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.
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.
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.
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.
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.
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.
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.
Adjust sales incentives. Consider tweaking incentive plans to reward front-line sales people for their customer activation efforts.
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.
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.
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.
Most leading U.S. credit card issuers reported relatively strong y/y growth in outstandings in the first quarter of 2018.
Breaking these growth rates out by FICO Score segment, we see that issuers generated growth across multiple FICO Score categories.
There are important differences in the FICO composition of card portfolios. The <660 FICO Score segment accounted for 34% of Capital One’s portfolio, a much higher percentage than other issuers, such as Fifth Third (3%), Chase (7%), KeyBank (11%), Citi (16%) and Discover (19%).
Among the largest issuers, one of the most notable trends was strong growth in the low-prime/sub-prime and super-prime segments, but low/no growth in their prime portfolio. Bank of America grew its sub-prime (<620) outstandings by 6% and its super-prime (>720) increased 8%. However, its loan portfolio held by consumers with FICO scores between 620 and 739 only increased by 2%.
Most regional bank card issuers (such as PNC, SunTrust and Regions) reported strong growth in their sub-prime and near-prime portfolios. Fifth Third’s <660 FICO Score portfolio rose 43%, but this category only accounts for 3% of the bank’s credit card portfolio, so growth was from a very low base.
As issuers enjoy strong growth in their credit card outstandings—especially for sub-prime and near-prime consumer segments—it is worth noting that charge-offs are also on the increase. Most issuers reported double-digit y/y basis-point growth in their credit card net charge-off rates. Four of the 12 issuers below now have charge-off rates of more than 4%, and only one (American Express) has a charge-off rate of less than 3%.
So, while issuers want to grow credit card loans across the FICO Score spectrum, they need to ensure that various functions are all calibrated to ensure that cardholder delinquencies and charge-offs remain at manageable levels. These functions include:
Marketing: targeting, offer development, and messaging
Pricing: fees and APRs need to be set at levels that balance cardholder ability to pay with an appropriate margin to offset potentially higher charge offs
Customer support: onboarding, financial education, as well as early engagement in cases where cardholders experience payment challenges
The leading U.S. banks reported a 10% y/y rise in average commercial and industrial (C&I) loans in 2Q15, based on an EMI analysis of the FFIEC call report data.
Interest income on C&I loans rose 5% y/y, indicating that downward pressure on commercial loan pricing persists. This is reflected in the following table, which shows consistent y/y declines in commercial loan yields. However, there are signs that yield are now stabilizing.
Most leading banks report that the commercial loan market is highly competitive. So, how are banks managing to grow their C&I loan portfolios at double-digit rates?
Banks are targeting specialty segments. Many leading banks reported that targeted vertical segments drove overall commercial loan growth in the second quarter. Comerica’s average technology and life sciences loans rose 20% y/y, compared to only 3% for total Comerica middle market loans. And while KeyBank grew its commercial, financial and agricultural loans by 12%, loans to the transportation sector grew by a hefty 42%. A bank’s selection of target segments depends on a number of factors, including segment size and growth, concentration of specific segments in their footprint; and the bank’s heritage in serving this segment. To more effectively build a presence in specific vertical markets, many banks are now creating dedicated teams that include industry experts. In addition, a number of banks are developing segment-specific content, which both establishes bank credibility and creates opportunities for prospect engagement.
There are signs of growth in commercial loan utilization. As the economy and business optimism improves, companies are more inclined to invest to grow their businesses. A number of banks are now reporting a slow-but-steady rise in commercial loan utilization. Regions reported a 97 basis point increase in line utilization during the quarter. Equally, Fifth Third’s commercial line utilization rose from 32% to 33% in the second quarter.
Banks are increasingly focused on optimizing commercial client lifetime value. As in consumer banking, banks are seeking to optimize relationships with commercial clients by taking a lifetime value approach and focusing not just on acquisition, but on all key stages of the relationship (including onboarding, retention and cross-sell). The effect of this approach for banks can be significant. Since the start of 2010, Huntington Bank has grown commercial relationships by 36%, but commercial relationship revenue by 72%. The percentage of Huntington’s commercial clients with 4+ services rose from 32.6% to 43.4% over the past three years. This long-term perspective may also help explain why yields on new commercial remain low. In discussing its quarterly financials, KeyBank claimed that “if we believe we have a client who wants a broad relationship and the credit metrics look good for us, we know that over time we can generate a profitable relationship, even if we are pressured a bit on the loan pricing.”