The Credit Card Accountability, Responsibility and Disclosure Act (CARD) of 2009 was triggered by the financial crisis and designed to protect subprime borrowers by forcing lenders to provide more transparency and more reasonable, fairer rates and fees to borrowers. This has proven a costly burden for US lenders as they retool to adjust for narrower margins and a new outlook on customer retention and loyalty. While at the SAS Global Forum Executive Conference, Rex Pruitt, Manager, Profitability & Risk, MIS Analytics at PREMIER Bankcard, explained how analytics helped PREMIER find its profitable customer and price point.
According to Pruitt, when marketing in the subprime space, (consumers with credit scores typically of 660 and lower), lenders have to be able to position themselves to cover the losses – usually about 35 percent in the first year. Subprime lenders have traditionally relied on fees and rate increases for profitability.
Those fees are now largely restricted in the US by the new regulations:
“Prohibits Exorbitant and Unnecessary Fees
- Prohibits issuers from charging a fee to pay a credit card debt, whether by mail, telephone, or electronic transfer, except for live services to make expedited payments;
- Prohibits issuers from charging over-limit fees unless the cardholder elects to allow the issuer to complete over-limit transactions, and also limits over-limit fees on electing cardholders;
- Requires penalty fees to be reasonable and proportional to the omission or violation; Enhances protections against excessive fees on low-credit, high-fee credit cards.”
New rules regarding rates, fees, and limits
- Caps on high-fee cards. If your credit card company requires you to pay fees (such as an annual fee or application fee), those fees cannot total more than 25% of the initial credit limit. For example, if your initial credit limit is $500, the fees for the first year cannot be more than $125. This limit does not apply to penalty fees, such as penalties for late payments.”
(Excerpt from: http://www.federalreserve.gov/consumerinfo/wyntk_creditcardrules.htm)”
Lenders were required to be fully compliant with the terms of the Act by March, 2010. To meet those requirements, PREMIER began testing fees and rates even as regulators were still hammering out the final terms of the legislation. Additionally, PREMIER is using scoring models developed in SAS® Enterprise Miner™ and SAS Analytics to help with performance measurement and new customer acquisition activation.
Pruitt warned the audience that his presentation would only show the output of his analyses, but he said that he’d be more than happy to share any of the coding techniques behind the four systemic solutions that are helping PREMIER meet the challenges posed by the CARD Act. (His paper also includes only the output. You can find Pruitt’s contact information there if you want further information.)
“It is all systemically processed, and only one of the [analyses]cannot be systemically delivered simply by scheduling the code and running it all the way through email generation. I get one of the graphs from this on my PDA,” Pruitt said, holding his PDA aloft. “It is very integrated and can be replicated for additional processes as we move forward.”
PREMIER created four systemic solutions using SAS to address the new CARD Act requirements. Here is a brief description of how each solution helps PREMIER:
- Fee Justification Analysis – looks at APR and late fee strategies. Fee strategies are regulated by the US federal government. PREMIER tried to overcome this revenue lost from fee regulation by increasing APRs. In February 2011, PREMIER experimented with cards that had an opening rate of 79.9% APR. According to Pruitt, PREMIER had a high response rate in its market space. Rates on new cards are now between 35% and 59.9%. In order to justify these rates, PREMIER uses Fee Justification Analysis.
Customer Loyalty Analytics – PREMIER needed to identify its best customers. Before the CARD Act, PREMIER had no real customer retention strategy. They focused solely on those customers in the subprime market and were content that some customers graduated to prime cards. With the capital requirements and the tighter margins resulting from the regulations, the lender needed a customer retention program to help cover their exposure. Customer loyalty analytics also helped PREMIER prove to the regulators that some customers do graduate to prime cards.
Rapid Response to Strategic Planning – PREMIER’s marketing groups needed an accelerated timetable for the delivery of marketing data. They needed to be able to see results on a daily basis because of the flux in the market during the crisis. Additionally, in 2008, PREMIER was adding 200,000 accounts per month. PREMIER needed to stabilize the number of accounts coming in so that they could grow a stronger portfolio.
Improved Daily Forecasting Model – According to Pruitt, PREMIER decided to focus on doing a better job of choosing the right customer and improving daily account forecasting - choosing who becomes a customer and who leaves when.What would you do with 10%?
I won’t give away all of the details that you can read in the paper, but I will tell you about the most exciting story that Pruitt told in terms of real ROI. If your company must go through all of this, you’d hope to come away with best practices that you can apply to another part of your company. What if you also came away with real ROI? PREMIER makes it clear that they learned something AND saved some money!
Customer Loyalty Analytics segments and ranks the portfolio best to worst every month to show the value of PREMIER’s customers and generates a Microsoft Excel report. As you will recall, retention was not a part of PREMIER’s strategy before the crisis. Pruitt uses this report with his management to demonstrate that retention is a viable strategy for PREMIER. In his analysis, he found that a customer is worth an average US$11.58 per month in the 2-3 year timeframe.
“So, if we retain one customer for one extra month, we make $11.58,” said Pruitt. “That’s based on the top 75 percent of our portfolio … In an annual period, if I improve our retention strategy by 10 percent that equates to an annual revenue generation of $4.8 million.”
Read Pruitt’s paper and then tell me what you would do with systemic solutions like he and his team have developed.