.
Card level: Bank needs to focus on profitability per card. This is key to customer segmentation. We need to define our profit maximisation strategies basing on per card profitability. In turn, this will serve to identify the most customer profitable behaviour and also will help in the customer servicing strategy.
Customer level: (a) new customer - we need to assess the cost of acquisition of any new customer to determine whether such acquisition is likely to be a profitable. We also need to identify what is his potential, his risk profile and his likely behaviour; (b) existing customer - we need to assess whether we have profitable customer relationship with any given customer. For example, are insurance and non-card lending opportunities being maximised? What are the prospects when considering all cross- selling opportunities for other bank products?
Segment level: Considering size and margin of any particular segment we focus, is this a profitable segment. What are the comparative returns opposite other segments, to what extent should this be a focus and what are the opportunities for profit improvement?
Product Level: We need to assess whether the products we have ensure substantial profit for us. Considering size and margin, to what extent should this be a focus, how well does it suit the current market and is it necessary to change anything to improve product profit performance? We need to identify how we can best balance the product mix?
Portfolio level: What are the current and prospective economics of our portfolio? It is worth acquiring and at what price, what synergies can one extract, how can one use it to drive premium revenues and margins, what other cross selling and profit improvement opportunities exist, what data, technology, management or other intellectual capital will one acquire and what value should one place on that?
Country P & L level: what are the prospects for the country? What are the fixed and variable elements of the economic structure and so to what extent should one be investing in scale or focusing on marginal contribution through cost revenue re engineering? What is the sum of the above opportunities for this market?
Business Unit level: We need to identify how ROA and ROE stand up against industry and market best in class. What mode we have chosen - growth or profit harvesting mode? What role does card play in overall strategy of the financial institution and what key measures of performance should one be setting?
Most often more than one method will be used. All these particular dissections will feed into strategic and tactical decision making. They should naturally weave themselves into the planning and decision making processes of the business.
Once we have exercised the above, turning to the key elements of card business strategy can then determine successful and profitable businesses. It is suggested by world leaders in card industry that to make a highly profitable card business each bank must have the following characteristics:
lEconomies of scale and scope
l Strategic market positioning
l Customer loyalty
l Customer service orientation
l Operational efficiency
l Continuous business redesign
There are particular challenges to exploiting these characteristics in the financial card business in Bangladesh and besides, how well these characteristics are adopted and performed in each bank that is most important.
The writer is Senior Assistant Vice President and head of Cards, Arab Bangladesh Bank Limited
ELECTRONIC payment industry is stepping into maturity in Bangladesh. Banks are now more focused on investing in card business either in the form of debit card and/or credit card; independent processing or processing though third party. In whatever way it is, business is growing with a positive trend.
It is expected that within next two to three years, Bangladesh will experience a 100% growth in card industry especially in debit card. More banks are becoming on-line and started issuing debit card. On the other hand, lifting of AIT from credit card bill will augment card usage. But return from this high profile business does not show expected results as of now. It always remains blurred to most of the local banks how to ensure substantial profit from card business.
There are a number of ways to look at profitability in the card business and each in turn may be the most relevant depending on the purpose of the financial analysis. The following is a list of ways which one may consider the economics of card business.
Transactional level: Banks must focus on profitability per transaction. This approach is useful when considering how to encourage certain types of customer behaviour, including the role of loss-making transactions, play in the overall mix.
Card level: Bank needs to focus on profitability per card. This is key to customer segmentation. We need to define our profit maximisation strategies basing on per card profitability. In turn, this will serve to identify the most customer profitable behaviour and also will help in the customer servicing strategy.
Customer level: (a) new customer - we need to assess the cost of acquisition of any new customer to determine whether such acquisition is likely to be a profitable. We also need to identify what is his potential, his risk profile and his likely behaviour; (b) existing customer - we need to assess whether we have profitable customer relationship with any given customer. For example, are insurance and non-card lending opportunities being maximised? What are the prospects when considering all cross- selling opportunities for other bank products?
Segment level: Considering size and margin of any particular segment we focus, is this a profitable segment. What are the comparative returns opposite other segments, to what extent should this be a focus and what are the opportunities for profit improvement?
Product Level: We need to assess whether the products we have ensure substantial profit for us. Considering size and margin, to what extent should this be a focus, how well does it suit the current market and is it necessary to change anything to improve product profit performance? We need to identify how we can best balance the product mix?
Portfolio level: What are the current and prospective economics of our portfolio? It is worth acquiring and at what price, what synergies can one extract, how can one use it to drive premium revenues and margins, what other cross selling and profit improvement opportunities exist, what data, technology, management or other intellectual capital will one acquire and what value should one place on that?
Country P & L level: what are the prospects for the country? What are the fixed and variable elements of the economic structure and so to what extent should one be investing in scale or focusing on marginal contribution through cost revenue re engineering? What is the sum of the above opportunities for this market?
Business Unit level: We need to identify how ROA and ROE stand up against industry and market best in class. What mode we have chosen - growth or profit harvesting mode? What role does card play in overall strategy of the financial institution and what key measures of performance should one be setting?
Most often more than one method will be used. All these particular dissections will feed into strategic and tactical decision making. They should naturally weave themselves into the planning and decision making processes of the business.
Once we have exercised the above, turning to the key elements of card business strategy can then determine successful and profitable businesses. It is suggested by world leaders in card industry that to make a highly profitable card business each bank must have the following characteristics:
lEconomies of scale and scope
l Strategic market positioning
l Customer loyalty
l Customer service orientation
l Operational efficiency
l Continuous business redesign
There are particular challenges to exploiting these characteristics in the financial card business in Bangladesh and besides, how well these characteristics are adopted and performed in each bank that is most important.
The writer is Senior Assistant Vice President and head of Cards, Arab Bangladesh Bank Limited