Optimizing the cardholder lifecycle part 4: Retention

Key Takeaways

  • To retain customers as their needs and life situations evolve, banks must assemble their data and leverage their mobile apps to deliver personalized experiences at scale.
  • Proactively addressing credit card misalignment before it results in churn will lead to lower costs rather than addressing it reactively, after a customer has already defected to a competitor.
  • Banks should reinforce credit card alignment by communicating card value propositions via personalized experiences. 
  • Banks should use risk profile data to intelligently target customer segments showing symptoms of financial stress who may be tempted away by balance transfer offers or other competitor incentives. 
Acquiring a new customer is up to 25 times as expensive as retaining an existing one, according to Harvard Business Review. That makes the fourth and final phase of the cardholder lifecycle, retention, extremely important to banks. By reinforcing card value proposition and proactively addressing potential causes of churn, banks can reduce their costs while also building loyalty.
However, many banks struggle to communicate meaningfully with customers at this stage. Hampered by a reliance on expensive third-party channels like paid ads and flyers, they’re ill-equipped to personalize messaging at scale. Lacking the ability to assemble data and intervene in real time through digital channels, they also may not be able to act quickly enough to prevent customers from defecting to competitors.

There is a better way. By leveraging bank-owned, high-touch channels such as a mobile app, banks can deliver personalized experiences that nudge at-risk customers towards maintaining their banking relationship. In particular, banks can address two major causes of churn, credit card misalignment and economic stresses, proactively and effectively.


Addressing misalignment by leveraging data assets

Around one-fifth of Americans have a credit card with rewards and fee structures that are misaligned with their needs. This is a major problem for banks. Customers with misaligned cards spend 24% less per month and are also more likely to switch cards than customers with well-aligned cards, according to JD Power & Associates. 
Misalignment also results in wasted marketing spend. Customers with the wrong card are unlikely to see value in using it, no matter how much banks encourage them with incentives and offers.

Unfortunately, most banks aren’t equipped to address misalignment proactively and effectively. Instead, they respond reactively after noticing signs that a customer has already acquired a new card from a competitor. These red flags include: 

  • Redeeming points in bulk and/or paying down a revolving balance, signaling the customer is preparing to cancel the card.
  • Decreasing average spend and/or a long period of disuse, signaling the customer is shifting spend to another card.
  • Ending recurring payments and/or taking the card off file, signaling that another card is being used for those purposes instead. 
Tempting a customer back at this stage is difficult and, therefore, expensive. Banks can save resources by fighting misalignment proactively. First, banks should reinforce alignment where it already exists via non-interruptive channels like a mobile app. By clearly and regularly communicating benefits, fee structure, and redemption opportunities within a context where customers are already thinking about banking, banks can build trust and ensure customers understand how to get the most out of their card.
Second, as discussed in last week’s blog post on usage, banks should intelligently target customers based on their unique situations to address signs of misalignment before they lead to churn. For example, if a customer has a travel rewards card but rarely spends on travel, the bank could offer a different card better suited to their needs. 

Low rewards redemption and compartmentalization (spending limited to just a few categories) are other leading indicators of impending misalignment a bank should look out for.


Using contextual credit card retention offers to avoid and/or address misalignment

  1. Use renewal as an opportunity to reinforce alignment. The period right before an annual fee comes due is a great time to remind customers of the perks associated with their card and let them know about any contextually relevant offers coming up. For example, a customer who travels regularly and whose annual fee comes due in March might be interested to know that they’ll receive a discount on rooms booked at a particular hotel chain for all of April.
  2. Proactively address signs of misalignment by upselling where appropriate. If a customer’s needs have evolved so they no longer align with their current card, that’s a perfect opportunity for the bank to upsell a better-fit card with a personalized offer. For example, a customer who once used their basic card frequently has stopped using it for anything but big-ticket retail purchases. Their bank initially responds with campaigns to diversify spend categories, but the customer doesn’t act on incentives to use their card for gas, travel, or groceries. That might be a sign that the customer needs additional incentives, such as cash back rewards, to put the card in everyday use. When they’re at home with time to focus, their bank can send them an offer for a cash-back rewards card with a tailored sign-up incentive such as a discount on their next purchase at a grocery store near their house.
  3. Reactively address signs of misalignment. Even if a bank doesn’t detect signs of misalignment in time, it can still use personalized offers to attempt to win the customer back. For example, a customer has their first child — a life change that the bank detects via their increased spend on baby products. Now that the customer has more expenses, their high-interest-rate credit card no longer suits them, and they begin paying down their balance in preparation to take their spending elsewhere. Detecting this trend, a bank can send this customer an offer for a balance transfer to a credit card with a lower interest rate. Ideally, the offer would be timed to when they are home and stationary — an ideal situation to think the offer over and potentially discuss it with a spouse.

Incorporating risk profiles into customer retention strategies

Credit cards involve some additional risk for banks because they’re the last financial product most customers will make payments on during times of financial duress. Usually, customers will prioritize mortgages, car payments, and other obligations necessary to keep major assets. 
In addition, while high interest rates are an important source of income for banks, they can also increase the risk of churn. Customers who carry a revolving balance are easily tempted by a balance-transfer offer from another bank — or they may pay down their card and shift spending to a competitor’s card with lower rates.
Banks’ risk departments already track red flags that show when a customer is overextended. By sharing this information with the cards department and using them to intelligently target audiences, banks can also use these insights to increase customer retention. If a customer has a high score on the risk index — signaling they are likely to be under financial pressure — banks can take action to encourage less risky behavior and reduce the risk of churn if the customer is worth keeping.
For example, a customer has had to pay late fees two months in a row and has shown a 50% increase in the balance he carries over, increasing his risk profile score. The bank might offer a term loan or a balance transfer onto a card with lower rates. 
Or it might simply send financial advice and bill payment reminders, while disenrolling the customer from campaigns that encourage more spending. Either way, the bank helps mitigate risk of attrition and helps the customer regain their financial health at the same time.

A widespread impact

The impact of a successful cardholder retention strategy will be felt across the bank. As I mentioned in the first post in this series, about acquisition, successful relationship-building by the payments group has a trickle-down effect to other lines of business (LoBs), as primary-card customers are more receptive to cross-selling. Banks that leverage their owned channels to deliver personalized experiences at the retention phase will build loyalty and stickiness among credit card customers — and they’ll also lift overall bank revenues. 

Want more tips on how to optimize the cardholder lifecycle? Download our free ebook.

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