News & Views - Savantor

Dormancy - A Problem or an Opportunity?

Saturday, 01 January 2005

Article by Geoffrey Down, Managing Director, Savantor Limited


The ever changing nature of the credit card market has highlighted a new challenge for all credit card issuers as seen in increased rates of account dormancy.

At a time when issuers are under constant pressure to improve account retention and to grow portfolios, whilst still achieving operational cost reduction, this has now become an area that needs to be given attention.

The government is also concerned regarding the amount of debt and the number of cards each person has, therefore a clean up of credit card files to show an accurate picture, is now even more important in order to show evidence that the card issuer has a customer focus.

What is driving the increase in dormancy?

With the level of credit cards in the UK almost reaching saturation point, it is inevitable that cardholders will have many cards in their wallets or rather in the drawer at home. The credit card issuers are constantly looking for new and innovative ways to attract new cardholders whilst those cardholders have a wide choice of multiple products from a variety of issuers.

With many of these issuers now having a standard balance transfer offering plus an introductory promotional interest rate, the increased competition together with it's associated advertising encourages cardholders to shop around for the best deals. Many of these cardholders have no loyalty at all to these issuers and in many cases will not even be a customer in other product areas.

Once the promotional period is over cardholders will be swapping their outstanding balance to the next issuer offering a similar or better rate. These "rate tarts" are using the card issuers, and in their eyes "getting their own back" for the years of high interest rates that the issuers had traditionally – and still do – charge.

There are a few card issuers who have a balance transfer rate "for the life of the transfer". These are seen as a cheap way of financing a short-term loan with some rates as low as 3.9%. (e.g. Accucard Oct 2004). So, while technically, these cards are not dormant, they are inactive and will probably be costing the issuer money over and above the interest payments they are receiving.

The trend towards balance transfers with low introductory rates will inevitably mean that many cards will be taken out simply for that purpose and never used again. With the "low rate for the life of the balance transfer" cards these cards will probably never be used as a means of purchase but as a way of obtaining a low cost loan, without the hassle.

The sales strategies, and associated incentives of the card issuers, encourage hard sell to customers that results in the opening of unwanted accounts that are often, after the initial use, left dormant. As far as the cardholder is concerned, they will have forgotten about the card – perhaps left in a drawer somewhere – and will probably never inform the card issuer that they have stopped using the card or will actually never use it. After all, it is still a legitimate credit line should it be needed in an emergency.

Anecdotal evidence suggests that the introduction of Chip and PIN will reduce the number of active cards in the wallet of the consumer. This will inevitably lead to a further increase of dormant cards as the cardholder will probably not inform the issuer that he no longer wants to use the card.

The size and economics of the problem

Industry estimates suggest that on average 18% of any credit card portfolio is dormant and, in some worst case scenarios, this figure has been as high as 35%.

With a credit card issuance of almost 55 million in the UK, this is a significant problem.

For the credit card issuers costs are still incurred for these dormant accounts. The minimum costs being processor account residency fees, but can also include the wasteful production of statements and plastics, plus the unnecessary inclusion of these accounts in advertising mail shots.

The move to Chip and PIN has further increased operational costs. Each card that is issued with a Chip and PIN will cost approximately £1.00. With a large portfolio of over 250 000 cards and with a dormancy rate of an average of 18%, a large issuer will be incurring unnecessary costs of circa £45,000 in the conversion to Chip and PIN. That is without the cards that only have balance transfers on them that will never be used as transactional credit cards.

With the cost of attracting a new cardholder estimated to be in the region of £130, and the significant cost implications when moving to Chip & PIN, the maximisation of dormant accounts will becoming increasingly important when issuing new chip cards.

Many of the issuers are now looking at their portfolios and seeking to reduce the number of dormant accounts. The main drivers for this initiative are the costs of keeping inactive and therefore profitless accounts on file, the cost of issuing Chip cards, generating and managing multiple PINs, statement and postage costs and any account residency fees.

The solutions

Marketeers are constantly looking at new and innovative ways in which to attract new cardholders to take up their card offering. More and more effort is being placed on winning new customers. However, the real cost of winning a new customer is much greater than simply re-activating an existing customer.

Many customers will have outgrown the card they first took out and may have moved onto another product from the same issuer or have moved to a different issuer for its card products. It is therefore in the interest of the issuer to re-activate usage of the card rather than to close the account.

Some of the issuers have made a unilateral decision to close all dormant accounts and so save costs. This, however, will normally be undertaken without any analysis of the reason as to why the account has become dormant. This type of "one strategy fits all" approach has its dangers and may cause the issuer to lose customers by not taking into account the other relationships that the cardholder has with the issuer. Having won the customer, it would be a pity to lose the account simply because the card is not currently being used, possibly for the reason that the card holder is running an overdraft or has converted to a fixed period loan.

There will also be a large percentage of card accounts that are either temporarily inactive or dormant. By intelligent use of segmentation and then running various treatment strategies it should be possible to re-activate a significant number of these accounts or to close them, if appropriate. However in closing them, the issuer knows why they are inactive and is making a POSITIVE, INFORMED decision to close the account.

It is because of this market opportunity that Savantor has created it's Activation, Retention or Closure service (ARC). ARC is a fully managed end-to-end service that reduces costs through the identification and closure of truly dormant accounts. It also provides the opportunity to identify reactivation and to maximise cross-selling opportunities.


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