Some bad habits are harder to kick than others. In banking, the preapproved credit card mailing is apparently as addictive as nicotine. How else can you explain the record 1.4 billion solicitations mailed in Q1 2005 according to researcher Synovate? (">see previous article on 2004 mail volumes)
We can't speak for the economics of the recent mailings. On a macro level, things are going pretty well. Other than the sub-prime specialists, most credit card companies have weathered the economic slowdown of the past years admirably. However, we still think the online channel is vastly underused as a credit marketing vehicle.
Analysis
First, we'll crunch some numbers to compare traditional direct mail (DM) to online marketing (OM):
***DM***
1.5 billion pieces times $1 per piece = $1.5 billion in marketing
Fraud = 0.04% x 1.5 billion = 60,000 bad accounts x $2500 = $150 million
Teaser rate = 3% subsidy x $1.2 billion outstanding = $360,000 million
Total cost of program = $2 billion
===> Response = 0.4% times 1.5 billion = 600,000 good accounts
DM acquisition cost = $333 per good account
***OM***
30 million online banking households x $5 for 90-days of online credit offers = $150 million
Teaser rate = none
Fraud = 0.04% x 30 million = 12,000 bad accounts x $2500 = $30 million
Total cost of program = $180 million
===> Response = 30 million x 2% = 600,000 accounts
OM acquisition cost = $30 per good account
Implications
Depending on a multitude of factors, a credit card issuer can still make an account costing $333 profitable over its lifetime, but it's not going to be easy, especially with costly rewards programs demanded by most good customers these days.
Why not divert some of the direct mail budget to online marketing programs that eliminate the paper from the equation?
Every credit-worthy online banking customer should have preapproved credit available to them at all times. And it should be very visible when they are conducting activities that could indicate a potential need for extra cash, such as paying bills.
Alternatively, preapproved offers could be timed to appear at login when account balances dip below historical levels indicating potential cash flow difficulties for the consumer.
The beauty of this approach is that it's more about timing than price. Consumers needing $500 for the orthodontist today will be more concerned about a fast, convenient advance rather than playing the field to bag a 0% teaser rate and/or maximum rewards points.
The twin benefits of online credit marketing:
- lower marketing expenses
- less dependency on teaser rates and rewards programs
For an extended discussion of online credit card and loan originations, see:
- OBR 66, Creating an Open Lending Platform
- OBR 72, Online Lending Gains Momentum
- OBR 73, Best of Web Winners in Online Lending
- OBR 104, Lessons from the Credit Card Marketers
Online Banking Report subscribers will receive updates to these reports this fall.
— JB