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Exclusive insights from MasterCard Advisors Engaging the disengaged: An inside look at credit card customer behavior Authors: Mayank Prakash, Amit Singh, Sanket Nerkar Contributor: Michael J. McEvoy Problem Inactive credit card users are an untapped opportunity for issuers. Solution Trigger-based marketing can re-engage inactive customer segments. Figure 1 Time Period of Study While financial services companies make huge investments in acquiring new customers and retaining existing ones, the less engaged/inactive population represents a potentially large “undertapped” opportunity. And that opportunity is particularly significant for highly competitive, mature, developed markets. As issuers develop their future marketing strategies, they should consider analyzing their customer needs and their portfolios to identify relevant triggers and enhance their customer engagement strategies accordingly. The potential gains to issuers for engaging the currently disengaged makes this a potentially profitable effort. A recent study was conducted by MasterCard Advisors across three such markets: Singapore, the UK and the U.S. For a proportion of credit card customers, the study found that a shift from a low level of spending activity to that of “highly engaged” was a step change that happened over a very short period of time. This is counter to conventionally-held wisdom of a gradual shift over time. The finding may imply that customers are responsive to specific triggers, suggesting new potential opportunities for banks to effectively engage with their cardholder base. Studying cardholder behavior MasterCard Advisors, with its access to anonymous and aggregated transactional data, recently conducted a study across several markets to understand the change in spend behavior as cardholders increase engagement with their credit cards. Anonymized card accounts were aggregated into one of five usage segments — Very High, High, Medium, Low, and Zero — based on the number of industries (i.e., Figure 1: Time Period of Study Country U.S. UK Singapore 2% MC (Debit + Credit) sample data 5% MC (Debit + Credit) sample data 5% MC (Debit + Credit) sample data Active Period Jul–Sep 2013 Jul–Sep 2012 Jul–Sep 2012 Pre-Period Oct–Dec 2013 Oct–Dec 2012 Oct–Dec 2012 Analysis Period Jan–Sep 2014 Jan–Sep 2013 Jan–Sep 2013 Post-Period Oct–Dec 2014 Oct–Dec 2013 Oct–Dec 2013 Pre-Migration Period Jan–Dec 2013 Jan–Dec 2012 Jan–Dec 2012 Post-Migration Period Oct 2014 onwards Oct 2013–Sep 2014 Oct 2013–Sep 2014 Data Source: MasterCard Advisors Exclusive insights from MasterCard Advisors compendium.mastercard.com 1 Figure 2 Figure 2: Major Time Segments Comprising the Overall Period of Study Major Time Segments Comprising the Overall Period of Study Pre-Migration Period Active Period Pre-Period Post-Migration Period Analysis Period Post-Period Source: MasterCard Advisors merchant categories) in which the spend occurred (1). The analysis sought to develop a greater understanding of the transition from low/inactive to a “High” level of engagement. To help remove potential bias related to a particular geography, the analysis included three different markets, namely the U.S., the UK and Singapore. While geographically distant, all three markets are highly developed and mature markets for credit cards. For the analysis, spend behavior was analyzed over a period of 2+ years (Figure 1). This period was divided into three major parts (Figure 2): a) pre-migration period, b) long study/analysis period, and c) postmigration period. Each card was segmented twice: once in the pre-migration period and again in the postmigration period. The segment that was active before the last 3 months of the pre-migration period was included in the study. It is worth noting that, from earlier studies by MasterCard Advisors, the number of industries has been found to more accurately represent “customer engagement” than overall spending volumes or number of transactions. In fact, it has been shown that as customer engagement increases, the cardholder begins to use the card across more diverse industries. Therefore, a “top of wallet”/ engaged card will typically be used for spending across more industries compared to rarely used cards. When customers migrate to a more engaged state, they tend to remain there, spending more and engaging across a broader range of merchant categories b Migrating cardholders most often stay in the “High” usage segment once they move to it (Figure 3), transacting across a broader, more diverse range of industries (Figure 4). In addition, customers that migrate to these more active customer segments show increased activity in terms of average number of transactions and average purchase volume (Figure 4). The combined impact suggests a more profitable portfolio for the card issuer. c Key finding: The fact that cardholders can suddenly become highly engaged suggests that “account triggers” may instigate the change in customer behavior The fact that shifts in customer behavior are typically sudden suggests that there may be “trigger” events influencing the cardholder — likely, issuer-activated triggers. An example is a card issuer offering rewards points to its cardholders if they spend in certain sectors (e.g., restaurants and grocery stores) during the next statement period. “Early month on book” strategies, reactivation campaigns and category expansion campaigns are all potential sources of triggers aimed at influencing cardholder behavior. Conclusion The study gave rise to several important findings: a Disengaged/low engaged customer segments move to a highly engaged stage in a step manner (i.e., within a short period of time) The study showed that, across all three markets, disengaged/low engaged customers that move to a highly engaged stage do so in a step manner (i.e., suddenly and within a short period of time, such as several weeks — see Figure 3). This is contrary to a more intuitive view that such transitions would happen in a steady, progressive manner. Exclusive insights from MasterCard Advisors compendium.mastercard.com Card issuers would do well to analyze the impact of issuer-initiated triggers on cardholders and determine if they account for the types of rapid shifts in cardholder behavior highlighted by the study described in this paper. If so, determining which triggers are effective for particular card portfolios and markets would add considerably to the understanding of customer behavior and therefore would prove invaluable to card issuers redesigning their marketing strategies. In addition, it could potentially help issuers understand gaps in their current “customer value proposition” and suggest new products to keep customers more engaged. 2 To determine the “perfect” triggers would require additional analysis of issuer data and customer engagement programs. However, with the inactive cardholder population a relatively untapped potential source of growth in mature markets, the potential gains to issuers for engaging the currently disengaged makes this a wholly worthwhile endeavor. Figure 3 Migration Path from Inactive/Low to High Segment NOTES 1. The number of industries associated with a particular usage segment designation was determined by local market conditions and therefore varied by market; e.g., “Very High” card usage was defined as activity in 12+ industry sectors in the U.S., 9+ sectors in the UK and 6+ sectors in Singapore. Figure 3: Migration Path from Inactive/Low to High Segment (Average Number of Industries vs. Time Period) United States 16 14 12 10 8 6 4 2 0 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 2 4 6 8 10 12 2 4 6 8 10 12 United Kingdom 9 8 7 6 5 4 3 2 1 0 -12 -10 -8 -6 -4 -2 0 Singapore 5.0 4.0 3.0 2.0 1.0 0 -12 -10 -8 -6 -4 -2 Note: Month zero in the chart is the month during which the analysis period commences. The time period 0 in the chart runs from 12 months prior to 12 months following the month in which the analysis period starts. Source: MasterCard Advisors Figure 4 Increase of Customer Spending Across a Broader Spectrum of Industries Among Customers that Migrate to “High” Card Usage Segment Figure 4: Increase of Customer Spending Across a Broader Spectrum of Industries Among Customers that Migrate to “High” Card Usage Segment Metrics U.S. UK Singapore High Segment Definition 7–12 industries 4-9 industries 3-6 industries Average Pre-period Spend U.S. $500 U.S. $500 U.S. $500 Average Post-Period Spend U.S. $2,000 U.S. $1,300 U.S. $800 Average Pre-Industry Count 3 2 2 Average Post-Industry Count 12 7 4 % of Customers Migrating from Low/Zero to High Usage Segment 2% 1.7% 7.5% Key Industries • Eating places • Auto fuel • Grocery • Grocery • Eating places • Auto fuel • Eating places • Grocery • Department stores Growth in Number of Transactions in Key Industries 6-7 times 4-5 times 4 times Source: MasterCard Advisors Exclusive insights from MasterCard Advisors compendium.mastercard.com 3