Citibank in Asia PacificCitibank in Asia Pacific

Introduction• Citibank’s branch banking business conducted

operations in 15 countries throughout Asia Pacific and the Middle East in 1989

• Citibank’s branch banking business was projected as a prestigious, consumer-oriented international bank and the undisputed leader in the marketplace

• Financial services were targeted to affluent upper and middle income market segment

• Citibank’s Asia Pacific branch banking business was challenged with increasing earnings from $69.7MM to $100MM by 1990

Citibank’s Challenges• Increase earnings in Citibank’s Asia Pacific bank

business through the launch of a credit card product • Obstacles:

– Mixed opinion from the Asia-Pacific country managers that a successful credit card launch was possible

– Questions abound regarding Citibank’s ability to adopt mass-market positioning to acquire credit card customer and maintain its up-market positioning with its current upscale branch banking customers

– Differing customer attitudes and usage patters across the Asia Pacific region

– High level of market uncertainty across the region with regulations, branch limitations, talent, poor infrastructure, etc.

SWOT AnalysisStrengths

• Market Leader• Branding• Credit card considered a status symbol• Targeted countries include booming, growing economies (Philippines, India) and affluent, Westernized countries (Australia, Singapore), diversifying risk• Strong economies of scale in data processing• Hong Kong presence provides valuable data to estimate revenue impact and price credit cards accordingly

Weakness• Consumer attitudes and usage varies

across countries• Australia & Singapore are saturated

markets• Country managers are unconvinced/no

buy-in. • Credit card offering adds complexity to

organizational compensation structure• Cannibalization of current services• Brand dilution• Collections process is undefined• Centralized data processing costs, politics• Learning curve on demand side & cost side

Opportunities• Penetration leader in new markets• Target growing middle and upper class• Portfolio allows for customization in markets • Additional revenues from cross-selling and arbitrage

Threats• Fraud• Defaults• Laws and regulations• AMEX and Diner’s Club are early entrants with brand cachet• Competitors offer discounts

Acquisition Costs

Break Even Analysis

Break Even - Sensitivity Analysis

Unit Cost Prospects RR Qualify Cards Card Customers Acq Cost/CardDirect Mail 1.5 300,000 0.02 0.67 0.8 3216 139.93Direct Sales 225,000 30,000 0.5 0.67 0.8 8040 27.99Take One 0.25 2,000,000 0.015 0.334 0.8 8016 62.38Bind In 0.15 3,000,000 0.01 0.334 0.8 8016 56.14

Revenue Per Customer120 150 180 210 240

Scenario I 425,892 340,713 283,928 243,367 212,946 II 692,283 553,827 461,522 395,590 346,142 III 937,317 749,853 624,878 535,610 468,658 IV 1,200,217 960,173 800,144 685,838 600,108

Scenario Target No Fixed Costs VC Total Costs Rev/Cust Break Even #

Acquisition Advertising Support ($25/card)

I 250,000 7,857,000 2,000,000 35,000,000 6,250,000 51,107,000 180 283,928

II 500,000 16,574,000 4,000,000 50,000,000 12,500,000 83,074,000 180 461,522

III 750,000 27,228,000 6,500,000 60,000,000 18,750,000 112,478,000 180 624,878

IV 1,000,000 40,026,000 9,000,000 70,000,000 25,000,000 144,026,000 180 800,144

Market Entry – Game Theory

Source: Demisch, McGarry, Mukhtar, Rajbansi; Feb 2008

Citibank

AMEX

Conjoint Analysis• Build ideal mix of product attributes• Determine customer segmentation• Identify cannibalization & competitive response

Joining Fee Annual Fee Brand Services Incremental Revenue

None None Citi (Visa, MC) Card replacement Cash advance

Low Low Amex Loss/misuse liability Pre-payment

High High Visa/MC Spending limit Advance ticket sales

Diner’s Club Cash Advance Product warranty extension

Local Bank Year-end summary Product/Travel insurance

Cross-Selling• Success selling auto loans through car dealers• Greater potential with Citi cardholders

– Opportunity for cross-sell of products such as Auto Loans, Ready Credit, Deposits, Mortgages

– Enables virtual presence in countries restricting number of foreign bank branches

• Bundle with bank services for lower combined fees

How calculate cross-sell value?Take Hong Kong Citibank example where 6% of account holders also have Citi credit card and assume same opportunity in reverse…

Cross-Sell Value CalculationRelative Year 1 (phased launch)

Australia Hong Kong Singapore TOTAL

Total # cards 10.5M 2M 630K 13.1M

Proj. # Citi cards Yr 1 1M 150K 25K 1.75M

Proj. Citi card customers 588K 88K 15K 691K

       

# of Citibank customers 85K 130K 18K 233K

Net Revenue from Fund $59M $67M $16M $142M

NRFF per customer (exact figure) $694.12 $515.38 $888.89  N/A

       

Card holders w/ 2nd product 35.3K 5.3K 0.9K 41.5K

Incremental NRFF (cross-sell value) $24.5M $2.7M $784K $28M

Assumes 1.7 cards per customer and 6% of card holders will purchase 2nd Citi product as result of cross-sell efforts. Percentage based on 6% of Hong Kong’s Citibank customers also owning Citi card.

Total Relative Yr 1 value for all 9 Asia markets would be

$29M

Arbitrage Opportunities

Sample Exchange RatesUS $1 = HK $1.13US $1 = Australian $1.33HK $1 = Australian $1.18

Buy HK $11.3M with US $10M

Buy Aus $13.334M with HK $11.3M

Buy US $10.025M with Aus $13.334M

Triangular Arbitrage Example = US $25K Profit!

Across Citibank’s Asia-Pacific customer accounts = $1.5M+ per turn.

Market Segmentation

Market Segmentation

Weight Data Rating India Rating Data Rating Data Rating Data Rating Data Rating Data Rating Data RatingPer Capita 25% 11929 5 279 1 338 1 2018 3 527 2 8817 5 4837 3 930 2Real GNP 10% $196.80 5 $222.50 5 $63.40 3 $34.10 2 $32.60 2 $23.80 1 $95.80 4 $51.10 31988 Growth Rate 10% 4 2 9.7 4 4.8 2 8.1 4 6.8 3 11 5 7.3 3 10.8 51988 Inflation 10% 7.6 3 9.8 2 8 3 2 5 8.7 2 1.5 5 1.2 5 3.8 4Average Annual 15% $60,000 5 $10,000 2 $24,000 4 $14,000 3 $10,000 2 $20,000 4 $25,000 4 $15,000 3Customer IncomePolitical/Economic 30% A 5 C 3 C 3 B 4 D 2 B 4 A 5 B 4 Risk Factors

Score 4.5 2.55 2.55 3.5 2.1 4.15 4.05 3.35PRIORITY 1 3 3 2 4 1 1 2

Phillipines Singapore Taiwan ThailandAustralia India Indonesia Malaysia

Customer Lifetime Value (CLV)

Source: CLV Calculator- HBR http://hbswk.hbs.edu/archive/1436.html

  Assumptions  

         

Years of Customer Life 5    

Annual Discount Rate 15%    

         

    Item 1 Item 2 Item 3

Initial Purchase Price $150.00 $ 60.00 $ 15.00

Annual Product Inflation 7% 5% 2%

Margin per Product 25% 15% 10%

Retention Rate Year 1 95% 95% 95%

Retention Rate Later Yrs. 80% 80% 80%

Years between Purchase 2 0.6 0.25

   Value of Purchase  

 Profit perAcquired Customer  

  Item 1 Item 2 Item 3 Item 1 Item 2 Item 3Year 1 150.00 60.00 15.00 37.50 9.00 1.50Year 2   15.30     1.45Year 3 171.74   15.61 32.63   1.19Year 4 69.46 15.92   6.33 0.97Year 5 196.62   16.24 23.91   0.79

             

 

Net Present Value          

  Item 1 Item 2 Item 3        65.95 11.45 4.13                     Total NPV 81.53        

      Discount Rate(%)  

    5 10 15 20

  5 $101.60 $90.57 $81.53 $74.03

Customer 7 $117.58 $102.12 $90.00 $80.33

Life Years 10 $127.91 $108.88 $94.51 $83.39

  15 $140.63 $116.01 $98.63 $85.83

Long Run Effects of Risk on Marketing Policies

Expected Cash Flow

Period 1

Expected Cash Flow

Period 2

Discount Rate

NPV Calculation

NPV

Low Price Strategy

$10M $14M 15% (10)/(1+0.15)+(14)/(1+0.15)2

$19.27M

High Price Strategy

$6M $4M 5% (6)/(1+0.05)+ (4)/(1+0.05)2

$9.34M

Coordinate finance & marketing functions to select appropriate discount rate, marketing policies and resource allocations after analyzing the risks and returns from different marketing policies.

Reference: Sharan Jagpal (2008) “Fusion for Profit” pp 26

EV of Entering a Test Market in Singapore Using Real OptionsExpected incremental profit from test market/(1+ discount rate) $8.5M(1+0.05) +Probability of low demand X Cash Flow from Yr 2 on/ discount rate 0.5x ($0/0.05) X1/(1+ discount rate) 1/(1+0.05) +Probabaility of high demand X Cash Flow from Yr 2 on/ discount rate 0.5 x ($100/0.05)X1/(1+ discount rate) 1/(1+0.05) -Probability of introducing new product X investment/(1 + discount rate) (0.5X $70M)/(1+0.05) -Upfront cost for setting up test markets $20M =Total incremental value of expected cash flows from test market strategy $907M

Conditional NPV with strategic flexibility on immediate Launch =[Expected Profit in Yr1/(1+ Discount rate)] + (probability of withdrawing product at end of Yr X conditional NPV of cash flows from Yr 2 on) + (probability of staying in market at end of Yr 1 X conditional NPV of cash flows from Yr 2 on) - upfront inves

=85/1.1+(0.5x0)+(0.5x909)-70

= $462MP.S: Conditional NPV of profits=Annual CF from Yr2 on/[Discount Rate(1+Discount Rate)] = 100/(0.10 x [1+0.10]) = $909MEconomic Value of waiting for uncertainity to be resolved =$907M-$462M

$445M

Country Managers• Risk-averse and reluctant to handle card product• Tie compensation to product• Compensate for long term vision• Local currency (Jagpal, NB chapter 23)• 4 Component Parts of Compensation

– Base wage– Share of NPV of after tax operating cash flow– Share of NPV of tax shield– Share of real options of product

• Above mix changes per country and per period!

Compensation - Period 1• Australia vs. India example

NPV Operations

NPV Tax Shield

Real Options

Compensation Recommendation

Australia High ($59M) High Low 25% Base Salary37.5% NPV Operations 25% NPV Tax Shield12.5% Real Options

India Low ($6 M) Low High 50% Base Salary12.5% NPV Operations6.25% NPV Tax Shield31.25% Real Options

Compensation - Period 2• Australia vs. India example

NPV Operations

NPV Tax Shield

Real Options

Compensation Recommendation

Australia High (>$59M) High withdraw 50% Base Salary25% NPV Operations 25% NPV Tax Shield

India Low (>$6 M) Low remain 50% Base Salary25% NPV Operations6.25% NPV Tax Shield18.75% Real Options

Recommendations• Use a staged roll out plan introducing each of three groups at 6-9 month

intervals (Australia, Singapore, Taiwan first).• Opt for a test market initially, followed by multi-country entry.• The presence of cost and demand dynamics must be considered when

formulating pricing strategy, and Citibank may choose to learn from first movers errors.

• For uncertain marketplaces, use Real Option Valuation model.• Build centralized data processing center before entering test market.

(Citi absorbs initial $35 MM investment)– Establish specific credit card business independent from other

business units in each country– Charge country managers usage fee based on either computational

usage, dollar usage, or user (per merchant/cardholder) & continue to charge until investment recouped

– Allow country managers to set join fee

Recommendations (cont’d)• Features of credit card program should match the brand positioning

and corporate image. Include gold features for premium clients and regular/base features for others.

• In saturated markets grow through acquisition, and use green field approach in emerging countries.

• Capitalize on cross-selling and foreign currency exchange arbitrage opportunities.

• Structure flexible country manager compensation to encourage elements of shared risk and long term focus on available marketing options.

• Compensate country managers in local currency.

Questions