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Timothy Kolk(603) [email protected]
2019ONLINE CARD SCHOOL
Session #2
Calculating Card Program Πability(& Using It)
June 2019
TRK ADVISORS
2TRK ADVISORS
The Online Card School Purpose
• Provide market and competitive information
• Build critical management skills
• Share proven approaches to growth & profitability
• Develop competitive products you can be proud of
• Help you prove your program’s value to the credit union, your members, and your own sense of living a life fully realized.
CO-OP Financial ServicesStrategic Vision: Your Growth Is Our Growth
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Integration
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New Tools
Consultation
Business Intelligence
Reporting
4TRK ADVISORS
Webinars, Documents & Access
• Live webinars are open to all
• Need to be a CO‐OP or TRK Advisors client to receive Access to this year’s recordings Log‐in to library of past sessions (3 year cycle) Downloads of presentation documents
• To register for access: Go to www.onlinecardschool.com Register via the “Learn More Today” area Enter the CO‐OP promotional code (or leave a related note in the
“Message” input)
• Not a CO‐OP client? Well, let that be a lesson to you!
5TRK ADVISORS
2018 Sessions (Recordings On‐Line)
#1 CARD MARKET OVERVIEW
#2 DESIGNING PROGRAM REPORTINGFOR SUCCESS
#3 BUILDING YOUR ANNUAL CARDACTION PLAN (MORE THAN ABUDGET)
#4 LOOKING AHEAD TO 2019: WHAT’S NEXT?
6TRK ADVISORS
2019 Sessions
Apr 10 CARD MARKET OVERVIEW
June 30 CALCULATING PROGRAMPROFITABILITY (& USING IT)
Sept 5 MAPPING PRODUCTS TOMEMBER EXPECTATIONS
Oct 17 MATCHING PRICING & PRODUCT VALUE TO RISKLEVELS
7TRK ADVISORS
What We Covered Last Session
1. Market has reached record levels• Credit unions overall are doing well. Again.• BUT: half shrank & 80% grew at < market rates
2. Credit losses are creeping up• CU rates now at all‐time high except for recession
3. Prime increases since 2015 (+225bp) have fueled increasing revenues. Move to Signature has fueled revenues. Rewards and promos have fueled expenses.
4. Innovation is creeping, but relentless: data access & delivery, mobile tools and features, contactless a focus…
Q1 UpdateBalances ‐1% from Dec. (typical)
Balances +8% from yr prior
Q1 UpdateNCL Q1 = 3.1%Banks = 3.8%
Gap = 70bp…closing!
8TRK ADVISORS
Quick Conference Season Highlights1. Evolution of Rewards Approaches
Cobrand (1990s) General (2000s) Relationship (now)
2. Things We Know, But Need to Keep SayingCard switchers in last year: 47% due to better rewards (JD Powers)68% said rewards most important feature, up from 59% year prior (TSYS)
3. What Types of Rewards:Cash: 30% favor, with 24% of these redeeming at least once per month.Miles: 25% of super prime favors this, scaling down to 10% in sub primeNone: 10% of super prime, 20% of prime, 30% of near, 40% of sub prime
4. Experience: 65% of digital users use mobile tools with their FIRush is on for Younger Cardholders
World Cards: $10 credit for every 5th Lyft Ride, $5 for every two movie tix (Fandango), mobile phone coverageVisa: Visa Next platform allowing mobile wallets to create digital accounts on demand direct to wallets
Citibank adding card rewards to checking accounts.
9TRK ADVISORS
THIS SESSION: PROFITABILITY
Understanding It
Calculating It
Using it for a Purpose
(It’s gonna be a bit of a grind)
10TRK ADVISORS
Why This is Particularly Timely
• Some of our good luck seems to be losing steam: rate increases appear to have paused (or worse), cost of funds catching up, credit losses creeping up…
• The 1‐in‐2 credit unions who are not growing tend to be caught with no plan, so they can’t prioritize or invest.
• Recessions happen. We are closer than we used to be to the next one. Bad decisions happen if not prepared.
• Updating rewards and promotional offers feels expensive, unless you have the right context.
• Planning season will be here VERY soon. Be ready!
On to the Math
Card Program Profitability
11TRK ADVISORS
Nuts & Bolts Day: Building a P&L• Data sources
• Suggested structure
• Building it line by line
• Breaking out by product…and more
• Using it to maximize balance priorities in your program
12TRK ADVISORS
Having a Reliable P&L Is Invaluable
• Full Service: Most Common, Standard Reporting₋ FDR Based (COOP, PSCU, WorldPay, ...): CM‐051 Report₋ FIS Based (FIS, LSC, …): Executive Report ₋ TSYS: Unusual for credit unions
• In‐House: Must produce internally₋ IT Resources should produce monthly ‘portfolio report’₋ More work (you didn’t go in‐house only to save money, did you?)₋ Better access to info for follow up if needed (generally)
• Both: A few other internal pieces (CFO‐type stuff)₋ Cost of Funds₋ Reward Accrual Formula (many are not conservative enough)₋ Recoveries₋ Expense Elements
13TRK ADVISORS
Data Sources: Depends on Processing
14TRK ADVISORS
THE FDR SYSTEM: CM‐051
Several Sections: Looks Like This
Single Page: Looks Like This
15TRK ADVISORS
FIS: Executive Report
16TRK ADVISORS
IN‐HOUSE: IT’S UP TO YOUHere is the (minimum) data you need:
Prod 1 Prod 2 Prod 3 TotalBalances
Month-endRevolving$ in Promo RateCredit Lines
AccountsTotal On FileOpenGross ActiveDebit ActiveNew
ActivityPurchase #Purchase $Cash Advance #Cash Advance $BT #BT $
Prod 1 Prod 2 Prod 3 TotalRisk
Charge-off #Charge-off $Recovery $Fraud ## 60+ DQ$ 60+ DQ
RevenuesFinance ChargesLate FeesOther Fees
Payments# Paid in Full$ Paid in Full# Min Pay$ Min Pay# All Else$ All Else
Get this produced every month.
Suggested P&L Structure&
Building it Line by Line
17TRK ADVISORS
• Accurate representation of program contribution
• Easy to understand and process (Sr Mgt)
• Logical flow showing interactions between the pieces (educational tool!)
• Identify areas for further exploration
• Facilitate priority/strategy discussions. Keep discussions on the rails.
18TRK ADVISORS
Purpose of a Profit & Loss Statement
Part 1: Portfolio InformationTRK Federal Credit Union Portfolio Note:Key Metrics
All Balances 10,000,000$ All the $ owed (typically at month end)Revolving Balances 7,350,000$ FDR System Reports this; FIS does not.Revolve Rate (% paying interest) 73.5% Revolving Balances / All BalancesPurchase $ (net) 28,000,000$ Year-to-date total purchase $ (not one month)
Total Lines 44,000,000$ All credit lines availableUnused Lines 34,000,000$ Total Credit Lines - All BalancesUtilization % 22.7% Balances / Credit Lines
Total Accounts 5,400 Clean up your files: purge 'dead' accountsActive Accounts 3,800 Use a consistent definitionActive % 70.4% Active / Total AccountsNew Accounts 275 Definitely track this!
Average Balance / Active 2,632$ Total Balances / Active AccountsAverage Purchase $ / Active 7,368$ Total Purchases / Active Accounts
30+ Days DQ ($) 80,000$ 2+ Cycles past due ($)30+ Days DQ (%) 0.8% 30 Day DQ $ / Total Balances
19TRK ADVISORS
Suggested Report Structure
• Most are pretty straightforward
• Some choose to track multiple definitions of ‘active’. I generally leave that to deeper analysis if needed.
• FDR system separates delinquencies into 2 groups: ₋ DQ (D Status) &₋ Overlimit DQ (X Status).₋ Add them together.
• Lots of ‘artifacts’ here from the past: Supermarket sales?Warehouse sales?Weird!
20TRK ADVISORS
Where To Find It: FDR System
21TRK ADVISORS
Where To Find It: FDR System (cont.)• Remember to look for the monthly figures, not YTD or prior three months
• You’ll be surprised how quickly you learn exactly where to look
• Data entry favors the bold.
• Some also track cash volume (though on FDR this can include BTs)
• Some also track statused accounts. I generally leave that to deeper analysis if needed.
}
This is interesting but not for today. Track over time.
22TRK ADVISORS
Where To Find It: FDR System (cont.)
This is interesting (though not as interesting as FDR equivalent) but not for today. Track over time.
OR
23TRK ADVISORS
Where To Find It: FIS System
• FIS provides less information in its standard reporting
• Definitions a little different than FDR. That’s ok.
• Make sure to net out returns in sales volume metrics
TRK Federal Credit Union Portfolio Note:Key Metrics
All Balances 10,000,000$ All the $ owed (typically at month end)Revolving Balances 7,350,000$ FDR System Reports this; FIS does not.Revolve Rate (% paying interest) 73.5% Revolving Balances / All BalancesPurchase $ (net) 28,000,000$ Year-to-date total purchase $ (not one month)
Total Lines 44,000,000$ All credit lines availableUnused Lines 34,000,000$ Total Credit Lines - All BalancesUtilization % 22.7% Balances / Credit Lines
Total Accounts 5,400 Clean up your files: purge 'dead' accountsActive Accounts 3,800 Use a consistent definitionActive % 70.4% Active / Total AccountsNew Accounts 275 Definitely track this!
Average Balance / Active 2,632$ Total Balances / Active AccountsAverage Purchase $ / Active 7,368$ Total Purchases / Active Accounts
30+ Days DQ ($) 80,000$ 2+ Cycles past due ($)30+ Days DQ (%) 0.8% 30 Day DQ $ / Total Balances
24TRK ADVISORS
That Gets You To Here (or similar)
P&L Items Year-to-Date Note:($ Basis)
Interest Income 1,010,750$ Direct from processor report. Actual interest billedCost of Funds (100,000) From CFO. Average cost of liabilities (5300 Report)Net Interest Income 910,750 Calculated
Gross Charge-offs (290,000) Maybe from Processor Report. Check against 5300 ReportFraud (14,000) Maybe from Processor Report. Maybe collected internallyRecoveries (est*) 20,000 Certainly an internal figure. Check against 5300 Report.Net Charge-offs (284,000) Calculated
Interchange 520,000 May be a processor report available. Also available internallyAssociation Fees (33,600) % of purchase $, use average for year (Op Cert.)Reward Expense (258,000) ACCRUAL BASIS!!! Cost per point x Redemption RateNet Interchange 228,400 Calculated
Fees 36,000 Direct from processor report
Processing Expense (285,000) Invoiced (put marketing functions in below line)Marketing Expense (19,000) Combination of processor invoice items & other internalInternal Expense (190,000) Internal support, work with CFO. Think of as "per active"Net Income 397,150$ The punch line!
25TRK ADVISORS
Now: To Profitability ($ first)
• We don’t normally care whether interest is coming from cash or purchase balances
• You can report fee lines separately if you want. If you have a card with an annual fee that makes sense (I kinda hope you don’t)
• Credit life fees are a bit different, but also not common
26TRK ADVISORS
Where To Find It: FDR System
27TRK ADVISORS
Where To Find It: FDR System (cont.)
• Charge‐offs are generally reported after reversing interest income.• Some also track the # charged‐off. This can be useful if charge‐off rates are increasing.• “What about interchange?” you ask. Because you are smart. It’s on the CM‐995 Report (by product).
• There is a line for fraud, but seldom used.
• Some report fraud as a separate line. Some bundle it with charge‐offs.
• FIS does you the favor of reporting interchange as a line item.
28TRK ADVISORS
Where To Find It: FIS System
Add in ROA• ROA is simply the $ value divided by the portfolio balance.
• Remember to annualize! (e.g. June $ is only ½ year: multiply ROA calc by 2).
• Allows demonstration of raw bottom line and product return rate
• Data points often needed from internal sources:– Cost of funds (make friends with CFO)– Association fees (usually about 12bp of purchase volume)
– Fraud– Expense lines
• Brand incentives: net to expenses or separate line. But don’t forget them!
P&L Items: YTD $ Basis ROA
Interest Income 1,010,750$ 10.1%Cost of Funds (100,000) -1.0%Net Interest Income 910,750 9.1%
Gross Charge-offs (290,000) -2.9%Fraud (14,000) -0.1%Recoveries (est*) 20,000 0.2%Net Charge-offs (284,000) -2.8%
Interchange 520,000 5.2%Association Fees (33,600) -0.3%Reward Expense (258,000) -2.6%Net Interchange 228,400 2.3%
Fees 36,000 0.4%
Processing Expense (285,000) -2.9%Marketing Expense (19,000) -0.2%Internal Expense (190,000) -1.9%Net Income 397,150$ 4.0%
29TRK ADVISORS
Now That We Have All The $s
• Why APR does not equal Yield
• The stronger your rewards, the lower the revolve rate tends to be.
• Do not assume new accounts will behave like older accounts
• But always revolvers, even in rewards30TRK ADVISORS
Quick Aside: APR‐to‐Yield
TRK FCU Low Rate Signature BusinessAPR to Yield
Average APR 12.5% 14.5% 14.5%x Revolve rate 92% 67% 60%= Yield 11.5% 9.7% 8.7%
• Processor Invoice: Simple enough (credit portion only!)
• Marketing expenses: Third party & out‐of‐pocket should be easy enough. Internal allocations generally not included here.
• Internal: The Tricky Part!– Really should do full cost studies every 3 years– Can use other available data (e.g. Raddon, but be careful)– Most ‘quick’ internal calculations are very much undercounting
(better to be seen as conservative/objective)
• The Shortcut: Processor and Internal Expenses set to a total of $125 per Active Account per year (“deannualize” accordingly mid‐year).
31TRK ADVISORS
A Word About Expenses
• Processor Invoice: Simple enough (credit portion only!)
• Marketing expenses: Third party & out‐of‐pocket should be easy enough. Internal allocations generally not included here.
• Internal: The Tricky Part!– Really should do full cost studies every 3 years– Can use other available data (e.g. Raddon, but be careful)– Most ‘quick’ internal calculations are very much undercounting
(better to be seen as conservative/objective)
• The Shortcut: Processor and Internal Expenses set to a total of $125 per Active Account per year (“deannualize” accordingly mid‐year).
The importance of Balance per Account
If Operating Expenses = $125 per year per active account:
If Account Balance is $1,750 this is 7.1% of balancesIf Account Balance is $2,500 this is 5.0% of balancesIf Account Balance is $4,000 this is 3.1% of balances
This difference goes straight to ROA performance
32TRK ADVISORS
A Word About Expenses
Now, Where You Really Need to Be…
33TRK ADVISORS
P&L Items Low Rate Signature Business Total Low Rate Signature Business($ Basis)
Interest Income 343,750$ 580,000$ 87,000$ 1,010,750$ 11.5% 9.7% 8.7%Cost of Funds (30,000) (60,000) (10,000) (100,000) -1.0% -1.0% -1.0%Net Interest Income 313,750 520,000 77,000 910,750 10.5% 8.7% 7.7%
Gross Charge-offs (120,000) (150,000) (20,000) (290,000) -4.0% -2.5% -2.0%Fraud (2,000) (10,000) (2,000) (14,000) -0.1% -0.2% -0.2%Recoveries 6,000 12,000 2,000 20,000 0.2% 0.2% 0.2%Net Charge-offs (116,000) (148,000) (20,000) (284,000) -3.9% -2.5% -2.0%
Interchange 66,000 370,000 84,000 520,000 2.2% 6.2% 8.4%Association Fees (4,800) (24,000) (4,800) (33,600) -0.2% -0.4% -0.5%Reward Expense - (210,000) (48,000) (258,000) 0.0% -3.5% -4.8%Net Interchange 61,200 136,000 31,200 228,400 2.0% 2.3% 3.1%
Fees 15,000 18,000 3,000 36,000 0.5% 0.3% 0.3%
Processing Expense (75,000) (187,500) (22,500) (285,000) -2.5% -3.1% -2.3%Marketing Expense (5,000) (12,500) (1,500) (19,000) -0.2% -0.2% -0.2%Internal Expense (50,000) (125,000) (15,000) (190,000) -1.7% -2.1% -1.5%Net Income 143,950$ 201,000$ 52,200$ 397,150$ 4.8% 3.4% 5.2%
34TRK ADVISORS
Expand To Separate Products (cont.)
Need to think of each card type as a separate product.
TRK FCU 2016 2017 2018 2019Key Metrics
All Balances 9,000,000$ 9,250,000$ 9,500,000$ 10,000,000$ Revolving Balances 7,380,000$ 7,307,500$ 7,267,500$ 7,350,000$ Revolve Rate 82.0% 79.0% 76.5% 73.5%Purchase $ (net) 20,000,000$ 22,000,000$ 25,000,000$ 28,000,000$
Total Lines 30,000,000$ 33,000,000$ 37,000,000$ 44,000,000$ Unused Lines 21,000,000$ 23,750,000$ 27,500,000$ 34,000,000$ Utilization % 30.0% 28.0% 25.7% 22.7%
Total Accounts 4,750 5,000 5,200 5,400 Active Accounts 3,500 3,600 3,700 3,800 Active % 73.7% 72.0% 71.2% 70.4%New Accounts 180 200 245 275
Average Bal. / Active 2,571$ 2,569$ 2,568$ 2,632$ Average Purch $ / Activ 5,714$ 6,111$ 6,757$ 7,368$
30+ Days DQ ($) 68,000$ 72,500$ 75,000$ 80,000$ 30+ Days DQ (%) 0.8% 0.8% 0.8% 0.8%
35TRK ADVISORS
Year‐over‐Year Changes Matter
P&L Items 2016 2017 2018 2019 2016 2017 2018 2019($ Basis)
Interest Income 792,000$ 851,000$ 902,500$ 1,010,750$ 8.8% 9.2% 9.5% 10.1%Cost of Funds (36,000) (55,500) (76,000) (100,000) -0.4% -0.6% -0.8% -1.0%Net Interest Income 756,000 795,500 826,500 910,750 8.4% 8.6% 8.7% 9.1%
Gross Charge-offs (189,000) (212,750) (237,500) (290,000) -2.1% -2.3% -2.5% -2.9%Fraud (10,000) (11,000) (12,500) (14,000) -0.1% -0.1% -0.1% -0.1%Recoveries 18,000 18,500 19,000 20,000 0.2% 0.2% 0.2% 0.2%Net Charge-offs (181,000) (205,250) (231,000) (284,000) -2.0% -2.2% -2.4% -2.8%
Interchange 371,429 408,571 464,286 520,000 4.1% 4.4% 4.9% 5.2%Association Fees (24,000) (26,400) (30,000) (33,600) -0.3% -0.3% -0.3% -0.3%Reward Expense (134,344) (164,199) (207,321) (258,000) -1.5% -1.8% -2.2% -2.6%Net Interchange 213,084 217,973 226,964 228,400 2.4% 2.4% 2.4% 2.3%
Fees 32,400 33,300 34,200 36,000 0.4% 0.4% 0.4% 0.4%
Processing Expense (262,500) (270,000) (277,500) (285,000) -2.9% -2.9% -2.9% -2.9%Marketing Expense (17,500) (18,000) (18,500) (19,000) -0.2% -0.2% -0.2% -0.2%Internal Expense (175,000) (180,000) (185,000) (190,000) -1.9% -1.9% -1.9% -1.9%Net Income 365,484$ 373,523$ 375,664$ 397,150$ 4.1% 4.0% 4.0% 4.0%
36TRK ADVISORS
Year‐over‐Year Changes Matter
Other Potential Views• By vintage (by age of account): see if new accounts are
performing as well as old accounts
• By member segment: many different strategies out there, match to yours
• By member age: Millennials are critical, how do they perform once you have them?
• By state: multi‐state clients see important differences
• Deep vs. limited relationship cardholders
(Finally, a place where In‐House processing helps!)37TRK ADVISORS
How To Be The Teacher’s Pet
• Picture a single Excel tab to house all data
• Sections for each product with rollup at the bottom for portfolio total
• Each section has all the data lines going down the left side of the page
• Data only, no formulas on this page!
• Months across the top. Best to have at least 2+ years trailing
• MUCH better to input data in one sheet and use it to populate reports than hard code into reports.
38TRK ADVISORS
Sound Model Building Tips
39TRK ADVISORS
Picture ThisJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Low Rate ProductBalancesRevolving BalancesTotal AccountsActive AccountsPurchase $……
Reward ProductBalancesRevolving BalancesTotal AccountsActive AccountsPurchase $……
Signature/WorldBalancesRevolving BalancesTotal AccountsActive AccountsPurchase $……
Business CardBalancesRevolving BalancesTotal AccountsActive AccountsPurchase $……
Total PortfolioBalancesRevolving BalancesTotal AccountsActive AccountsPurchase $……
2018 2019
How It Helps You Manage• Identify changes in cardholder behavior over time
• Identify and dimension opportunities (e.g. inactive accts)
• Differentiate by product, focus activities, save $
• Analyze marketing effort results on key drivers
• The data set is a great tool for quick ad hoc analysis
• Show what you contribute, fix if needed
• Anchor conversations around reward value in FACTS
• Stop vague, ill‐sourced impressions from derailing what is needed. Support a choice based on facts and priorities!
40TRK ADVISORS
More Than Just Counting
• Average CU ROA in 2018 = 1.0%.
• Example credit union: Card is 5% of assets with 6% ROA
• A little algebra: What is the CU ROA without card?(5.0% of assets x 6.0% ROA) + (95% of assets x ? %) = 1.0%, or
95% of assets x __% = 1.0% ‐ (5.0% x 6.0%) or
? % = 1.0% ‐ (5.0% x 6.0%)95%
The answer is 0.74%. Without card CU ROA = 0.74%.
• Card is 26% of all earnings, despite being 5% of assets.
41TRK ADVISORS
The Punch Line! My favorite part!
DO MORE CARD!
42TRK ADVISORS
2019 Online Card School
April 10 CARD MARKET OVERVIEW
June 20 CALCULATING PROGRAMPROFITABILITY (& USING IT)
Sept 5 MAPPING PRODUCTS TOMEMBERSHIP EXPECTATIONS
Oct 17 MATCHING PRICING & PRODUCT VALUE TO RISKLEVELS
CO‐OP Clients 3 Year LibraryAll Slides
All Recordings
Live Sessions Open to All
43TRK ADVISORS
THANK YOU