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Card Regulations Add Strain to Issuers: Finding New Revenue Will Require Innovative Marketing and Risk Management Analytics, Says Diamond Management and Technology Consultants

Complying with CARD Act, New Regulations, Will Cost Credit Card Companies Millions, Forcing Cost-Cutting that Will Affect Popular Consumer Programs

6.25.2009

Download Managing Revenue and Risk post-CARD: Strategic Alternatives for Card Issuers white paper (224 KB PDF)

CHICAGO, June 25, 2009 -- Credit card issuers, already scrambling to comply with the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act and facing the risk of daily $1 million fines for non-compliance, must confront an even tougher question: "Where will the revenue come from?"

According to financial services industry experts at Diamond Management & Technology Consultants, Inc. (NASDAQ: DTPI), new credit card regulations will put additional strain on the profitability of banks and other companies that issue credit cards. In 2008, net income for the top 11 card issuers declined by almost 67%, according to the Nilson Report. The industry charge-off rate for the top 50 issuers is nearing 10%.

Large credit card issuers are already investing tens of millions of dollars to revamp computer systems and change processes in advance of the February 2010 deadline for the CARD Act provisions. Instead of just spending to meet legal requirements, Diamond is advising its clients to view the new rules as an opportunity to sustain profitability.

"Improving customer segmentation and other analytical capabilities can uncover as much as 20% of new revenue from an issuer's existing customer base, without increasing customer churn," says Andrew Dye, a partner in Diamond's Financial Services practice. "In fact every aspect of credit card operations will be affected to various degrees by new credit card regulations. The CEO, the chief information officer, chief marketing officer, and head of underwriting must work together on executing a strategy that complies with new regulations and strengthens their franchise to compete in this new era."

"The annual revenue that card issuers earn from interest revenue and penalties could decline as much as 15% in 2010 and beyond," Dye predicts. "Some card issuers will cope by blindly cutting costs, which means that some reward programs will be abandoned, and cash-back programs will be reconsidered."

"But we think issuers need to respond more strategically to attract and retain the right customers and replace lost revenues," Dye said. "Those issuers that have powerful new marketing and risk management capabilities will be profitability leaders by making the needed adjustments to their products and their portfolio."

To read a complete report from Diamond, send an email to CARDact@diamondconsultants.com.

Behind the Scenes

"Card issuers need to know the total value of each customer if they hope to make better risk and pricing decisions," said Michael Heindl, a partner in Diamond's Financial Services practice. "We are going to see some major shifts in the issuers' customer portfolios and possibly some major changes to what cards consumers carry."

Diamond's Heindl points to five key success factors as card issuers adapt to the new regulatory environment.

• Rethink the ways revenue is created and reexamine the operations and technology foundation that issuers rely on to run the business and manage risks.

• Couple deadline-driven compliance with a longer-term view toward a better business design for competing within the constraints of the new regulations.

• Create an information advantage. With better information analytics capabilities issuers can, for example, improve the design, pricing, and marketing of their products.

• Increase market agility by developing the ability to test new products, monitor consumer attitudes, and roll out promising new products quickly.

• Coordinate across departments. Since every link in the issuer value chain—from product development to delinquency management—will be affected by new regulations, high-level project management oversight is essential.

"The CARD Act is changing the rules in an industry that has operated in much the same way for decades," says Heindl. "It's too early to predict all the implications for consumers, but one thing is certain: credit card issuers who learn to adapt quickly will lead the market."

About Diamond

Diamond is a management and technology consulting firm. Recognizing that information and technology shape market dynamics, Diamond's small teams of experts work across functional and organizational boundaries to improve growth and profitability. Since the greatest value in a strategy, and its highest risk, resides in its implementation, Diamond also provides proven execution capabilities. We deliver three critical elements to every project: fact-based objectivity, spirited collaboration, and sustainable results. Diamond is headquartered in Chicago, with offices in New York, Washington, D.C., Hartford, London and Mumbai. Diamond is publicly traded on the Nasdaq Global Select Market under the symbol "DTPI." To learn more visit www.diamondconsultants.com.

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