The Co-Branded Card - The Banks' Response To The Financial Crisis

Abstract

The use of cards has witnessed a continuous evolution since 1995. The expansion of the banking offers with electronic banking products represented another initiative, parallel with the card issue. The growth rate of the card market has accelerated together with the development of the market and of the consumer behavior in Romania. The development of the infrastructure and of the acceptance network has certainly been very important since they have determined the wide spread use of cards. At present, any private or legal person is engaged in commercial relationships involving financial transactions. Their number has rapidly increased to 300,000. The tendency to use co-branded cards for ordinary payments will become more prominent as long as the dealers and the issuing bank will think of more and more benefits attached to these cards which will finally lead to an increase in the number of card transactions. In addition, banks have recently negotiated client discounts with more retailers.

Headnote

Abstract: The use of cards has witnessed a continuous evolution since 1995. The expansion of the banking offers with Electronic banking products represented another initiative, parallel with the card issue. The growth rate of the card market has accelerated together with the development of the market and of the consumer behavior in Romania. The development of the infrastructure and of the acceptance network has certainly been very important since they have determined the wide spread use of cards.

At present, any private or legal person is engaged in commercial relationships involving financial transactions. Under the circumstances, the electronic payments have a major role practically representing the transactions of the future both at the national and the cross-frontier level.

The financial institutions have reached a more acceleration segmentation of the card portfolio and they have begun to focus more and more on the services and benefits beyond the payment instruments. Meanwhile, the card owners have become more and more educated and sophisticated knowing what to ask for in terms of cards. Moreover, most of the financial institutions have adapted their network in order to accept chip cards.

The number of the chip cards will increase on the Romanian market due to their effectiveness as far as the security of the transactions is concerned. The same will happen in the case of the co-branded cards which ensure the clients ' fidelity. These will seek to obtain as many advantages as possible from the different types of cards. At the same time, they will concentrate on the niche products, business cards either for shopping or for the payment of public services. Romanians have started using the co-branded cards which are eventually still credits. Their number has rapidly increased to 300,000.

The tendency to use co-branded cards for ordinary payments will become more prominent as long as the dealers and the issuing bank will think of more and more benefits attached to these cards which will finally lead to an increase in the number of card transactions. In addition, banks have recently negotiated client discounts with more retailers.

Keywords: card, crisis, card market, bank offer

Introduction

Recent studies in Romania have shown that the effects of the crisis have not been so evident on the card market in comparison with other domains. Out of all the banking services, cards could be considered a necessary service with frequent usage. This has been the main argument why the card market has been active at all levels: issue, acceptance, transactions. Banks have invested in cards and their campaigns to support them have led to remarkable results. According to the same studies, the increasing use of cards is a consequence of educating the clients in this field.

1. 2009 - The First Year of Decline on the Card Market

2009 was the first year in the whole history of the Romanian card market in which the number of valid cards in circulation was lower in comparison with 2008. Nevertheless, in only 10 years the number of cards in circulation has increased over 10 times. The 2009 situation regarding the card portfolio in Romania is the same in the case of 13 other European states. From the perspective of the downswing registered in 2009, Romania is on the third place, after Greece (13%) and Ireland (8%) with a decrease of 5% of the number of cards in circulation (exactly as in the case of Bulgaria).

2. The Card Market in the Interval 2008-2011

In 2008, the card market witnessed important launchings whereas the 2005-2006 trend continued and targeted the diversification of the product portfolio of the financial institutions and the issue of credit cards of all types: standard, co-branded or premium. The financial institutions have reached a more acceleration segmentation of the card portfolio and they have begun to focus more and more on the services and benefits beyond the payment instruments. Meanwhile, the card owners have become more and more educated and sophisticated knowing what to ask for in terms of cards. Moreover, most of the financial institutions have adapted their network in order to accept chip cards.

Besides, out of the 25 new programs launched by MasterCard in 2008, only two programs were debit cards (the debit card Marea Uniré launched in partnership with Bank Leumi - special edition and an euro debit card launched in partnership with Carpatica Commercial Bank), the rest being credit cards, special editions, either with chips or co-branded.

In comparison with 2008, 2009 was the year of cost cutting materialized in a decreasing number of card portfolios - by means of closing the inactive accounts - and even the abandonment of certain unprofitable acceptance contracts. Consequently, by the end of 2009, even if the issue activity had not been stopped, the portfolio of valid cards in circulation reached 12.8 million cards with a decrease of approximately 3.5% in comparison with the numbers registered at the end of 2008.

Credits cards have registered the most severe contraction because their number has decreased by almost half a million between March 2009 and June 2009. Practically, in only 3 months the rise of an entire year (March 2008 - March 2009) has been canceled. This decrease in the number of portfolios has had a benefic effect because it has led to an increase in the number of cards which generate transactions from 81.6% in September 2008 to 89.1% in September 2009. Likewise, another consequence of the crisis was the preservation of those commercial portfolios which were active.

Nevertheless, in spite of the hardships of the economic environment, the banking card market had a positive evolution. At the end of 2009, the data registered by the National Bank of Romania showed that the number of payments with debit cards had increased to 16.3 million Euros from 14.33 million Euros in the first semester of 2009 and the number of payments with credit cards had increased to 4.22 million Euros from 4.03 million Euros in the first semester.

Against the background of the financial crisis, the portfolio of the card issuers (banks and NBFIs) has decreased by one million cards up to approximately 12.6 million cards between December 2008 and December 2010.

In 2010, the contraction trend of the card issue remained the same so that by the end of 2010 out of the total amount of the issued cards the number of the valid ones reached 12.58 million of which 2.1 million were credit cards. The total number of cards decreased by 2.2% in 2010, but the number of credit cards decreased by 5.6% in comparison with 2009 and by 22% in comparison with 2008.

Taking into account the hardships of the economic environment, the credit card holders focused mainly on buying essential products. The average value of a transaction with credit cards has decreased by 11.6% indicating that Romanians have cut their high value expenses. In other words, they no longer buy expensive consumption goods as they used to in previous years. The business cards sector has witnessed a positive rise for all indicators, more Visa business cards have been issued (+12.5%), the number of transactions with these cards have been higher (+25.7%) and the number of the commercial transactions has increased too (+25.7%) which shows the companies' growing predisposition to use cards.

In 2011 Visa has encouraged the use of commercial cards even more by means of communication campaigns, promotions, new products and services and it will continue to expand the acceptance network for the local and central public authorities to use cards for rates and taxes payment.

Against the background of the financial crisis, the banks are looking for solutions in this respect therefore in 2010 MasterCard Europe has carried out a research on the Romanian card market which targeted the customs related to card usage among the persons over 15 years old. This research has shown the fact that in a period of crisis people are more careful with their expenses and card holders seek to fructify the advantages of these products. For example, 27% of the respondees have started searching for more information about the financial products, 13% have said that they acquit their shopping debts entirely during the grace period, 11% have searched for information about loyalty programs, 10% pay more often directly by card in order to avoid the cash withdrawal fee, and 9% have started looking for a credit card with installment payment and without any interest.

At national level, 41% of the Romanians hold a payment card whereas at urban level the card holders reach 54%. The percentages differ greatly in accordance with the educational level varying from 20% among the persons who graduated elementary school to 85% in the case of the persons with a university degree.

39% of the Romanians purchase a credit card especially if they receive an offer from the bank, 34% do this in order to always have a sum of money at their disposal and 27% in order to facilitate transactions. In choosing a certain credit card, interests and low fees matter the most for 63% of the holders and the issuing bank for 53% of them; the grace period is important for 38% of the holders and the credit limit is significant for 36% of them. The persons with a university degree are even more careful with these aspects: 78% pay attention to interests and fees, 50% to the grace period and 46% to the maximum sum available.

The Romanian market has made some important progress, 17% of the card holders saying that they pay by card for the sums over 100 RON. Out of all the credit card holders, 21% show this preference. For sums over 1000 RON, the percentages rise to 27%, respectively 32% among the credit card holders.

3. The Co-branded Card - A Solution for the Financial Crisis

In spite of the crisis which affects the banks' card portfolio, on June 7th 2011, during the NOCASH Gala for the banks' activity in 2010, the card industry awarded BRD - InstantPay a prize for "Breaking new ground in the industry of payments without cash" and the ATM money transfer service launched by Western Union in partnership with Transilvania Bank was considered "The novelty of the year".

Although the commercial banks have competed on a market affected by the financial crisis, they have achieved remarkable results such as:

- the best promotion. The BCR - RATB issuers have entered the competition with the campaign "We hold your place for a year" for the promotion of the operations of charging/recharging, the RATB transport card in the BCR network; BRD has joined the competition with the campaigns "A la carte" - "Make yourself a card as original as you", "Point Card" and "Instant Pay" - "Speed in life, super speed in payment"; The Romanian Bank with the campaign "A smart card for smart shopping"; Transilvania Bank with the campaign "Pay your local rates and taxes by card"; GarantiBank - the Bonus Card campaigns dedicated to the stimulation of the product usage and the brand consolidation on the market; Raiffeisen Bank with the campaigns "Multishop" - the program of bonuses and rates without interest and "Studentocard - A perfect choice for your lifestyle". The winner is GarantiBank for "The Bonus Card Campaign" because as a result of its promotion campaigns, in 2010 GarantiBank has registered a rise in the following domains: the card portfolio + 52%; active cards + 62%; the number of transactions + 230%; the value of transactions + 270%.

- breaking new ground in card industry. BRD - Instant Pay has developed the first application allowing the use of the contactless technology for the payment of the fare in public transport and BCR has created the possibility of recharging the active transport card directly from the Underground ATMs.

- Transilvania Bank is the best bank of the year on the card market. In 2010 the bank reached a peak in the case of the portfolio of valid cards in circulation and of the network of POS terminals. Likewise, Transilvania Bank was the most active bank in launching products and services on the market of payments without cash.

- the co-branded card remains a solution for the financial crisis, a fact proven by the competition for this product among the great banking players. Thus, Raiffeisen -Vodafone has been the most successful card and co-brand program having the following results: The number of transactions in 2010 - 1.760.000; The value of the transactions in 2010 - 220 million RON; new card accounts in 2010 - 1.100. Transilvania Bank - Rotary; BRD - ISIC and GARANTI - AVON have enjoyed a similar success.

As a consequence, banks are constantly looking for solutions and products meant to raise the clients' interest for card acquisitions in response to the already obtained crediting which has been discouraged when the financial crisis broke out.

The number of the chip cards will increase on the Romanian market due to their effectiveness as far as the security of the transactions is concerned. The same will happen in the case of the co-branded cards which ensure the clients' fidelity. These will seek to obtain as many advantages as possible from the different types of cards. At the same time, they will concentrate on the niche products, business cards either for shopping or for the payment of public services.

Romanians have started using the co-branded cards which are eventually still credits. Their number has rapidly increased to 300,000. Apparently, the banks which work with co-branded cards do not earn incredible profits because if the loan is returned in less than a month the interest rate is zero. Sooner or later, everybody may delay in payment and the bank still has some advantages: it is promoted outside its branches and it sells cards through the stores. There is a saying in the business world: "co-branded card selling means selling more and better". The tendency to use co-branded cards for ordinary payments will become more prominent as long as the dealers and the issuing bank will think of more and more benefits attached to these cards which will finally lead to an increase in the number of card transactions. In addition, banks have recently negotiated client discounts with more retailers.

The card in your wallet could be more than a payment instrument. Personalized with the user's photo, perfumed or decorated with a small mirror, your plastic card can become a true accessory. The ordinary plastic card is more attractive if it has something in addition, a reason for the holder to take it out of his wallet more often. Actually, they are payment instruments used for shopping, for the online or POS payment of rates and taxes or for the simple ATM cash withdrawal. In addition, in the case of the cards with photos, the holders' identity could be easily checked.

Moreover, with the support of the member banks, the local office of Visa Europe will try to respond to the clients' needs by launching innovatory products such as contactless cards, the cashback service or the on-line payment of rates and taxes.

4. The Aims Ensuring Banking Success in Card Management

The consecration of cards as a means of payment in Romanian economy would require achieving the following aims:

* designing and implementing an aggressive program of promoting cards as a means of payment. Short and convincing articles in the written press, suggestive TV commercials displayed several times a day as well as other actions could make both private and legal persons use cards. Everybody is aware of the fact that the success of a product is directly dependent (in a ratio of at least 70%) upon the quality and efficiency of the advertising programs. Taking into consideration the high costs in advertising, the mass-media message needs to be efficiently oriented. Advertising slogans of the type 'This card is both the future and the present" are to the detriment of the banks since no matter the authenticity of the message they send, the patterns create nothing but the idea of a dangerous uniformization of the receiver. In order to avoid such drawbacks, the bank has to clearly define its product as well as the targeted market sector. In this way, the product will be received especially by the targeted subjects and its success will be immediate.

Through advertising, the Romanian Banks will soon manage to generate a new kind of payment behavior in the Romanian economic environment.

* creating some specialized departments in the banks, departments which are meant to ensure the design, implementation and administration of an integrated program of cards. Working with cards requires specialized and unceasing efforts as well as the common results of a strictly specialized personnel exclusively dedicated to this domain (marketing, advertising, market behavioral sociology, banking methodology). In order to achieve the expected results the bank clerk working in this domain needs to pass through a strict training. Solutions such as loans or the transfer of personnel in the crediting, payments or treasury services generate nothing but a superficial approach to this domain and solutions may fail to appear due to behavioral non-involvement.

* without extolling behavioral market studies or "banking philosophy", one can assume that a favorable financial result will not appear unless the bank clerk is aware of his responsibility regarding the final outcome of his daily activity. For the development of the commercial card as well as of the co-branded card, banks need to provide a better explanation regarding the advantages of accepting cards from the way it functions to persuading the client of the advantages of accepting to pay by card. At the same time the bank needs to understand its client and think of viable arguments to determine the salesman to accept the card, to convince him that in this way he will raise his profits. Any salesman's mentality is the same: he promotes a known product which he is sure he will sell.

* laying a greater emphasis upon the quality of the products/services as well as upon the quality of the client-bank interface;

* during the period in which the clients will pay more attention to what they pay in comparison to what they receive, the long-distance electronic channels stand great chances of being promoted due to their efficiency, accuracy and low cost;

* the compensation of the interest incomes with the fees incomes is necessary. The level of card usage has to grow and the offer of services with higher added value for the client has to be completed.

* the card industry will oscillate between two approaches - either going on in an individualist manner at the level of every issuer/acceptant on the basis of bilateral agreements with partners from various domains or moving forward towards a systemic collaboration in national projects which are meant to answer the clients' main expectations (unitary payment of rates and taxes, bills, fines, health services etc.). The second approach, the one based on collaboration takes into consideration the opportunity to extent the present EMV technology (global standard for debit and credit cards based on chip technology) with contact to the contactless one which can tackle the problem of public transport as well as all the applications for payments of small value which require a high execution speed. [2]

The banking affairs with cards in general and co-branded cards in particular have a huge potential for making a profit in the case of those banks which get involved in the design and administration of some card integrated programs. Taking into account the constant concern of the Romanian banks in the modernization of their activities and the adoption of global operating techniques at the average level of payments in our country, the card payments will definitely become an ordinary reality in a short while. The Romanian card market has recently witnessed a two-digit rise being one of the most active markets in the region in the case of all its components: card issue, the dynamics of the installment of new POS and ATM terminals, the number of payment transactions and cash withdrawal. Even if the first cards have been issued in our country approximately 14 years ago, the behavior of the card holders is characteristic of an emerging market since 12.5% of the transactions are commercial ones (the rest represent ATM cash withdrawal).

Conclusions

The period in which any actor present on the market used to have rapid and consistent results on the basis of classic recipes draws to an end. Only those who manage to combine quality with price, technology with efficiency and imagination with speed of implementation will survive.

The permanent monitoring of the market and the continuous adaptation to various conditions will become a necessity. The present customer is more exigent, more educated and less tolerant in his/her relationship with any kind of suppliers and especially with those providing financial services.

References

References:

[1] Vechiu, C. (coord.), (2009), Management §i tehnici bancare, Independent Economicä Publishing House, Pitesti

[2] Moga, L.M., (coord.), (2011), Serviciile bancare electronice în România, ASE Publishing House, Bucharest

[3] www.nocash.info.ro/2011/06/banca-transilvania-este-banca-anului-pe-piata-cardurilor

[4] www.wall-street.ro/articol/Finante-Banci/55701/Piata-cardurilor-in-2008-Evolutie-si-tendinte.html

[5] www.nocash.info.ro/about/

[6] www.bnr.ro/Raport-statistic-606.aspx