Australian consumers are technology savvy, evident in the way they have adapted to online banking and retail shopping during the pandemic.
As more and more consumers bank online or through apps, the “bankscape” has seen a predominant shift from cash transactions to credit card and debit card usage.
According to Australian Banking Association (ABA), the analysis of RBA data shows that cash withdrawals fell by 10% in 2020, while cheques made up less than 0.5% of all transactions. Credit card transactions have increased worldwide by six percent from 2019 to 2020 (statista.com).
It is no surprise that around a quarter of Australians have more than one credit card, and banks continue their efforts to retain existing customers and attract new customer using loyalty programs by giving them incentives to use a specific card. A few key questions that arise from the changing debt profile of consumers are: what can we learn about credit cards usage patterns? What is the degree of loyalty towards a specific bank and its credit card offerings?
Examining these questions is not as simple as it sounds. Marketers often consider customer loyalty from their firm’s perspective without considering how customers switch between their company and competitors from one time period to another. In addition, marketers striving to cultivate customer loyalty often assume that loyal customers would contribute to higher profits, but this widely held belief may not always hold true, especially given the rapid changes in the business environment, complex and dynamic nature of customer behaviours and the shift in consumer response to product offerings.
In a collaborative project with Hillburn Ho from the University of Technology Sydney (UTS), we examined the relationships between patterns of customer loyalty behaviour of credit card consumers and financial outcomes of firms over time. We examined credit card usage data which revealed that a customer may exhibit four loyalty prototypes (loyalty, switching, disloyalty, and dormancy) based on whether a customer uses a credit card from the focal bank and/or the competing banks in a given month. Specifically, in a given month, loyalty (L) denotes customers who solely use the focal bank’s cards while switching (S) denotes customers who use cards from both the focal bank and competing banks. Disloyalty (D) refers to customers who solely use competing banks’ cards, and dormancy (O) represents customers who use neither the focal bank’s nor competitors’ cards in a given month. Therefore, it is interesting to note that the same customer may be loyal to a bank in one month and switch to another bank’s credit card in another month. A more in-depth analysis of these prototypical behaviours, pooling the credit card use patterns generated from 87,667 customers’ credit card records, reveals 10,578 unique sequences in which consumers rotate between various credit cards!
To generate more insights from these mind-boggling numbers, let’s dig deeper into the usage patterns to understand the variation in the degree of loyalty towards a specific bank. We clustered the unique sequences over a 12-month period and this reveals six distinct segments of customers. These segments are: Loyalist, Switching Loyalist, Switching Defector, Defector, Dormant Loyalist, and Dormant Defector.
The Loyalists represents the focal bank’s frequent credit card users who occasionally access competitors’ services.
The Switching Loyalist represent customers who used credit cards from both the focal bank and competing banks. Notably, this group consistently uses credit cards from multiple banks for months. However, after a few consecutive months of disloyalty, customers in this group switch back to the focal bank for a short period, probably induced by the focal bank’s time-dependent promotional offers. As can be easily seen, these customers only exhibit short-lived rather than long-lasting exclusive use of the focal bank’s card. Overall, this group represents frequent credit card users who tend to use cards from multiple banks and are loyal for repeated short periods.
The Switching Defector segment makes up the largest proportion of the focal bank’s customer base of any of the segments. This group consistently uses credit cards from multiple banks for consecutive months. After two to three consecutive months of switching behaviour, the switching defectors concentrate their spending on competitor’s cards for a short period (one to two months). Overall, this group represents frequent credit card users who tend to use cards from multiple banks and stay with competitors for a short period of time, then revert to using cards from multiple banks.
The Defector segment comprises of customers who solely use competitors’ credit cards segment. However, after six or more consecutive months of using competitors’ credit cards, this group either uses the focal bank’s service for a single month or becomes dormant for a month.
The Dormant Loyalist segment represents customers who do not use any credit cards in a given month. This group consistently uses no credit cards for consecutive months. However, after six or more consecutive months of dormancy, customers in this group use the focal bank’s cards for a short period (e.g., a month). While this group seldom uses credit cards, they use the focal bank’s cards when they need to.
The last segment is the Dormant Defector which is the smallest segment comprising of 3.19% customers. This group consistently uses no credit cards for consecutive months, and after a long period of dormancy, they use competitors’ cards for one to three months.
Interestingly, these segments exhibit nuanced relationships with financial outcomes for the bank. The Loyalists have a similar level of profitability as the two switcher segments (Switching Loyalist and Switching Defector), suggesting that retaining the latter by allocating resources to cultivate customer relationships can boost the focal bank’s profitability. In addition, since the Switching Defectors constitute the largest portion (38.17%) of the focal bank’s customer base and have high credit card usage, the aggregate profits of this segment surpass those of the Loyalists, implying that the focal bank should allocate comparable amounts of resources to develop and retain all three of these segments rather than focusing solely on the Loyalists!
The Defectors segment has a high potential if the focal bank can effectively convert customers in this segment into Switching Defectors, who are largely profitable. This will require an assessment of the profit potential through an estimation of the share-of-wallet of these customers. Since Defectors are frequent credit card users, the focal bank could provide them with attractive inducements to gradually develop the habits of using cards from multiple banks concurrently. These inducements should be designed with the goal to change customers’ habitual card use behaviours. Banks can further personalise such inducements for individual customers by gathering and analysing data about their psychographics and lifestyles. One must be cautious, though, about using monetary incentives, since such incentives may only have a short-lived rather than enduring impact on customers’ habitual service use.
Finally, the two Dormant segments, which comprise of 11.65% of the customer base, are red flags for the focal bank since customers in these segments do not appear to habitually use credit cards. Thus, banks should question whether their customer acquisition efforts are focusing on the right customers. We suggest that banks should monitor the proportion of customers falling into this dormant state each month, as the group might reflect an over-use of promotions and hard selling tactics to get customers to sign up for credit cards. Such excessive marketing efforts would waste resources, with a low possibility of earning payback from the acquired customers.
Taking into consideration customers’ use of services from multiple credit card issuers, this study shows that even if customers who are not completely loyal, their profit potential may not be necessarily low. Consumers are variety seekers and tend to switch across competing credit cards posing a challenge for the banks to predict customers’ potential value. Therefore, there’s a greater need for banks to consider the likelihood of customers’ future product/service use in formulating customer acquisition strategies.
Customers interact with a focal bank as well as competitor banks over time, and therefore, it is vital to assess whether the customer’s loyalty toward a firm is temporary or long lasting. Allocating resources to the right customer segments is instrumental to maximising customer profitability for firms, in contrast to observed business practice where firms focus solely on retaining loyal consumers, and therefore, find it challenging to reduce customer churn. The shift towards cashless transactions implies greater focus on credit card customers and, coupled with increased usage of digital wallets and buy now pay later services, it has implications for both profitability and proactive debt management.
Dr Sonika Singh is a lecturer at UTS Business School.
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