10 Considerations to Boost Credit Card Activation Rates

In recent years, leading U.S. credit card issuers have changed their focus from simply acquiring new customers to optimizing relationships with existing cardholders.  A key element to the overall success of this strategy is the ability to motivate newly-acquired cardholders to start—and continue—to use the card.  According to The Nilson Report, the average credit card activation rate (active accounts as a percentage of total accounts) for the top 50 Visa and Mastercard issuers was 57% in 2017.  However, there is significant variation among issuers. For example, Citibank had a credit card activation rate of 68%, while Fifth Third’s was just 49%.  Low activation rates represent a lost opportunity in optimizing customer lifetime value, as well as a waste of marketing resources expended in cardholder acquisition.

Here are 10 key considerations for boosting credit card activation rates.

  1. Benchmark current credit card activation performance.  The starting point involves gaining a strong understanding of your current activation rate, how this rate has changed over time, and how it compares to competitors’ rates.  Also study previous and current activation rates to identify the primary factors contributing to the current rate.
  2. Conduct customer research.  Analyze customer data to size and profile the inactive cardholder base.  Conduct additional primary research to identify key card activation triggers and barriers.
  3. Develop a credit card activation plan.  With input from all relevant stakeholders in the organization, develop an integrated credit card activation plan.  Create a team dedicated to implementing the plan, and assign roles and responsibilities.  Develop an integrated series of initiatives, and establish a timeline to roll out these initiatives and measure progress against plan objectives.
  4. Create bonus offers.  Most credit card bonus offers are based on acquisition and activation, with the cardholder receiving the bonus (points, miles, cashback) if they meet a certain spending threshold within a period following acquisition (typically 60-90 days).  Higher-end cards (many of which carry annual fees) have larger bonus offers.  Chase recently launched the Marriott Rewards Premier Plus Card, featuring 100,000 bonus points if the cardholder spends $5,000 within three months of account opening.  A variation on the bonus offer is to have higher earn rates on specific spending categories for an initial period.
  5. Develop pricing to drive activation.  Set pricing levels (interest rates and fees) to encourage the cardholders to start using the card.  One common approach is to have 0% introductory rates on balances transfers for transfers made within an initial period.  For example, the new BBVA Compass Rewards Card has a 0% introductory rate for 13 months for balance transfers made with 60 days of account opening.
  6. Focus on cardholder onboarding. Develop a communications plan to engage with new cardholders during the crucial initial 90-day period.  These communications should welcome the cardholder, reinforce the card’s key strengths and differentiating features, highlight incentives, and encourage card usage.
  7. Adjust sales incentives.  Consider tweaking incentive plans to reward front-line sales people for their customer activation efforts.
  8. Leverage cardholder usage of different service channels.  Many cardholders use multiple channels (desktop, mobile, branch, call center, social media) to engage with their financial services provider.  Develop messaging across these channels to promote card benefits and highlight the need for activation.
  9. Create financial education tools. Many financial firms are investing in financial education tools using multiple media to boost overall financial literacy and to enable consumers made smart decisions in using a variety of financial products and services, including credit cards.  Developing and sharing content around managing a credit card effectively can both build affinity with your company and encourage the cardholder to use the card responsibly.
  10. Review performance. Following the launch of your credit card activation initiatives, identify and address any issues in implementation, track performance relative to objectives, and incorporate learnings into ongoing card activation efforts.

Investing in digital channels generates benefits for banks…but they should not abandon human channels

One of the most notable trends in leading U.S. banks’ quarterly earnings conference calls was the extent to which digital channels have become central to their current operations and future growth plans. The reason? Digital channels provide numerous benefits to banks, including:

  • Allowing banks to reduce branch density…and more easily expand into new markets. With the growth of online and mobile banking, branches account for a significantly decreased share of everyday banking transactions, so most banks have been able to reduce their branch density, which saves costs while enabling banks to maintain a physical presence in markets.  Bank of America reported that its branch network has declined from 6,100 to 4,400 during the past decade, but also referred to plans to open 500 branches in new markets.  Similarly, Regions discussed plans to open 20 de novo branches in new markets in 2018, while also closing 30-40 branches.
  • Building a national presence. Banks that already have a limited branch presence are looking to leverage their brand strength and develop a national presence by creating a digital bank. Citibank recently announced that it was creating a national digital bank. Similarly, PNC reported that it would begin rolling out a national digital strategy later in 2018, which it claimed would enable it to take advantage of its brand awareness and serve more customers beyond its traditional retail banking footprint.
  • Enhancing the customer experience. Banks are investing in digital service channels not only to provide a wider range of functionality to clients, but also to enrich the customer experience. In doing so, banks can improve customer satisfaction and boost retention levels.  Regions discussed its goal of providing a consistent experience, with customers seeing the same information and having access to the same capabilities across all channels. The shift to electronic self-service channels also reduces servicing costs; Citibank reported that call center volume fell by 12 million phone calls in 2017.
  • Communicating through new marketing channels. Banks are significantly changing their media mix and messaging to reflect the channels where people are now consuming information and entertainment, and to communicate to clients and prospects in fresh new ways. In its 1Q18 earnings conference call, BB&T discussed that it is ramping up its digital marketing campaigns; 86% now have a digital component.
  • Capturing new sales opportunities and lowering average cost per acquisition. As customers increasingly use digital channels for their banking activities, they become more receptive to using these same channels to open new accounts and/or upgrade existing products and services. As a result, many banks are reporting strong growth in digital sales. Wells Fargo recently launched a digital mortgage application and noted that 10% of its mortgage applications in March 2018 came through that capability. The number of BB&T business accounts opened online rose 43% y/y and retail savings accounts grew 96%. Bank of America reported that digital accounted for 26% of all sales. It also rolled out an auto shopping app, with auto loans sourced digitally accounting for 50% of all direct auto loan originations in the first quarter.

Banks Need an Integrated Digital-Human Channel Strategy

While strategic investments in digital channels can lead to significant bottom-line benefits, banks should be careful not see this progress as proof that they no longer need human channels. A recent J.D. Power survey found that satisfaction levels are lowest for retail banking clients who exclusively use online or mobile channels and highest for “branch-dependent digital customers.” Moreover, the gap in satisfaction levels is highest for Millennial customers, underscoring this demographic segment’s affinity for branches. And while digital sales for many banking products are growing strongly, human channels are still vital for a bank’s success.

This means that banks must develop an integrated channel strategy, with digital and human channels acting in synch—and indeed actively promoting each other. Bank of America provided a great example of this synergy in operation in its 1Q18 earnings conference call: clients used its digital channels to schedule an average of 35,000 branch appointments per week during the quarter.  Full integration of digital and human channels recognizes the particular strengths and limitations of different channels, and can optimize a bank’s return on its investments in marketing, sales and the customer experience.

Credit Card Issuers Looking to Grow Loans Across the Credit Spectrum

An analysis of 10-K SEC filings by EMI Strategic Marketing has found that leading credit card issuers are looking to grow outstandings across a wider range of FICO Score segments.

In the aftermath of the Financial Crisis and Great Recession, issuers narrowed their focus, moving away from lower FICO Score segment, and concentrating their efforts on prime and superprime consumers.  In recent years, issuers have reduced charge-off rates to very low levels.  With the steady growth in the economy and rising consumer confidence, issuers see an opportunity to grow their credit card outstandings and many are willing to take on more risk in order to achieve the desired growth.

The four largest credit card issuers—Chase, Bank of America, Citibank and Capital One—all reported growth in each of their FICO Score categories in 2016.  Three of these issuers (the exception was Citi) had strongest growth in their lowest credit score segment.  Citibank had double-digit growth in large part due to the acquisition of the Costco portfolio from American Express, and this acquisition influenced the relative growth rate of different credit score segments.  Note that 36% of Capital One’s outstandings are held by consumers with credit scores below 660, compared to only 14% of Chase’s and 15% of Citibank’s (Citi-Branded Cards unit) outstandings.

credit_score_4Q16_big4

Leading monoline credit card issuer Discover followed a similar pattern, with stronger growth for the <660 FICO Score segment, which accounted for 18% of total outstandings at the end of 2016.

credit_score_4Q16_discover

Among the regional bank card issuers, Wells Fargo reported very strong growth (+19%) in the <600 segment, and consistent growth across most other segments.  However, it had a 7% decline in the 800+ segment, as it does not appear to have an affluent credit card that can compete effectively with American Express, Chase (which launched Sapphire Reserve in 2016) and Citibank.

credit_score_4Q16_wells_fargo

Other regional bank card issuers are also looking to drive growth across the credit spectrum.  SunTrust, KeyBank and Regions have some of the strongest credit card loan growth rates in the industry, with very strong growth at the lower end of the spectrum.  In contrast, PNC had strongest growth in the 650+ FICO Score segments.

credit_score_4Q16_regional_issuers

The following are some key considerations for issuers looking to grow outstandings across the credit spectrum:

  • Compare the FICO composition of the issuer’s credit card portfolio to its peers.  Assess the organization’s appetite to expand into new credit score segments.
  • Understand the financial needs, characteristics and behaviors of different credit score segments
  • Have products, offers and pricing in place for a range of consumer segments.
  • Invest in new marketing channels (and develop messaging) to reach different segments
  • Partner with other bank units that have strong connections with particular segments (e.g., wealth management and consumer financing units) in order to drive cross-sell to underserved segments
  • Ensure that company underwriting reflecting company objectives (while maintaining underwriting discipline).