Adding Value to Your Card Adding Value to Your Card ProductsProducts

- Building a Business Case - Building a Business Case for Rewardsfor Rewards

Dan ThompsonDan ThompsonJHA Payment Processing SolutionsJHA Payment Processing Solutions

AgendaAgenda

Defining RewardsDefining Rewards CompetitionCompetition ResearchResearch Successful Program ComponentsSuccessful Program Components Cost/Benefit AnalysisCost/Benefit Analysis Case StudyCase Study Q&AQ&A

Defining RewardsDefining Rewards

A permanent or long-term incentive offered A permanent or long-term incentive offered to participating cardholders in order to to participating cardholders in order to achieve commitment and primary-card achieve commitment and primary-card usage status usage status

Loyalty points represents the second-largest Loyalty points represents the second-largest currency in issue, behind the US dollar. currency in issue, behind the US dollar. More than 100 million consumers receive More than 100 million consumers receive promotional currencies (i.e. points) promotional currencies (i.e. points)

Defining RewardsDefining Rewards

Reward types:Reward types:• Points-basedPoints-based

Cash rebateCash rebate TravelTravel Gift/gift certificateGift/gift certificate DiscountsDiscounts

• Cash backCash back• Co-brand/partner-basedCo-brand/partner-based• OtherOther

CompetitionCompetition Top Bank IssuersTop Bank Issuers

• All offer a rewards cardAll offer a rewards card• All offer cash back or cash rebateAll offer cash back or cash rebate

Non-bank IssuersNon-bank Issuers High Performing Credit UnionsHigh Performing Credit Unions

• 9 of 10 top credit unions by asset size offer a rewards 9 of 10 top credit unions by asset size offer a rewards cardcard

• 7 of 10 top credit unions in credit card penetration offer 7 of 10 top credit unions in credit card penetration offer a rewards carda rewards card

• 6 of 10 top credit unions in growth in outstanding credit 6 of 10 top credit unions in growth in outstanding credit card balances offer a rewards cardcard balances offer a rewards card

• 5 of 10 top credit unions in average credit card balance 5 of 10 top credit unions in average credit card balance offer a rewards cardoffer a rewards card

Relationship StrategyRelationship Strategy

CompetitionCompetition

1.4 billion card solicitations in 21.4 billion card solicitations in 2ndnd quarter 2004, 52% were quarter 2004, 52% were rebate/reward offersrebate/reward offers• 53% cash back53% cash back• 37% non co-brand cards37% non co-brand cards

Rewards cards are growing faster Rewards cards are growing faster than co-branded cardsthan co-branded cards

Synovate/CCM

CompetitionCompetition AMEX Everyday Promotion gives double and triple AMEX Everyday Promotion gives double and triple

points – non-travel purchases account for 2/3 points – non-travel purchases account for 2/3 volumevolume

Providian allows cardholders to “buy-down” APR Providian allows cardholders to “buy-down” APR or waive fees with pointsor waive fees with points

Discover offers up to 5% cash back at Discover offers up to 5% cash back at supermarkets, drug stores and gas stationssupermarkets, drug stores and gas stations

Chase offers 3% cash back on all gasoline Chase offers 3% cash back on all gasoline purchasespurchases

Citi offers a full 5% cash back or 5 points per Citi offers a full 5% cash back or 5 points per dollar spent at supermarkets, drug stores and gas dollar spent at supermarkets, drug stores and gas stationsstations

Competition - DebitCompetition - Debit

¾ of debit cards ¾ of debit cards carry no incentivescarry no incentives

Debit rewards Debit rewards issuers charge an issuers charge an annual fee ranging annual fee ranging between $19-$65 between $19-$65 per yearper year

OpportunityOpportunity

50% of credit card used in 2004 were not in the cardholder’s 50% of credit card used in 2004 were not in the cardholder’s wallets a year agowallets a year ago

The average monthly new charges in the first quarter for a The average monthly new charges in the first quarter for a rewards card were $943 compared to $360 for a non-rewards card were $943 compared to $360 for a non-rewards card – Synovate Inside Trackrewards card – Synovate Inside Track

2004 TNS Global Study2004 TNS Global StudyReasons for opening a new accountReasons for opening a new account• Rewards ranked 2Rewards ranked 2NDND for all reasons listed for all reasons listed• Rewards ranked 1Rewards ranked 1stst for “most important” reason for “most important” reasonMost important reasons for making card primaryMost important reasons for making card primary• Rewards ranked 1Rewards ranked 1stst – 27% – 27%

ResearchResearch

Visa Credit Card Commitment Study Visa Credit Card Commitment Study • CommittedCommitted• OpenOpen• UnavailableUnavailable• UncommittedUncommitted

Offer most potentialOffer most potential• The cost to acquire a new customer is six times the The cost to acquire a new customer is six times the

cost of maintaining existing ones. cost of maintaining existing ones. • A 5% increase in customer retention yields a 75% A 5% increase in customer retention yields a 75%

increase in customer value.increase in customer value. Young 18-24Young 18-24 Rewards is triggerRewards is trigger

Credit Card Commitment ResearchCredit Card Commitment Research

Individual card commitmentIndividual card commitment• ““First card” ever ownedFirst card” ever owned• TenureTenure• Innovative/Unique FeaturesInnovative/Unique Features• Cross-relationshipCross-relationship• RewardsRewards• CommunicationCommunication• Multi-card accountsMulti-card accounts• Incentive for everyday purchasesIncentive for everyday purchases• Superior serviceSuperior service• Internet accessInternet access• Higher credit limitsHigher credit limits• Bill paymentBill payment• Member focusMember focus

Visa USA

ResearchResearch

2/3 of consumers say they’d prefer to have 2/3 of consumers say they’d prefer to have all their financial needs met by one all their financial needs met by one institutioninstitution

77% use a credit card issued from another 77% use a credit card issued from another FIFI• #1 reason cited -> lack of incentives offered #1 reason cited -> lack of incentives offered

by their primary institutionby their primary institution 50% of debit cardholders surveyed said 50% of debit cardholders surveyed said

they would spend more on cards with they would spend more on cards with rewards - Edgar, Dunn & Co.rewards - Edgar, Dunn & Co.

ResearchResearch Rewarded cardholders are more profitable Rewarded cardholders are more profitable

• 80% of reward participants do more business as a result 80% of reward participants do more business as a result of the programof the program

• Membership in a rewards program makes these groups Membership in a rewards program makes these groups more likely to do more business with that company:more likely to do more business with that company:

89% of consumers 18-24 years old89% of consumers 18-24 years old 86% of consumers w/ income $75k-$100k86% of consumers w/ income $75k-$100k 86% of consumers w/ income over $100k86% of consumers w/ income over $100k

• 60% of American Express cardholders are enrolled in 60% of American Express cardholders are enrolled in one or more Membership Rewards programs, up 30% one or more Membership Rewards programs, up 30% from 1998from 1998

54% lower attrition54% lower attrition Spend 40% more in 1Spend 40% more in 1stst year year Have ½ credit loss ratesHave ½ credit loss rates Pay bills fasterPay bills faster Average profitability is 5-times that of non-rewardsAverage profitability is 5-times that of non-rewards

ResearchResearch

60% of consumers said that a rewards 60% of consumers said that a rewards program influences their decision of which program influences their decision of which credit card to usecredit card to use

75% of redeemers indicate a rewards 75% of redeemers indicate a rewards program influences their decisionprogram influences their decision

½ of all adults participate in some type of ½ of all adults participate in some type of rewards programrewards program• 4 of 10 have opted out of a program4 of 10 have opted out of a program• 74% of the drop outs do less business with the 74% of the drop outs do less business with the

companycompany

Successful Program ComponentsSuccessful Program Components

Uncomplicated & ClearUncomplicated & Clear RelevantRelevant AffordableAffordable AttainableAttainable Value perceptionValue perception Credit limitCredit limit MarketingMarketing

Successful Program ComponentsSuccessful Program Components

Uncomplicated & ClearUncomplicated & Clear• Rules and RegulationsRules and Regulations

22% don’t know all the rules22% don’t know all the rules 58% understand them somewhat58% understand them somewhat 19% understand them very well19% understand them very well

• 89% more likely to do business89% more likely to do business

• 4 out of 10 have opted out of a program4 out of 10 have opted out of a program #4 – rules kept changing (or unclear)#4 – rules kept changing (or unclear)

• Internet impactInternet impact

Successful Program ComponentsSuccessful Program Components

Uncomplicated & ClearUncomplicated & Clear RelevantRelevant

• 27% of affluent travelers carry a air miles card, 27% of affluent travelers carry a air miles card, compared to 7% of non-affluentcompared to 7% of non-affluent

• 69% of affluent use a rewards card, compared 69% of affluent use a rewards card, compared to 37% of non-affluentto 37% of non-affluent

• 4 out of 10 have opted out of a program4 out of 10 have opted out of a program #3 – rewards weren’t relevant#3 – rewards weren’t relevant

• 90% of rewards card offers have a cash back or 90% of rewards card offers have a cash back or cash rebate componentcash rebate component

Successful Program ComponentsSuccessful Program Components

Uncomplicated & ClearUncomplicated & Clear RelevantRelevant AffordableAffordable

• 4 out of 10 have opted out of a program4 out of 10 have opted out of a program• #1 – high fees#1 – high fees

74% of the drop outs do less business with the 74% of the drop outs do less business with the companycompany

• 80% of rewards card offers fell under 9.99% 80% of rewards card offers fell under 9.99% APR in 1APR in 1stst quarter 2004 quarter 2004

• 90% of rewards card offers had no annual fee90% of rewards card offers had no annual fee

Successful Program ComponentsSuccessful Program Components

Uncomplicated & ClearUncomplicated & Clear RelevantRelevant AffordableAffordable AttainableAttainable

• Maritz: Length of time it takes to build up point is Maritz: Length of time it takes to build up point is primary reason consumers leave a rewards programprimary reason consumers leave a rewards program

• 4 out of 10 have opted out of a program4 out of 10 have opted out of a program #2 – inability to redeem#2 – inability to redeem

• Redeemers outspend non-redeemers by as much as Redeemers outspend non-redeemers by as much as 355% - ESC355% - ESC

The average monthly new charges in the first quarter for a The average monthly new charges in the first quarter for a redeemer were $943 compared to $360 for a non-redeemerredeemer were $943 compared to $360 for a non-redeemer

Successful Program ComponentsSuccessful Program Components

Uncomplicated & ClearUncomplicated & Clear RelevantRelevant AffordableAffordable AttainableAttainable Value perceptionValue perception

Loyalty Programs -Loyalty Programs -Consumer PreferencesConsumer Preferences

PreferencePreference• DiscountsDiscounts• CashCash• MerchandiseMerchandise• Gift certificatesGift certificates• TravelTravel

BehaviorBehavior• Gift certificatesGift certificates• CashCash• DiscountsDiscounts• MerchandiseMerchandise• TravelTravel

Source: Maritz

Card Rewards – Payment Card Rewards – Payment Processing Solutions ExperienceProcessing Solutions Experience

Redemption Mix 04/03-09/03

Travel69%

Gift11%

Rebate14%

Hotel4%

Car2%

Redemption Mix 04/04-09/04

Travel50%

$325 Credit20%

Rebate13%

Hotel5%

Gift Certificate

11%

Car1%

Gift0%

Successful Program ComponentsSuccessful Program Components

Uncomplicated & ClearUncomplicated & Clear RelevantRelevant AffordableAffordable AttainableAttainable Value perceptionValue perception Credit limitCredit limit

• Average credit line = $7,699Average credit line = $7,699• Balance rises by 13% relative to credit Balance rises by 13% relative to credit

line increaseline increase

Rewards – Case StudyRewards – Case Study

Is a rewards program affordable?Is a rewards program affordable?

Card Program ProfileCard Program Profile• Premium credit cardPremium credit card• Full selection of reward typesFull selection of reward types• Competitive award levelsCompetitive award levels• Mature program 5+ yearsMature program 5+ years• Over 100 million pointsOver 100 million points

Cost/Benefit ConsiderationsCost/Benefit Considerations

Pts-based rewards programs yield Pts-based rewards programs yield between 10 to 25 transactions per between 10 to 25 transactions per active account each monthactive account each month

Cash-back rebate cards average Cash-back rebate cards average between 10 to 18 transactions per between 10 to 18 transactions per active account each monthactive account each month

Premium card w/ rewards exceeds Premium card w/ rewards exceeds 75% active75% active

Cost Analysis – Case StudyCost Analysis – Case Study

Average Rewards Average Rewards

11.8 trans11.8 trans

$80 ticket$80 ticket

75.8% active (3306)75.8% active (3306)

Average Non-rewards Average Non-rewards

7.25 trans 7.25 trans

$80 ticket size$80 ticket size

63% active (2748)63% active (2748)

Cost Analysis – Case StudyCost Analysis – Case Study

Average Gold CardAverage Gold Card$1,593,840 sales$1,593,840 salesX .0175 X .0175 interchange rateinterchange rate$27,892 interchange income$27,892 interchange income

AwardsAwards$0$0

Adjusted interchangeAdjusted interchange$27,892$27,892$10.15 per active account$10.15 per active account

Rewards CardRewards Card$3,120,864 sales$3,120,864 salesX .0175X .0175 interchange rate interchange rate$54,615 interchange $54,615 interchange

AwardsAwards$687 admin fees$687 admin fees$20,215 redemption$20,215 redemption

Adjusted interchangeAdjusted interchange$33,713$33,713$10.20 per active account$10.20 per active account

Cash Back Case StudyCash Back Case Study

1% Cash Rebate Card1% Cash Rebate Card18.22 trans/active18.22 trans/active591 active accounts 591 active accounts

(83%)(83%)$73 average ticket$73 average ticket

InterchangeInterchange$13,756$13,756($7,860) cash back($7,860) cash back--------------------------$5,896$5,896

No Cash Rebate CardNo Cash Rebate Card7.5 trans/active7.5 trans/active435 active accounts 435 active accounts

(61%)(61%)$82 average ticket$82 average ticket

InterchangeInterchange$4,681$4,681

Marketing Success Marketing Success

Balance TransferBalance TransferProgram summary:Program summary:

Product use: Visa Gold credit card Product use: Visa Gold credit card

Value: 9.6% APRValue: 9.6% APR

Appeal: 1% cash back on minimum $1000 balance transferAppeal: 1% cash back on minimum $1000 balance transfer

Promotion period: 11/20/2002 offered for a *limited time (ended January 1)Promotion period: 11/20/2002 offered for a *limited time (ended January 1)

Acceptance options: return completed self-mailer, calling the service center, Acceptance options: return completed self-mailer, calling the service center, or visitingor visiting

Web site.Web site.

ResultsResults

Response rate: 3.09% (new and existing cardholders)Response rate: 3.09% (new and existing cardholders)

227 transfers227 transfers

Cost: $2.84 per piece including 1% pay outCost: $2.84 per piece including 1% pay out

$1,274,201 million new balances$1,274,201 million new balances

Marketing SuccessMarketing Success

IncentivesIncentivesProgram summary:Program summary:

Product use: Visa Gold credit card Product use: Visa Gold credit card

Value: 10.9% APRValue: 10.9% APR

Appeal: Lowered interest rate and double reward points when use card for 12 or more Appeal: Lowered interest rate and double reward points when use card for 12 or more purchases each monthpurchases each month

Promotion period: July and AugustPromotion period: July and August

Acceptance options: Use the cardAcceptance options: Use the card

ResultsResults

Response rate: 852/833Response rate: 852/833

Average spending per qualifying account: $1900+Average spending per qualifying account: $1900+

$1.6 million in sales each month$1.6 million in sales each month

Recorded 2Recorded 2ndnd and 3 and 3rdrd highest total purchase volume, active accounts and total highest total purchase volume, active accounts and total

transactions (9/02)transactions (9/02)

7% increase each month in interchange income (compared to 6/03)7% increase each month in interchange income (compared to 6/03)

Final WordsFinal Words

6 of 10 cardholders polled said they 6 of 10 cardholders polled said they chose a card with rewards as their chose a card with rewards as their preferred cardpreferred card

90% stated they would not reduce 90% stated they would not reduce usage or cancel their preferred cardusage or cancel their preferred card

- Edgar, Dunn & Co.- Edgar, Dunn & Co.

QuestionsQuestions