Vision 2014:...

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Develop a market leading investment strategy by targeting consumers by the amount of interest they pay and their credit card spend

Jason Dietrich Experian

Mike McGinley Experian

#vision2014

2 © 2014 Experian Information Solutions, Inc. All rights reserved. Experian Public.

The state of card portfolios

Revenue proxies – targeting spend and yield

Building a profitable portfolio – redefining strategy

Finding the right product to capture spend and yield

Agenda


Response rates remain low

► < 50 basis points

To improve cost, more lenders want to acquire accounts via:

► Point of sale

► Web

► Digital marketing

Direct mail volumes are declining YOY

Mail volumes and response rates

Can you use direct

mail campaigns to build

profitable campaigns?


The keys to profitability

Credit card portfolios generate revenue from three sources:

1. Fees

► Late fees

► Over-limit fees

► Annual fees

2. Interest income

► Revenue from annual percentage rate on balances

3. Interchange

► Approximately 1.5% revenue from every purchase

Can you target

these behaviors?


Card lenders need to improve profitability

Inactives 30%

Low spending

transactors 20%

Low rate revolvers

20%

High spend 15%

Revolvers 15%

20%–30% of consumers

generate most of a

portfolio’s profit – build a

portfolio that has more

of these consumers

70% of the portfolio

is a drag on the P&L

A typical credit card portfolio


How do lenders try to improve profitability today?

SPEND and REVOLVE are concentrated within a small population

The attempt … The issue …

Not all low risk consumers revolve

Additional risk added to the portfolio

Lower risk score cutoffs to find revolvers

No way to know if balance is from spend or how quickly consumer will pay it off

Targets too many consumers already revolving at 0% APR or very low rates

Target consumers with balances with BT incentives and offers

Activation and bonuses are only effective if spend persists or balances are revolved

Offers go to low spending transactors

Offer rewards incentives to get people to use cards (points for gas/ groceries, etc…)

Many consumers have no “off us” spend or yield

Small line increases are not useful for higher spending segments

Increase lines on inactives with acceptable credit risk

40% of consumers who make more than $75,000 per year spend less than $5,000 on cards annually

Income models correlate to risk

Target based on wealth / income to find high spenders


Revenue proxies aggregate past spend and revolve behavior

Experian TAPSSM is a special

algorithm that uses longitudinal credit

data to proxy the last 12 months of

spend on credit and charge cards

Key fields used:

► Total annual plastic spend

► Wallet share

► Payment rate

Over 60 validations

► R2 exceeds 0.80

Experian TAPSSM

Total annual plastic spend (Visa, MC, AMEX, DFS)

EIRC for RevolvingSM is a yield

algorithm that uses longitudinal credit

data to proxy the last six months of

interest on credit cards

Key fields used:

► Average effective APR (%)

► Average interest ($)

► Average daily balance

► Average revolving balance

Over 30 validations

► R2 exceeds 0.90

EIRC for RevolvingSM

Estimated interest rate calculator for revolving credit

cards (Visa, MC, AMEX, DFS)


4%

34%

$10,779

13%

33%

$3,219

83%

33%

$504

4% of U.S. bankcard holders account for a third of total spend, at almost $11,000 per

month per consumer … but most spend offers target low spending populations

Spend is highly concentrated…

U.S. Population

% of total U.S. card spend

Average monthly spend


Targeting higher spend segments allows you to target fewer consumers but more interchange

$129,348

$38,629

$6,050

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

High ($65k+/year) Medium ($25-$65k/year) Low (<$25k/year)

Spend

Average spend is significantly higher in medium ($39K) and high spend ($129K) segments

than low spend ($6K); investments should be significantly higher for high spend segments


3%

33%

$5,978

8%

34%

$2,310

89%

33%

$202

Yield is also concentrated amongst a small segment of the population

U.S. Population

% of total U.S. card spend

Average monthly spend

A third of the total yield opportunity is with just 3% of U.S. cardholders; they generate

nearly $6K in average annual yield/consumer, but lenders target mostly other consumers


As with spend, using tools designed to find high-yield populations can bring significant benefit

$5,978

$2,310

$202

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

High ($3.75k+/year) Medium ($1.5k-$3.75k/year)

Low (<$1.5k/year)

The average yield is significantly higher in medium ($2.3K) and high yield ($6K) segments

than low yield ($200); investments should be significantly higher for high yield segments


Spend opportunity is correlated with credit risk …

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

501-600 601-700 701-800 801-900 901-990

Low spend (<$25k/year, 100%=$659B)

Medium spend ($25k-65k/year, 100%=$653B)

High spend ($65k+/year, 100%=$653B)

VantageScore®

VantageScore® is a registered trademark of VantageScore Solutions, LLC.


… however, it is inefficient to target spend by risk alone

A marketing campaign attempting to capture the spend market mails

VantageScore® 750+ prospects. This would result in:

4.5 million of the 5.1 million high-spenders mailed (88% of the high spenders!)

However … 82 million low and medium spenders would be included

95% of the mail file would be low and medium spenders – highly inefficient

U.S. population

VantageScore® Low spend (<$25k) Medium spend

($25k–$65k) High spend (>$65k)

501–750 41.9M 1.8M .6M

750–990 56.8M 14.8M 4.5M


Yield potential and risk – related, but less so than spend

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

501-600 601-700 701-800 801-900 901-990

Low EIRC (<$1.5k/year, 100%=$25B)

Medium EIRC ($1.5k-3.75k/year, 100%=$25B)

High EIRC ($3.75k+/year, 100%=$25B)

VantageScore®

Yield opportunity is significant

in high VantageScore®

segments:

$25 billion (of the total

of $75 billion) of yield

is with cardholders with

VantageScore® greater

than 800

Another $27 billion is in

VantageScore® between

700–800


Targeting yield opportunity by risk score alone creates higher risk and is inefficient

An issuer seeks to target interest revenue by

lowering score cut off to 651 VantageScore®…

They could use only the score cut:

108 million consumers:

$70B in yield

39 million with VantageScore®

< 800

or

They could use EIRC and score

11.9 million consumers:

Target $44B in yield

7.5M with VantageScore®

< 800

U.S. population

Low yield Medium yield High yield

VantageScore® Consumers Interest Consumers Interest Consumers Interest

501–650 20.9M $3.3B 1.2M $1.1B .4M $3.2B

651–800 32.1M $10.6B 5.3M $14B 2.3M $15.3B

801–990 64.0M $16.7B 3.3M $8.3B 1.0M $6.0B


Developing the right

products to capture

spend and yield


Spend levels show clear product alignment: no-preset-spend-limit products rank highest

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

Year-1 average spend

Card spend in months 7–18

FS – best in class FS – other Credit card

NPSL accounts capture

substantially more spend

than regular credit cards

Best in class NPSL

accounts capture $3,000

in spend in year 1 and

almost 2x the spend of

other NPSL accounts in

months 7–18


Yield is similar across multiple products

$-

$75.00

$150.00

$225.00

$300.00

Average 2-year yield

Flex Spend (NPSL)

Bankcard, prime (VS 700+)

Bankcard, near-prime (VS<700)

NPSL accounts capture

similar yield to prime and

near prime bankcard

NPSL is capturing spend

and yield at high levels


Targeting spend at acquisition will result in a high spending portfolio

$0.00

$5,000.00

$10,000.00

$15,000.00

$20,000.00

Flex spend(NPSL)

Bankcard, prime(VS 700+)

Bankcard, near-prime(VS<700)

Fir

st

year

avera

ge m

on

thly

sp

en

d

Account type

$0–$25k $25k–$65k >$65kPrior year spend

Regardless of product type, actual post-book spend

aligns with pre-booking Experian TAPSSM spend estimate


Targeting consumers who historically pay high interest will result in a profitable portfolio

$-

$100

$200

$300

$400

$500

$600

Flex Spend (NPSL) Bankcard, prime (VS 700+) Bankcard, near-prime(VS<700)

Cu

mu

lati

ve 1

8 m

on

th y

ield

$0 - $1500 $1501-$3750 > $3750Prior year yield

Again, post-book yield aligns strongly with

pre-book EIRCSM estimate, across products


Redefining product

offers to capture

spend and yield


>$70k >$50k >$30k >$15k None

Response Approval

Creating the right offer for capturing spend and yield – a case study

High spend product:

Vellum envelope,

upscale creative

50% annual bonus

200,000 points

borrowing capability

High line / NPSL

16.99% APR

High spending consumers respond to offers that appeal to them; success

rates increase with Experian TAPSSM contrary to traditional experience


“ABC Bank” case study data: The impact of line assignment

$0

$100

$200

$300

$400

$500

<$5k $5k–$10k $10k–$25k $25k–$50k $50k–$100k > $100k

Acco

un

t valu

e

Annual spend

Interest Fees Interchange

Where credit limits

were > $20k – optimized

profit for high spenders

Profit contribution and VantageScore® by spend bin 807 796 789 774 785 762

Low spending customers can be less profitable generating only interest and fee income

Higher spending segments generate both interchange and interest income


Spend offer

High bonus in line with spend (transactors)

Higher bonus for spenders with back end revolve

No promo rates

Reasonable rates (low – mid teens)

Upscale creative showcasing rewards

Revolve offer

No BT fees (fees are charged now because don’t know who will revolve)

0% for 12-15 month intro with reasonable go to rate (%11.99)

► Higher rates create adverse select

► High “go to” rates is a disincentive for revolvers at average rates – even with intro period

Creating the right offer


$50,000 annual spend

customer:

100% pay rate

(pure transactor)

High credit line needed

Meaningful rewards

Not sensitive to APR

Generates $850 in

Interchange annually

$5,000 spend but $19,000

in average balance:

10k average balances

10% pay rate

Very sensitive to APR

Average line strategy

captures enough

revolving balance to

offset risk

Given low spend

Rewards caps are not

necessary (disclosing

caps reduces response)

Total net interest

To

tal n

et

inte

rch

an

ge

Transactor offers

Level of incentives

Revolver offers

Spend and yield are natural differentiators in prescreen targeting

A new framework for product targeting at the consumer level – plot every

consumer on the below chart to determine incentives and investment strategy


For additional information, please contact:

[email protected]

[email protected]

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