R.K. Hammer is a world-renowned bank card advisory services firm with a payment and credit card industry specialization, our research and that of many others have shown an escalating CPA curve for getting new credit card accounts. Why is that?
Well, for one the solicitation response rates have plummeted in the last ten years. Ten years ago we saw an average solicitation response rate of 0.66%, less than one in a hundred, depending on application flow channel. Today that average number is about 0.22%, a third of what it was a decade before. You’ve got to send out a lot more offers through all channels just to stay even with your new booked account results of the past.
Next, quality costs. After the 2008-2010 recession debacle, all card issuers raised new applicant cutoff scores. The result? Obviously fewer accounts are approved. So, as consumers grew cautious, and additionally fewer approvals as issuers raised underwriting standards. All this raised costs per new booked card accounts.
Then again, new rules and regulations before and after the recession have caused costs to rise, as issuers dealt with compliance issues and loan loss provisions. The necessary focus on card quality produced additional cautionary measures in most issuers risk management protocols.
Application fraud, as well, has not gone away. Perhaps not in CPA calculations directly, but it falls to the bottom line just as seriously as loan losses. If anything, new credit card applicant fraud has become as sophisticated as our own technology and decision science tools. It is and always been a “cat and mouse” game between the card issuers and the fraudsters. That is even more expensive to the banks than low solicitation response rates. Like credit losses, fraud losses come right off the P/L results.
What is the CPA cost to get a qualifying new card account? Our bank card advisory services research shows that ten years ago it was at $95 on average. Today that average (of all channels and product types) has risen to $145. The CPA annual rate of ascent has been at about a 45 degree climb year over year until only recently, topping out.
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Can you improve that trend? Yes, but it takes work. Pinpoint solicitation target accuracy is the new norm. Shotgun approaches are out. Moreover, offers must meet the needs of each particular segment, down to the applicant level. If a given value proposition bores me or otherwise does not meet my needs, you’ll be in the click delete trash can – real or electronic – in less than 15 seconds. Lines must be adapted to the present day situation. An otherwise great product from a world class issuer will fall on deaf ears if the line of credit offered is simply not where it needs to be, in the applicant’s eyes.
What else can be done? Take a look at your weekly number trends for cardholder sentiment or other customer satisfaction tool data. Oh, you don’t have that weekly? There’s an opportunity here. What do your new applicant focus groups tell you? Oh, you don’t have those either? I see a problem that ought to be addressed.
Looking at all distribution channels for new card accounts, the “range” of CPA the last time we looked was between $20 to over $300, based upon channel. How does that compare to your CPA data results?
You would not expect that a branch sourced application (with other products they also buy from you) to have the same CPA as a customer with whom you have no existing relationship. In addition the CPA for agent bank applications, merchant take-one’s, online applications, and portfolio acquisitions will be vastly different from one another.
An agent bank program reward for new accounts is often $40 – $50 in the first year per active account, plus an ongoing rev-share of so many basis points on net cardholder sales (50 bps to 100 bps). On the other hand, a card portfolio acquisition with existing seasoned balances and acceptable credit quality would be worth much more in terms of purchase CPA. Most of us have a blended population of new accounts from lots of different channels. The average of all might be $145 but the range by channel will be very wide.
Our recent research at Card Knowledge Factory® shows that the prior escalating trend in CPA for new card accounts is leveling off as it nears its theoretical maximum threshold. We do not expect that past 45 degree annual ascent rate to continue, but nevertheless will still remain stubbornly high near its present level for the foreseeable future.
There is another meaningful metric to consider: Net Present Value of those newly acquired card accounts. How does the present rate for CPA ($145) compare to the Net Present Value of those new card accounts? How does $1,275 average NPV sound? That is the latest bank card advisory services calculation at our Card Knowledge Factory® research and analysis division. Therefore, there is a lot of room in the card pricing spread we’ve found for issuers to pay higher rewards for obtaining new accounts. Take your own data and measure the spread between your CPA and your NPV. I suspect that your results may be similar.
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