2017 ONLINE CARD SCHOOL

Transcription

1 2017 ONLINE CARD SCHOOL Session #2 Calculating Card Program Profitability Timothy Kolk (603) May 2017

2 The Online Card School Purpose Provide market intelligence including performance trends, competitive events and market evolution. Build staff skills and expertise in managing your credit card program to growth, profitability and member value. Share proven tactical approaches and specific action items which you can use immediately. Design and provide fair and competitive products that your entire organization can deliver with pride. Put you in a position to demonstrate your program s future potential and advocate for the resources you need. 2

3 CO-OP Financial Services Strategic Vision: Your Growth Is Our Growth SEAMLESS Greater Integration Simplified Client Experience Business Intelligence One CO-OP Ease Of Expansion SECURE Better Authentication New Tools Consultation Business Intelligence Reporting

4 Logistics We target minutes, and will stick around for Q&A longer if people keep asking questions Feel free to ask questions via the Questions box during the session. We ll try to get to them on the fly if we can. Slides were sent to all registrants before the session. They are also available to download from the Handouts section. Sessions are being recorded and you will have access to the library throughout the year. Upload in about a week. Anyone from your organization can listen in: one subscription covers all of your colleagues. 4

5 2017 Sessions March 30 May 18 June 29 Sept 7 Nov 16 CARD MARKET OVERVIEW CALCULATING PROGRAM PROFITABILITY MATCHING PRICING & PRODUCT VALUE TO RISK LEVELS MARKETING, SEGMENTATION & MEMBER EXPECTATIONS LOYALTY TODAY: STAYING RELEVANT 5

6 What We Covered Last Session 1. Market growth has reached pre recession levels Credit unions overall are doing well (> overall market growth %) BUT: 2 in 5 shrank; 68% grew at < market rates 2. Credit losses remain near record lows But Q4 charge offs were up to highest rate since recession (and maybe highest credit union rate ever except for ) 3. Increasing rates will improve bottom lines while on the rise (unless non variable, in which case you will be seeing the opposite) 4. Card remains a unique source of interest, fees and profits. And member engagement. 6

7 THIS SESSION In this highly competitive card environment, knowing your credit card program s bottom line is critical. This is not necessarily to maximize profits, but to ensure that you have properly balanced profitability and delivering fair and competitive cardholder value. A properly structured profitability analysis can help identify where program design is not well matched to member value expectations, enable meaningful conversations around program management needs and priorities, and allow Card Managers to effectively advocate for their program needs. It s going to be a bit of a grind today 7

8 Why This is Particularly Timely Bank competition is at levels not seen Consumers have proven that they prioritize reward value more than any other feature Banks have increased their reward values (as we all know, and very likely use) Top bank growth 2016 was driven by new account acquisition, not growth of balances on existing accounts THE SAD TRUTH: Banks are accepting lower levels of profitability to gather accounts. THE SADDER TRUTH: You will have to consider doing this for your credit union 8

9 5+% ROA + 6+% GROWTH MAY BE OVER 9

10 On to the Math Card Program Profitability 10

11 Having a Reliable P&L Is Invaluable Nuts & Bolts Day: Building a P&L Data sources Suggested structure Building it line by line Breaking out by product and more Using it to maximize balance priorities in your program 11

12 Data Sources: Depends on Processing Full Service: Most Common, Standard Reporting FDR Based (PSCU, TMG, Vantiv,...): CM 051 Report FIS Based (CSCU/FIS, Leagues): Executive Summary Rpt TSYS: Very unusual for credit unions In House: Must produce internally IT Resources should produce monthly portfolio report Harder to start (you didn t go in house to save money, did you?) Better access to info for follow up if needed (generally) Both: A few other internal pieces (CFO type stuff) Cost of Funds Reward Accrual Formula (many are not conservative enough) Expense Elements 12

13 THE FDR SYSTEM: CM 051 Several Sections: Looks Like This 13

14 FIS: Executive Report Single Page: Looks Like This 14

15 Suggested P&L Structure & Building it Line by Line 15

16 Purpose of a Profit & Loss Statement Accurate representation of program contribution Easy to understand and process (Sr Mgt) Logical flow showing interactions between the pieces Identify areas for further exploration Facilitate priority/strategy discussions ( Grow and improve profits! ) 16

17 Suggested Report Structure Part 1: Portfolio Information TRK Federal Credit Union Portfolio Note: Key Metrics All Balances $ 10,000,000 All the $ owed (typically at month end) Revolving Balances $ 8,000,000 FDR System Reports this; FIS does not. Revolve Rate (% paying interest) 80.0% Revolving Balances / All Balances Purchase $ (net) $ 30,000,000 Year-to-date total purchase $ (not one month) Total Lines $ 40,000,000 All credit lines available Unused Lines $ 30,000,000 Total Credit Lines - All Balances Utilization % 25.0% Balances / Credit Lines Total Accounts 5,000 Clean up your files: purge 'dead' accounts Active Accounts 4,000 Use a consistent definition Active % 80.0% Active / Total Accounts New Accounts 200 Definitely track this! Average Balance / Active $ 2,500 Total Balances / Active Accounts Average Purchase $ / Active $ 7,500 Total Purchases / Active Accounts 30+ Days DQ ($) $ 80, Cycles past due ($) 30+ Days DQ (%) 0.8% 30 Day DQ $ / Total Balances 17

18 Where To Find It: FDR System Most are pretty straightforward Some choose to track multiple definitions of active. I generally leave that to deeper analysis if needed. FDR system separates delinquencies into 2 groups: DQ (D Status) & Overlimit DQ (X Status). Add them together. Lots of artifacts here from the past 18

19 Where To Find It: FDR System (cont.) Remember to look for the monthly figures, not YTD or prior three months You ll be surprised how quickly you learn exactly where to look } Get a keyboard with a #s keypad! Some also track cash volume (though on FDR this can include BTs) Some also track statused accounts. I generally leave that to deeper analysis if needed. 19

20 Where To Find It: FDR System (cont.) This is interesting but not for today. Track over time. 20

21 Where To Find It: FIS System This is interesting (though not as interesting as FDR equivalent) but not for today. Track over time. FIS provides less information in its standard reporting OR Definitions a little different than FDR. That s ok. Make sure to net out returns in sales volume metrics 21

22 That Gets You To Here (or similar) TRK Federal Credit Union Portfolio Note: Key Metrics All Balances $ 10,000,000 All the $ owed (typically at month end) Revolving Balances $ 8,000,000 FDR System Reports this; FIS does not. Revolve Rate (% paying interest) 80.0% Revolving Balances / All Balances Purchase $ (net) $ 30,000,000 Year-to-date total purchase $ (not one month) Total Lines $ 40,000,000 All credit lines available Unused Lines $ 30,000,000 Total Credit Lines - All Balances Utilization % 25.0% Balances / Credit Lines Total Accounts 5,000 Clean up your files: purge 'dead' accounts Active Accounts 4,000 Use a consistent definition Active % 80.0% Active / Total Accounts New Accounts 200 Definitely track this! Average Balance / Active $ 2,500 Total Balances / Active Accounts Average Purchase $ / Active $ 7,500 Total Purchases / Active Accounts 30+ Days DQ ($) $ 80, Cycles past due ($) 30+ Days DQ (%) 0.8% 30 Day DQ $ / Total Balances 22

23 Now: To Profitability ($ first) P&L Items Year-to-Date Note: ($ Basis) Interest Income $ 840,000 Direct from processor report. Actual interest billed Cost of Funds (50,000) From CFO. Average cost of liabilities (5300 Report) Net Interest Income 790,000 Calculated Gross Charge-offs (240,000) Maybe from Processor Report. Check against 5300 Report Fraud (15,000) Maybe from Processor Report. Maybe collected internally Recoveries (est*) 20,000 Certainly an internal figure. Check against 5300 Report. Net Charge-offs (235,000) Calculated Interchange 545,000 May be a processor report available. Also available internally Association Fees (36,000) % of purchase $, use average for year (Op Cert.) Reward Expense (132,000) ACCRUAL BASIS!!! Cost per point x Redemption Rate Net Interchange 377,000 Calculated Fees 34,000 Direct from processor report Processing Expense (300,000) Invoiced (put marketing functions in below line) Marketing Expense (20,000) Combination of processor invoice items & other internal Internal Expense (200,000) Internal support, work with CFO. Think of as "per active" Net Income $ 446,000 The punch line! 23

24 Where To Find It: FDR System We don t normally care whether interest is coming from cash or purchase balances You can report fee lines separately if you want. If you have a card with an annual fee that makes sense (I kinda hope you don t) Credit life fees are a bit different, but also not common 24

25 Where To Find It: FDR System (cont.) Charge offs are generally reported after reversing interest income. Some also track the # charged off. This can be useful if charge off rates are increasing. What about interchange? you ask. Because you are smart. It s on the CM 995 Report (by product). 25

26 Where To Find It: FIS System There is a line for fraud, but seldom used. Some report fraud as a separate line. Some bundle it with chargeoffs. FIS does you the favor of reporting interchange as a line item. 26

27 Now That We Have All The $s P&L Items: YTD $ Basis ROA Interest Income $ 840, % Cost of Funds (50,000) -0.5% Net Interest Income 790, % Gross Charge-offs (240,000) -2.4% Fraud (15,000) -0.2% Recoveries (est*) 20, % Net Charge-offs (235,000) -2.4% Interchange 545, % Association Fees (36,000) -0.4% Reward Expense (132,000) -1.3% Net Interchange 377, % Fees 34, % Processing Expense (300,000) -3.0% Marketing Expense (20,000) -0.2% Internal Expense (200,000) -2.0% Net Income $ 446, % Add in ROA ROA is simply the $ value divided by the portfolio balance. Remember to annualize! (e.g. June $ is only ½ year: multiply ROA calc by 2). Allows demonstration of raw bottom line and product return rate Data points often needed from internal sources: Cost of funds (make friends with CFO) Association fees (usually about 11bp of purchase volume) Fraud Expense lines Brand incentives, if any (if not call me to discuss!) 27

28 A Word About Expenses Processor Invoice: Simple enough (credit portion only!) Marketing expenses: Third party & out of pocket should be easy enough. Internal allocations generally not included here. Internal: The Tricky Part! Really should do full cost studies every 3 years Can use other available data (e.g. Raddon, but be careful) Most quick internal calculations are very much undercounting (better to be seen as conservative/objective) The Shortcut: Processor and Internal Expenses set to a total of $125 per Active Account per year ( deannualize accordingly mid year). 28

29 Getting a Little More Sophisticated (just a little) 29

30 Expand to Separate Products TRK Federal Credit Union Low Rate Reward Card Total Key Metrics All Balances $ 6,000,000 $ 4,000,000 $ 10,000,000 Revolving Balances $ 5,400,000 $ 2,600,000 $ 8,000,000 Revolve Rate 90.0% 65.0% 80.0% Purchase $ (net) $ 10,000,000 $ 20,000,000 $ 30,000,000 Total Lines $ 18,000,000 $ 22,000,000 $ 40,000,000 Unused Lines $ 12,000,000 $ 18,000,000 $ 30,000,000 Utilization % 33.3% 18.2% 25.0% Total Accounts 2,500 2,500 5,000 Active Accounts 1,800 2,200 4,000 Active % 72.0% 88.0% 80.0% New Accounts Average Bal. / Active $ 3,333 $ 1,818 $ 2,500 Average Purch $ / Active $ 5,556 $ 9,091 $ 7, Days DQ ($) $ 60,000 $ 20,000 $ 80, Days DQ (%) 1.0% 0.5% 0.8% Different behaviors by product Portfolio management techniques differ by member segment/product Helps illustrate the need for different products for different segments CRITICALLY important for reward value proposition analysis Can see if overall performance is masking something at a product level 30

31 Expand To Separate Products (cont.) P&L Items Low Rate Rewards Total Low Rate Rewards Total ($ Basis) Interest Income $ 540,000 $ 300,000 $ 840, % 7.5% 8.4% Cost of Funds (30,000) (20,000) (50,000) -0.5% -0.5% -0.5% Net Interest Income 510, , , % 7.0% 7.9% Gross Charge-offs (180,000) (60,000) (240,000) -3.0% -1.5% -2.4% Fraud (5,000) (10,000) (15,000) -0.1% -0.3% -0.2% Recoveries 12,000 8,000 20, % 0.2% 0.2% Net Charge-offs (173,000) (62,000) (235,000) -2.9% -1.6% -2.4% Interchange 175, , , % 9.3% 5.5% Association Fees (12,000) (24,000) (36,000) -0.2% -0.6% -0.4% Reward Expense - (132,000) (132,000) 0.0% -3.3% -1.3% Net Interchange 163, , , % 5.4% 3.8% Fees 30,000 4,000 34, % 0.1% 0.3% Processing Expense (135,000) (165,000) (300,000) -2.3% -4.1% -3.0% Marketing Expense (9,000) (11,000) (20,000) -0.2% -0.3% -0.2% Internal Expense (90,000) (110,000) (200,000) -1.5% -2.8% -2.0% Net Income $ 296,000 $ 150,000 $ 446, % 3.8% 4.5% 31

32 How To Be The Teacher s Pet Other Potential Views By vintage (by age of account): see if new accounts are performing as well as old accounts By member segment: many different strategies out there, match to yours By member age: Millennials are critical, how do they perform once you have them? By state: multi state clients see important differences Deep vs. limited relationship cardholders (Finally, a place where In House processing helps!) 32

33 Sound Model Building Tips Picture a single Excel tab to house all data Sections for each product with rollup at the bottom for portfolio total Each section has all the data lines going down the left side of the page Data only, no formulas on this page! Months across the top. Best to have at least 2+ years trailing MUCH better to input data in one sheet and use it to populate reports than hard code into reports. 33

34 Picture This Low Rate Product Balances Revolving Balances Total Accounts Active Accounts Purchase $ Reward Product Balances Revolving Balances Total Accounts Active Accounts Purchase $ Signature/World Balances Revolving Balances Total Accounts Active Accounts Purchase $ Business Card Balances Revolving Balances Total Accounts Active Accounts Purchase $ Total Portfolio Balances Revolving Balances Total Accounts Active Accounts Purchase $ Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 34

35 More Than Just Counting How It Helps You Manage Identify changes in cardholder behavior over time Identify and dimension opportunities (e.g. inactive accts) Differentiate by product, focus activities, save $ Analyze marketing effort results on key drivers The data set is a great tool for quick ad hoc analysis Show what you contribute, fix if needed Anchor conversations around reward value in FACTS Stop vague, ill sourced impressions from derailing what is needed. Support a choice based on facts and priorities! 35

36 How On Earth Will I Stay Current? Online Card School 2017 Sessions March 30 May 18 June 29 Sept 7 Nov 16 CARD MARKET OVERVIEW CALCULATING PROGRAM PROFITABILITY MATCHING PRICING & PRODUCT VALUE TO RISK LEVELS MARKETING, SEGMENTATION & MEMBER EXPECTATIONS LOYALTY TODAY: STAYING RELEVANT 36

37 THANK YOU TO 37