Ryan Burkard, Giampiero Giunta, AND Ruchi nanda. Why Credit Cards?. Complex industry. Well-known advertising campaigns. Relevant to everyone . A card association earns revenue from a merchant fee and an interchange fee. ID: 735079
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The Credit Card Industry
Ryan Burkard, Giampiero Giunta, AND Ruchi nanda
Slide2Why Credit Cards?
Complex industry
Well-known advertising campaigns
Relevant to everyone
Slide3A card association earns revenue from a merchant fee and an interchange fee
Merchant/
Retailer
Merchant Bank /
Processor
Card Association
Issuing
Bank
Consumer
Issuing bank forwards the original charge to the consumer who pays the balance due ($100)
Cardholder Purchase ($100)
Submit charge to merchant bank and then on to card association
Card association forwards charge to card’s issuing bank
Issuing bank submits payment back to association minus an interchange fee (% of transaction) ($99)
Card network submits payment minus a fee (%) back to merchant bank ($98)
Merchant bank gives payment to retailer minus fees
($97.50)
Slide4Slide5‡ Giunta, Nanda, & Burkard
Slide6Porter’s Five Forces
An industry framework used to determine attractiveness and competitive intensity of an industry
Slide7The Credit
C
ard Issuer Market is Highly Concentrated
Source: Ibisworld
Slide8The Credit Card Industry has got huge barriers to Entry
Source: Ibisworld
Slide9The
c
redit card issuer follows a TOP DOG strategy in order to survive
Barriers Ex-Ante
Aggressive Behaviors
High
High
Low
Low
Source: Ibisworld
Slide10Suppliers and
c
onsumers in the industry have medium bargaining power, putting downward pressure on profitability
Source: Ibisworld
Slide11The
c
redit card issuer industry is HIGHLY PROTIABLE due to the u
pward pressure on profits from these five forces
Slide12‡ Giunta, Nanda, & Burkard
Slide13The card association industry is extremely
concentrated
Source: Ibisworld
Slide14The credit card association plays the role of a FAT CAT
Source: Ibisworld
Slide15The credit card association plays the role of a FAT CAT
Barriers Ex-Ante
Aggressive Behaviors
High
High
Low
Low
Source: Ibisworld
Slide16Suppliers have low bargaining power and consumers have medium bargaining power, putting insignificant pressure on profitability
Source: Ibisworld
Slide17The credit card association industry is deemed
VERY PROFITABLE
based on these forces
Slide18Together, the credit card industry is very lucrative and, unsurprisingly, was heavily regulated by Credit Card Act of 2009 and Dodd Frank Wall Street Reform
-16% in credit card issuing
Dodd Frank
Wall
Street Reform
Source: Ibisworld, Bloomberg, Seeking Alpha
Slide19Advertising Strategies and Raw Data Analysis
‡ Giunta, Nanda, & Burkard
Slide20After the financial crisis, there has been a significant decrease in consumer spending and advertising allocation…
…resulting in more practical marketing choices
Example
Impact
Less consumer spending
Less
pizzazz, more practical marketing
Quick, concise messaging
Less consumer confidence
Market
reward programs for consumers with ideal credit score
Increased regulation in industry
Market credit cards with lower signing interest rate
Shorter agreements
Effects of financial crisis realized
Source: Bloomberg: Company 10-Ks
Slide21Total Ad Expenditures of Each Firm
American Express and Capital One have remained with high expenditures.
MasterCard and Visa have dropped significantly in their ad expenditures
We will look further into this.
Slide22Number of Ads for Each Firm
American Express airs the most ads
SignalingCheapest ads
Visa and MasterCard spent a lot in 2006, however they aired much fewer ads compared with Am EX
Higher profile events?
Olympics, Super Bowl
Visa and MasterCard’s ad expenditures and airings declined a lot
Slide23Empowered consumers expect marketers to support them “on demand”
The average American household has 10 active credit cards, the average American has 4 active credit cards
The internet allows consumers to easily compare interest rates, rewards, etc. from the comfort of their home
80% of complaints filed with the Consumer Bureau are tied to credit cards
Source: Consumer Bureau
Slide24Humor Advertising
Slide25Iconic Advertising
Source: Mastercard 10-K (2002)
Slide26Card appeal
Personal pictures
Exclusive groups
Philanthropy
Slide27Sponsorship
Slide28Social Media/Mobile Advertising
One in four cardholders has become a fan, friend or follower of their credit card brand or issuer
Source: Synergistics Research Corp.
Slide29Low price point
High price point
Narrow customer base
Broad customer base
Large transactions > fewer customers > better customer service
Many small transactions > connection with banks (no vertical integration)
Slide30Capital One
treats credit cards as information, data drives its business strategy
Makes key acquisitions in the information technology market: Bundle
Performs about 30, 000 credit card experiments a year
Uses every client interaction, including ads, as an opportunity to cross-sell
Its advertising strategy is a paradox, but not really
Source: Bloomberg News
Slide31What types of Programs does Capital One Advertise On?
Sports heavy, especially College sports
March Madness
Capital One Bowl
Capital One has a low price point
target the college aged person
Drama and Adventure TV series
Slide32For
American Express,
being a customer is not just a transactional mechanism, but a lifestyle choice
Caters to the lifestyle of the customer with the ideal credit score of 760
Entices with exclusive memberships, and shared reputation i.e. gold and black cards
Its advertising strategy is purely complementary
Source: American Express
Slide33Where does American Express Advertise?
Mostly on Drama/Adventure TV series
Major network TV shows to reach a large number of people.
Reinforces signaling advertising strategy
Slide34Monthly Advertising of American Express
Strong correlation between years
Heavier advertising towards the
later part of the year
Holiday season: remind shoppers to use their American Express cards to buy the gifts!
Slide35MasterCard
and
Visa
attract the largest audience by being very involved in all American events and using memorable advertising strategies
Slide36Where does MasterCard Advertise?
Obviously major cuts in ad spending across the board, except for golf
Why did MasterCard cut spending?
Went public in 2006, possibly advertised very heavily to gain investors’ interest initially
Now taking a similar path to Discover
less advertising
Increased profits with similar revenues. The stock has performed very well
MasterCard Advertising Program Distribution
Slide37MasterCard Monthly Advertising Distribution
Drastic changes in overall advertising efforts across all months
Minimal ads in 2010 compared to 2006
Arnold Palmer Invitational presented by MasterCard in
March
Overall, not much of a trend in month-to-month spending
Slide38Where does Visa Advertise?
Very heavy focus in sports
NFL
Olympics
Slow decline in all other program types
Why such a drop in Spending from ‘06 to ’10?
MasterCard is their main competitor, maybe they don’t need to advertise as much because MasterCard is not.
Prisoner’s Dilemma
Slide39Visa’s Olympic Ad Campaign
Drop in ad expenditures while consist number of ads
Lower cost for each ad
Still a strong effort in 2010 despite less spending
Less Olympic ad spending contributes to the overall spending reduction of Visa
Slide40Visa’s Monthly Advertising Distribution
Significant overall decline in Ad Expenditures
Largest Months:
February
October through January
February expenditures are so much higher because of the Olympic ad campaigns
Oct. – Jan. high due to NFL season
Slide41Investment and Advertising Recommendations
‡ Giunta, Nanda, & Burkard
Slide42Source: Seeking Alpha
Slide43The credit card industry should advertise new technologies to connect with young consumers on a new level
Source: Wired.com
Slide44Questions?
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