global consumer credit development learnings evangelos stefatos senior director business line...

Global Consumer Credit DevelopmentLearnings

Evangelos StefatosSenior DirectorBusiness Line Development

Payment Card 2007Kiev, Ukraine7th June 2007

Presentation Identifier.2Information Classification as Needed 2

Discussion Topics

Global Consumer Lending

Country Segmentation

Learnings from Credit Leaders

Product and Industry Developments Around the World


Global Consumer Lending Environment

At the aggregate level, consumer lending and credit card industry expected to grow at similar rate as economic growth (personal disposable income).

20

06

Fig

ure

s (

US

$ i

n T

rill

ion

)

PCE

Segmentation Sizing Estimate

$24 T

2006 Global Consumer Lending

Source: Global Insight; Morgan Stanley

$6 T

Consumer Credit

$22 T

Non-Mortgage Consumer Credit

$1.5 T

Credit Card

• Global consumer credit (including mortgage and non-mortgage credit) estimated at $22T, or around 90% of personal disposable income (PDI) and personal consumption expenditure (PCE)

• Non-mortgage credit estimated at $6T, around 25% of PDI / PCE

• Credit cards represent 25% of non-mortgage credit; the rest includes auto loans, retail financing, personal loans, etc.

Key Observations


Regional Consumer Lending Environment

At the regional level, opportunity for growth of non-mortgage lending varies according to level of country maturity.

% o

f D

isp

os

ab

le I

nc

om

e

US / Canada

Non-Mortgage Regional Sizing

110% = Total Consumer Credit

2006 Non-Mortgage Regional Sizing

Source: Morgan Stanley

Asia Pacific

95%

Europe

20%

Latin America

• In mature countries like US, Canada, and UK, mortgage lending taking share away from non-mortgage due to ease of home refinancing (some consumers view their home equity as “ATM machines”).

• In newly developed regions like Asia Pacific, penetration of non-mortgage credit is high as the growing upper-middle class consumers are very responsive to all forms of credit vehicles.

Key Observations

25% = Non-Mortgage

40%

75%

20%

25%


Credit Card Growth Opportunities

Opportunity exists to shift share from alternative consumer lending vehicles – especially in emerging countries.

0%

5%

10%

15%

20%

25%

30%

35%

40%

Austra

lia

Korea

Canad

a UK US

Spain

Brazil

Japan

Ger

man

yIta

lyIn

dia

Franc

e

Credit Card Debt as % of Consumer Non-Mortgage Debt

Source: Morgan Stanley (2002 Data); general purpose credit card receivables as % of all non-mortgage loans.

Global Average


Discussion Topics






Regional View of Visa Credit Business

Large Variation Around the World

Visa Credit RSV as % of PCE

<2% 2-6% >6%

Need an alternative way to compare development of credit environments


Segmentation of Visa Business by Market Economic Development

Personal Consumption Expenditure (PCE) per Capita

< $2K

$2K to $10K

> $10K

Eco

no

mic

Dev

elo

pm

ent


Long Term High Potential Economies

PCE per Capita

< $2K

Eco

no

mic

Dev

elo

pm

ent

ChinaEgyptIndia

Indonesia

Vis

a D

eb

it D

ev

elo

pm

en

tV

isa

De

bit

RS

V a

s %

PC

E

Visa Credit DevelopmentVisa Credit RSV as % PCE

2% 6%

2%

6%


Emerging Economies

PCE per Capita

< $2K

$2K to $10K

Eco

no

mic

Dev

elo

pm

ent

S. ArabiaBrazil

S. Africa

Mexico

Russia

Poland

ArgentinaThailand

Turkey

Vis

a D

eb

it D

ev

elo

pm

en

tV

isa

De

bit

RS

V a

s %

PC

E


2% 6%

2%

6%


Developed Economies

PCE per Capita

< $2K

$2K to $10K

> $10K

Vis

a D

eb

it D

ev

elo

pm

en

tV

isa

De

bit

RS

V a

s %

PC

E


2% 6%

2%

6%

Eco

no

mic

Dev

elo

pm

ent

Sweden

FrancePortugal UK

Italy SpainU.S.

Australia

GermanyJapan

UAE

Greece

Ireland


Credit Card Clustering

• PCE per capita bands: <$2K, $2-$10K, >$10K

• Non-mortgage credit of PDI bands: >20%, 5-20%, <5%

• Credit card share of non-mortgage bands: >20%, 10-20%, <10%

• Merchant acceptance of credit cards

• Credit bureau and scoring

• UW, line assign, collections

• Prospect / customer data mining

• Pricing, products, distribution

• Active PM

Marketing

Portfolio Mgt

Credit Risk Mgmt

Credit card Acceptance

Credit Card % of NM

Lending

Non-Mortgage Lending

PCE per Capita

Developed Credit

Emerging Credit

Established Charge

Established Debit

Segmentation Criteria

Criteria

Long Term

• Sample Countries: France, Italy, Germany

• Sample Countries: US, UK, Canada, Australia, Taiwan

• Sample Countries: Thailand, Turkey, Brazil, S. Africa, Mexico

• Sample Countries: Japan, Spain

• Sample Countries: China, India, Indonesia, Egypt, Russia*


Developed Credit Environment

Developed Credit

• Regulatory pressure on pricing

• Slower growth in prime segment

“Current State” Opportunity Areas

• Mass affluent products

• Selective subprime / niche segments

• Merchant value proposition

Lending Infrastructure

Responsible LendingProduct InnovationsMerchant Value

Proposition

Common Themes and Opportunities

Refine all aspects of consumer lending proposition to optimize value to merchants, consumers, and issuers.


Opportunities in Credit Card Environment

Developed Credit

Emerging Credit

• Regulatory pressure on pricing

• Slower growth in prime segment

“Current State” Opportunity Areas

• Mass affluent products

• Selective subprime / niche segments

• Merchant value proposition

• Prime segment already penetrated

• Large un-banked & subprime consumers

• Some acceptance challenges

• Credit risk management, especially subprime

• Product differentiation

• Portfolio management

Lending Infrastructure

Portfolio Management

Product Development

Merchant Acceptance

Common Themes and Opportunities

Strengthen fundamentals of consumer lending to improve product economics and deepen market reach


Income and consumer spending in Ukraine have been rising over the last few years

2,711 2,9393,479

4,337

6,135

7,074

2001 2002 2003 2004 2005 2006

3,7334,517

5,547

7,075

9,674

12,497

2001 2002 2003 2004 2005 2006

Yearly Average Nominal Wages of Persons Employed in the Ukrainian Economy (UAH)

Yearly Nominal Consumer Spend per Capita (UAH)

Income and consumer spending increases are favorable for growth in demand for credit

Source: National Bank of Ukraine, as of May 2007 Source: Planet Retail, as of May 2007


Discussion Topics






93.1% 90.8% 89.1% 87.2%83.0% 82.5% 80.8%

68.4%

7.1% 4.7%

Austra

lia

New Z

ealan

d

Canad

aUAE

USA

Poland UK

S. Kore

a

Russia

Ukrai

ne

Developed credit markets have very high RSV/CSV ratios in common

Credit

RSV/CSV Ratio

Credit Penetration

of PCE14.7% 13.6% 16.6% 4.7% 6.5% 1.1% 7.9% 20.8% 0.0% 0.1%

Increasing credit card usage at POS is correlated with sustainable credit card growth

Source: RSV/ CSV from Visa Operating Certificates, 4QE Q42006 and subject to change; PCE from Global Insight, 2005


Proposition must remain valuable through Account Life Cycle

Get Use more KeepStart Using

Acquisition

Activation

Usage

RetentionU

sag

e

Time in months

00 1-31-3 6-126-12

Market Management

Risk Management

Prospect Risk and Demographic

Market Strategy

Acquisition Value

Proposition

Portfolio Management

Reliable Information Systems

Account Level Performance Tracking

Risk Management

Value Optimization Tools and Strategy

Market Partners

Account Mgt Value Proposition

Product Potential

Optimized with Discrete

Streams (e.g. credit, debit,

prepaid)


Discrete Products Serve Discrete Customer Needs and Market Conditions

BANK FUNDSOWN FUNDS

SUFFICIENT MARKET INFORMATION

DEBIT

CREDIT

NO MARKET INFORMATION

Prepaid


Robust and complete information structures outside and inside the bank are fundamental to healthy credit growth

Market

Efficient risk management

Ability to reach deeper segments

Better segmentation and targeting

Better estimation of overall prospect risk through positive and negative information sharing

Optimization of credit extension

Prevention of market-wide risk issues

Bank

Cost efficient and reliable account management

Better segmentation and product assignment

Optimization of Marketing campaigns

More accurate new and existing customer risk management

Product strategy support by correct economics


The importance of sharing and using positive and negative information – the case of the UK in 2005

Number of IVAs

5000

10000

15000

20000

25000

30000

35000

Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05

3.00%

3.50%

4.00%

4.50%

5.00%

“A PwC study of 1257 IVAs registered in July 2005 reported that:

• Insolvent individuals had, on average, taken out 11 credit cards and other types of unsecured loan

• The total average debt was around GBP 60,000, or 3-4 times gross annual income

• 75% of insolvencies were caused by living above means”Source: Precious Plastic 2006, Consumer Credit in the UK, PriceWaterhouseCoopers 2006

Charge-offs as % of outstandings


Discussion Topics






Lending Infrastructure – UK Example

Credit Bureaux in UK

• UK market experiencing increased credit losses as a result of high consumer debt service burden

• UK already has three advanced credit bureaux providing positive & negative credit history

• Four major UK issuers agreed to share additional cardholder data to improve credit risk assessment and portfolio management

• New field include: amount of purchases, cash advances, and payments; changes to credit lines; bounced cheques; number of authorized users

Description

UK Credit Bureaux will have the most comprehensive data fields in the world

Responsible Lending, Optimum Credit Allocation and Risk Management


Lending Infrastructure – Korea Example

Credit Bureau Development in Korea

• Korea market experienced severe credit loss crisis in 2002-2003, following a period of exceptional growth in credit card lending

• Visa Korea demonstrated industry leadership by developing a roadmap to migrate Korea’s credit bureau system from sharing “negative only” to sharing both “negative and positive” information.

• Extensive research to compare credit bureau systems in other Asian countries (Singapore, Thailand, Australia, Hong Kong) and the United States

Description

Responsible Lending, Optimum Credit Allocation and Risk Management


Responsible Lending – US Example

Money Choices in US

• Visa USA developed “MoneyChoices” – an internet based consumer education program

• Integrated by Member banks through collections and delinquency prevention strategies

• Enhance consumers’ understanding of credit and general financial information

• Improve financial health to avoid delinquency, bankruptcy and charge-offs.

Description

Consumer Financial Lifecycle

FINANCIALHEALTHIncome > Expenses

LIFE AFTERBANKRUPTCY

FINANCIALPRESSURESExpenses > Income

RECOGNITIONOF DILEMMA

DEALINGWITH DILEMMA

BANKRUPTCY

SITUATIONALBEHAVIOR

CHANGE

Responsible Lending, Consumer Education


Product Innovations – UK Example

Payment Rate Incentives in UK

• Launched in October 2005, Barclaycard Flexi-Rate encourages cardholders to repay credit card balances more quickly

• APR varies based on payment rate:

• 9.9% APR (payment > 10% balance);

• 12.9% (5% < payment < 10%)

• 16.9% (2% min < payment < 5%)

• Strong PR and consumer value in current UK environment, without giving up too much profitability

• Another way of implementing risk-based pricing those who can afford to pay more are generally lower risk anyway

Description

Barclaycard “Flexi-Card”

Responsible Lending, Budgeting, Customer Empowerment


Merchant Value Proposition – US Example

VIN TargetingSegmentation on cardholder spend behavioracross entire universe to optimize merchant

targeting and justify best in marketmerchant offers

VIN DatabaseIssuers Merchants

Merchant Offers

Send CMF files toVIN at least monthly and

participate in Merchant offers

Offers are branded with Issuer’s Rewards

program assets

Offers are branded with Issuer’s Rewards

program assets

Provide merchantsaccess to highly desirable rewards-

motivated cardholders

Increase utilization and loyalty

Drive revenue and new

customers

Visa Incentive Network (VIN) in US

The Visa Incentive Network (VIN) is a robust platform that enables Merchant partners to deliver value to Visa consumer credit cardholders

All-party value, Loyalty, New Customers


Portfolio Management – Brazil Example

Private Label Conversion in Brazil

• Private label cards in emerging credit environments tend to target growing middle class consumers who need financing for big ticket household items

• Consumer finance specialists dominate this segment by mastering credit risk management and retailer distribution channel

• Large global opportunity to convert private label credit card to Visa –successful conversion case studies seen in US, Europe, AP, and LAC

• Example – C&A Brazil had 12 million private label cards (targeting segments C/C- segment); average credit line of US$150; decision to convert to Visa to grow spending and revolving

Description

Over 1 million Visa accounts from conversion of C&A private label portfolio!

Reaching New Segments, Expand Credit Potential


Product Innovations – Taiwan Example

Platinum Cards for Women in Taiwan

• Targeting women

– Business executives; entrepreneurs in 30’s to 40’s; high income earners

• Wide Array of Benefits

• Complimentary VIP club memberships (Howard Plaza)

• Preferential discounts at selected merchants

• Complimentary airport parking, 24-hour roadside assistance, annual vehicle servicing

• Free Business Class upgrade on local carrier

Description

Headline : “Rose Platinum Ladies Love And Know How To Be Pampered.”

Body copy : “Taishin Platinum Lady’s Card treats its women the way they deserve.”

Affinity, Segmentation


Product Innovations – Spain Example

Spain Leader in Mass Customization

• La Caixa is leader in product customization and design

• Focus on deep customer segmentation and multi-segment strategy oiptimization

• Strength in customer lifecycle relationship management

• Multiple and differentiated products

• Unique card designs

Description

Affinity, Segmentation


Portfolio Management – Turkey Example

Bonus Card in Turkey

• Europe’s largest multi-branded credit card program

• Launched in 2000, flexible and easy to use EMV-chip based rewards program

• Multi-branded revolving credit card with over 1000 merchant partners in single rewards pool

• Sophisticated CRM and rewards system – cash back pool, installment, discounts

• Over 4 million credit cards (20% market share in Turkey)

Description

Efficient Account Management, Rewards, Security


Multi Segment Co-brand– Germany Example

Description

LandesBank X-box Visa

Empowering repeat use, Segmentation, Serving unbanked segments

Co-brand product set with Microsoft Xbox tapping a new youth segment for the bank

• Xbox Visa Premium – Embossed, floor limit card – instalment

• Xbox Young – Unembossed, managed credit line

• Xbox Prepaid – Unembossed, reloadable no credit line

Results

• 77% of cards issued as prepaid

• 60% of cardholders aged 18-25

• New revenue stream/market

• Basis for future cross-sales


Product Development – México Example

Installment Cards in Mexico Description

• Leading Visa issuer in México launched new revolving credit card product

• Targeting entry level (C / C-) segments

• Credit lines of ~US$300 to $500 (about equal to monthly income)

• Fixed monthly payment – minimum payment set at 10% of credit line

• Translates to higher percentage of O/S balances (typically 5-8% in México)

• Customer can choose to pay in full (no prepayment penalty)

• Domestic use only; basic card benefits

• Promise to review account for future upgrade (higher credit lines, international acceptance, more card benefits)

Tarjeta Congelada (“Frozen Card”)

Responsible Lending, Reaching “Deeper” Segments


Product Innovation and Cross-selling – Philippines Example

Loan Disbursement - Philippines Description

Chinatrust Loan Combi card Value Proposition

Bill Pmt, Fund Transfer, Net / Phone Banking

Loan reload once loan is at least 50% paid

Convenience, choice and control

Bank Benefits

Back-office and front-office cost savings

Check handling cost savings

Interest income from float or unused loan

Revenue streams - POS, ATM fees, etc.

Cross-selling

Customer retention and extended account relationship

Results

100,000 cards issued

92% of personal loans disbursed this way

Behavior Change, Retention, Convenience


Dual Line Private Label / Gen. Purpose US Example

Dual Line Cobrand - US Description

Wells Fargo / Pella Dual Card

Affinity, Convenience, Enhancing POS Usage

Targeted to retailers with private label portfolios

Suitable for home furnishing and other big ticket financing

Two distinct revolving lines of credit

Private label (percentage of total line)

Visa general purpose card

One billing statement with detailed transactions for both lines.

Potential for differential rates and features

One monthly payment for both accounts

Allows retailers to ensure there will be a portion of line available for purchases in-store


Multi-product Co-brand– US Example

Combi-product Innovation - US Description

Starbucks Duetto Credit/Prepaid Card• Visa and Starbucks Card functionality

• “Closed-loop” prepaid card, used to buy Starbucks products

• Visa general purpose credit card used in Starbucks and everywhere else

• Cash reloads from credit to prepaid card

• 3% back on Visa auto-reload purchases

• 1% Starbucks Duetto dollars back, on all Visa purchases

• 40% higher average reloads on Duetto than on Starbucks prepaid-only

• 58% percent of cardholders say will buy more Starbucks products with Duetto

• 47% of Duetto cardholders have an improved image of Starbucks

Affinity, Enhancing POS Usage


Instant Issuance Co-brand– Peru Example

Mall instant issuance - Peru Description

Megaplaza Interbank Visa Credit Card

Enhancing POS Usage, Instant Gratification of POS Demand

• Visa Co-brand program launched in shopping mall to compete directly with Ripley and Falabella (anchor stores with strong Private Label programs)

• Bank developed process to approve and deliver Visa cards (Embossed Visa Flag) in 20 minutes.

• “Fill out the application, go shopping and come back in 20 minutes”

• Sales pitch: “6 months with no interest for 1st purchase today”

• Sales module in food court and promoters along the mall

• Instant prize through a game with credit card application

• Results: 10,000 cards in first 3 months and delivering 100 instant cards daily


In Summary

The Ukraine economy is growing and demand for credit is expected to continue to increase

Products will get more sophisticated and credit consumers will only get savvier and more demanding

Demands on banks for efficient and informed risk management will only increase as consumer credit exposure increases

Overall

Positive and negative market information sharing and use

Robust information systems in and out of the bank

Discrete product offerings and product reporting that allow products to reach full potential

Consumer propositions that maintain value and appeal

Strategies aimed at encouraging RSV spend

Long-term success in credit requires

Thank you

global consumer credit development learnings evangelos stefatos senior director business line...

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total consumer credit

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