Financial institutions which issue credit are in the business of making profits.  On one hand, they make their profits through the annual fees for the credit cards, the use fees that they impose on the merchants for the charges and the interest charges that the users incur.  On the other hand, they lose money when users default on their account and when people do not use the cards enough to cover the costs of operation.  To maximize profit, the financial institutions use strategies to

• tighten the screen to grant credit
• restrict/securitize the credit line
• stimulate usage

Towards these ends, they can take effective actions at

• identifying good credit prospects
• designing effective campaigns to solicit these prospects
• applying effective credit screens on applicants
• setting correct levels of  annual fee
• setting competitive interesting rates
• stimulate frequent usage
• stimulate higher charge amounts
• implement retention programs to prevent defection
• implement effective collection programs for delinquent accounts

There are literally hundreds of features that they can offer --- waived annual fees, affiliations with various organizations and causes, reward/rebate programs, sweepstakes, extended grace periods, frequent flyer mileage, fixed and variable interest rates, contributions to charity organizations, reduced interest rates for balance transfers from other cards, discounts from retail partners, concierge services, instant approval for increased credit limits, fraud detection services, credit card registry, additional cards for family members, life insurance, health/medical insurance, cash advances, traveler's checks, cheap basic no-frilled services, super-premium services, internet access to account information, etc.  This wealth of tools does not mean that the work is any easier, since there are many conflicting objectives and consequences.  For example, restricting the granting of credit results in a smaller customer base, thus leading to higher operating cost per head; and increasing the interest rate discourages usage and encourages defection.  So how these tools should be applied depends largely on consumer behavior.

We will present some survey data from the TGI Argentina study, a survey of 6,351 persons between the ages of 12 and 75 in Argentina.  This survey was conducted by IBOPE Argentina in 1999.  Within this sample, there were 971 credit card holders who were between the ages of 20 and 75.  We are interested in the attitudes and behaviors of these people with respect to their finances.  In the following table, we show the percentages among them who completely agree with a series of statements about personal finance.

% Completely Agree with Statements about Personal Finance
(Base: Credit Card Holders in Argentina between the ages of 20 and 75)

(Source: TGI Argentina, IBOPE Argentina)

We took these responses and divided these people into two cluster groups by the method of K-means clustering.  This construction results in the partitioning of the principal shoppers into two mutually exclusive and exhaustive groups, such that the answers within each group are similar and the answers between groups are dissimilar.  As a result, we were able to show that the population of credit card holders were heterogeneous in terms of their attitudes and behaviors for personal finance.  In the next table, we show how these two groups of people differ on these statements.  For convenience of interpretation, we present the index statistic, which is defined as 100 times the ratio of the percentage of those who completely agree in the group divided by the percentage of those who completely agree in the base population.  Thus, an index of greater than 100 means there is a higher percentage of agreement within the group.

Indices of Completely Agree with Statements about Personal Finance by two cluster groups
(Base: Credit Card Holders in Argentina between the ages of 20 and 75)

(Source: TGI Argentina, IBOPE Argentina)

From the perspective of reducing the loss due to charge-offs on bad debt, one would like to have customers who are knowledgeable about financial matters, financially secure, adept and responsible at managing their money.  That would be what the second group represents.  Unfortunately, from the perspective of generating revenue, this group may not be the ideal customers since they are fiscally conservative, risk-aversive and reluctant to assume debt.  It is therefore important to have concerted programs in place to stimulate credit card usage by them. 

In a two-cluster segmentation, one group is the opposite of the other.  In this case, the first group is therefore the opposite of the second group by being financially insecure and undisciplined at money management.  But that does not make them bad customers to be cut off automatically.  Rather, their high risks can be managed with a system of procedures such as secured credit lines, higher interest rates and so on.

In this short discussion, we have presented a simple two-group segmentation of the credit card population in Argentina.  There are in fact many more ways of segmenting the population.  Among all industries, the credit card business is probably the one with the most analytical information available --- by right, a credit grantor can demand personal ,business and past credit information at the time of application; over time, the credit card company will have accumulated a detailed history of usage on the users; and, furthermore, credit card company have databases of large numbers of consumers to provide historical baselines for comparison.  How such information is used profitably is what distinguishes successful credit card companies from the others.

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(posted by Roland Soong on 3/11/00)

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