The Green Sheet Online Edition

March 3, 2010 • 10:03:01

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Finding your most valuable customers

By Robert Christiansen

– ARM Loyalty

It is an accepted axiom in the loyalty space that by rewarding your best customers, they become your most vocal champions. Therefore, finding them is critical to a successful loyalty program. Without knowing who your best customers are, and more importantly their behaviors, you may be rewarding the wrong customers and encouraging unprofitable behaviors.

Consider the general purpose reloadable (GPR) card market. This dynamic and competitive market is growing at double digit rates, and all industry experts agree that growth will continue well into this decade.

In this market, identifying your best customers can be quite challenging. GPR cards work similarly to debit cards with bank accounts. They allow for direct deposit of paychecks, as well as cash loading through retail locations.

If they are branded Visa Inc., MasterCard Worldwide or Discover Financial Services, they allow for signature debit purchases at millions of locations. Many GPR card programs run on debit networks, like First Data Corp.'s STAR and MasterCard's Cirrus networks, which offer PIN-based purchases and ATM access.

GPR cards are flexible financial tools serving a rapidly growing international market. With so many moving parts, how do you identify the best customers and their profitable behaviors?

Program revenues

GPR cards are spending vehicles. Program managers generate revenue with them via transaction fees and interchange. Unlike issuing banks, program managers do not profit from deposit float. As a rule, the more money loaded (deposited) on a customer's prepaid card, the more profitable that customer is to the program manager.

Interchange is 140 to 150 basis points. ATM and PIN fees are typically collected per transaction. But, for most programs, the monthly maintenance fee is the single largest fee collected. However, collecting maintenance fees can be elusive. Cardholders often draw the balance on cards to near zero, making collection of the fees problematic. Without knowledge of deposit behavior, program managers are in a difficult position as to the profitability of the cardholder.

Card program costs

For purposes of identifying your best customers, do not consider marketing and fulfillment costs as part of our calculation. (That's the subject of another article.) When determining your best customers, consider program costs in three areas: processor, issuing bank and debit network switch fees. Let's briefly consider each area.

Processor: Your processor is likely to be your largest cost center. You must tie cardholder activities to actual processor costs. Review your processor invoices and select only those line items that are specific to activated and funded cardholders. Your processor may be providing ancillary services, such as handling Office of Foreign Assets Control issues, customer identification programs, customer service, interactive voice response and fulfillment services.

Issuing bank: Your issuing bank will have direct costs associated with cardholder behaviors. Issuing banks may charge fees for each financial transaction that occurs. In addition, they may charge monthly fees for card insurance and "open" cards that have yet to be loaded. As with your processor costs, be sure to keep cardholder transaction costs separate from marketing activities.

Debit network: Finally, your debit network will have switch fees that are passed along by your processor or through your issuing bank. The challenge here is identifying transactions to cardholders. In the GPR market, many nonactivated, nonloaded cards are used on the debit network.

This increases the cost burden for the program manager and must be figured into the per-transaction cost for those customers who are making successful purchases or cash withdrawals. Be sure to aggregate the total cost to only those customers who have loaded cards.

Your best customers

Now that we have our revenue and cost per month per card, we can determine the gross contribution. By subtracting cost from revenues over the life of the cardholder, we determine our best customers. This group generates the high profit per month and often carries the load for all other cardholder groups. Here are some key questions to ask yourself about the behaviors of your best customers:

• Deposit type: What is the preferred method of loading money? Industry lore says this group is direct deposit. Is this true for your card program?

• Initial transactions: What is the size of the initial load, and where do they spend the money?

• Deposit volume: Are you getting full wallet share or just a portion of their paycheck?

• Cash withdrawal: If they set up direct deposit, are they immediately withdrawing the full amount via ATMs?

• Retention: How long do they remain a cardholder?

Your database holds all these answers and many more. The simplest of transaction data can produce amazing insights into the behaviors of your best customers. Transaction amounts, dates, locations and times of day are the building blocks to identifying this most important group.

Find and conquer

Identifying your best customers is a powerful and satisfying activity. The process is absolutely necessary for a successful loyalty program. Be sure to document the steps you take to discover your best customers - you will need to repeat the same process each month. The process will become easier each time you do it. And you will gain critical insight into the fluctuations of this important customer group; coupled with the right incentive, you'll see it grow month over month.

Robert Christiansen is Senior Vice President at ARM Loyalty, providing loyalty and rewards programs for the prepaid market. He was co-founder and Chief Operating Officer of Bank Freedom prepaid debit cards and is a 25-year veteran of the technology industry. You may contact him at rchristiansen@armloyalty.com.

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