Citibank in Asia Pacific

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Citibank in Asia Pacific

• Jesse M. Cohen

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Introduction

• Citibanks branch banking business conducted
  operations in 15 countries throughout Asia
  Pacific and the Middle East in 1989
• Citibanks branch banking business was projected
  as a prestigious, consumer-oriented international
  bank and the undisputed leader in the marketplace
• Financial services were targeted to affluent
  upper and middle income market segment
• Citibanks Asia Pacific branch banking business
  was challenged with increasing earnings from
  69.7MM to 100MM by 1990

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Citibanks Challenges

• Increase earnings in Citibanks Asia Pacific bank
  business through the launch of a credit card
  product
• Obstacles
• Mixed opinion from the Asia-Pacific country
  managers that a successful credit card launch was
  possible
• Questions abound regarding Citibanks ability to
  adopt mass-market positioning to acquire credit
  card customer and maintain its up-market
  positioning with its current upscale branch
  banking customers
• Differing customer attitudes and usage patters
  across the Asia Pacific region
• High level of market uncertainty across the
  region with regulations, branch limitations,
  talent, poor infrastructure, etc.

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SWOT Analysis
Strengths Market Leader Branding Credit card considered a status symbol Targeted countries include booming, growing economies (Philippines, India) and affluent, Westernized countries (Australia, Singapore), diversifying risk Strong economies of scale in data processing Hong Kong presence provides valuable data to estimate revenue impact and price credit cards accordingly Weakness Consumer attitudes and usage varies across countries Australia Singapore are saturated markets Country managers are unconvinced/no buy-in. Credit card offering adds complexity to organizational compensation structure Cannibalization of current services Brand dilution Collections process is undefined Centralized data processing costs, politics Learning curve on demand side cost side
Opportunities Penetration leader in new markets Target growing middle and upper class Portfolio allows for customization in markets Additional revenues from cross-selling and arbitrage Threats Fraud Defaults Laws and regulations AMEX and Diners Club are early entrants with brand cachet Competitors offer discounts
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Acquisition Costs
Unit Cost Prospects RR Qualify Cards Card Customers Acq Cost/Card
Direct Mail 1.5 300,000 0.02 0.67 0.8 3216 139.93
Direct Sales 225,000 30,000 0.5 0.67 0.8 8040 27.99
Take One 0.25 2,000,000 0.015 0.334 0.8 8016 62.38
Bind In 0.15 3,000,000 0.01 0.334 0.8 8016 56.14
Break Even Analysis
Scenario Target No Fixed Costs Fixed Costs VC Total Costs Rev/Cust Break Even
Acquisition Advertising Support (25/card) (25/card)
I 250,000 7,857,000 2,000,000 35,000,000 6,250,000 51,107,000 180 283,928
II 500,000 16,574,000 4,000,000 50,000,000 12,500,000 83,074,000 180 461,522
III 750,000 27,228,000 6,500,000 60,000,000 18,750,000 112,478,000 180 624,878
IV 1,000,000 40,026,000 9,000,000 70,000,000 25,000,000 144,026,000 180 800,144
Break Even - Sensitivity Analysis
Revenue Per Customer Revenue Per Customer Revenue Per Customer
120 150 180 210 240
Scenario I 425,892 340,713 283,928 243,367 212,946
II 692,283 553,827 461,522 395,590 346,142
III 937,317 749,853 624,878 535,610 468,658
IV 1,200,217 960,173 800,144 685,838 600,108
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Market Entry Game Theory
Citibank
AMEX
Source Demisch, McGarry, Mukhtar, Rajbansi Feb
2008
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Conjoint Analysis

• Build ideal mix of product attributes
• Determine customer segmentation
• Identify cannibalization competitive response

Joining Fee Annual Fee Brand Services Incremental Revenue
None None Citi (Visa, MC) Card replacement Cash advance
Low Low Amex Loss/misuse liability Pre-payment
High High Visa/MC Spending limit Advance ticket sales
Diners Club Cash Advance Product warranty extension
Local Bank Year-end summary Product/Travel insurance
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Cross-Selling

• Success selling auto loans through car dealers
• Greater potential with Citi cardholders
• Opportunity for cross-sell of products such as
  Auto Loans, Ready Credit, Deposits, Mortgages
• Enables virtual presence in countries restricting
  number of foreign bank branches
• Bundle with bank services for lower combined fees
• How calculate cross-sell value?
• Take Hong Kong Citibank example where 6 of
  account holders also have Citi credit card and
  assume same opportunity in reverse

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Cross-Sell Value CalculationRelative Year 1
(phased launch)
Australia Hong Kong Singapore TOTAL
Total cards 10.5M 2M 630K 13.1M
Proj. Citi cards Yr 1 1M 150K 25K 1.75M
Proj. Citi card customers 588K 88K 15K 691K
       
of Citibank customers 85K 130K 18K 233K
Net Revenue from Fund 59M 67M 16M 142M
NRFF per customer (exact figure) 694.12 515.38 888.89  N/A
       
Card holders w/ 2nd product 35.3K 5.3K 0.9K 41.5K
Incremental NRFF (cross-sell value) 24.5M 2.7M 784K 28M
Total Relative Yr 1 value for all 9 Asia markets
would be 29M
Assumes 1.7 cards per customer and 6 of card
holders will purchase 2nd Citi product as result
of cross-sell efforts. Percentage based on 6 of
Hong Kongs Citibank customers also owning Citi
card.
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Arbitrage Opportunities

• Sample Exchange Rates
• US 1 HK 1.13
• US 1 Australian 1.33
• HK 1 Australian 1.18

Buy HK 11.3M with US 10M
Buy Aus 13.334M with HK 11.3M
Buy US 10.025M with Aus 13.334M
Triangular Arbitrage Example US 25K
Profit! Across Citibanks Asia-Pacific customer
accounts 1.5M per turn.
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Market Segmentation
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Market Segmentation
Low Risk, Safe Return - Australia, Singapore,
Taiwan Moderate Risk, Moderate Return- Thailand,
Malaysia High Risk, High Return - India,
Indonesia, Philippines
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Customer Lifetime Value (CLV)
   Value of Purchase    Profit per Acquired Customer  
  Item 1 Item 2 Item 3 Item 1 Item 2 Item 3
Year 1 150.00 60.00 15.00 37.50 9.00 1.50
Year 2   15.30     1.45
Year 3 171.74   15.61 32.63   1.19
Year 4 69.46 15.92   6.33 0.97
Year 5 196.62   16.24 23.91   0.79
             
  Net Present Value          
  Item 1 Item 2 Item 3      
  65.95 11.45 4.13      
             
  Total NPV 81.53        
  Assumptions Assumptions Assumptions  
         
Years of Customer Life Years of Customer Life 5    
Annual Discount Rate Annual Discount Rate 15    
         
    Item 1 Item 2 Item 3
Initial Purchase Price Initial Purchase Price 150.00 60.00 15.00
Annual Product Inflation Annual Product Inflation 7 5 2
Margin per Product Margin per Product 25 15 10
Retention Rate Year 1 Retention Rate Year 1 95 95 95
Retention Rate Later Yrs. Retention Rate Later Yrs. 80 80 80
Years between Purchase Years between Purchase 2 0.6 0.25
      Discount Rate() Discount Rate()  
    5 10 15 20
  5 101.60 90.57 81.53 74.03
Customer 7 117.58 102.12 90.00 80.33
Life Years 10 127.91 108.88 94.51 83.39
  15 140.63 116.01 98.63 85.83
Source CLV Calculator- HBR
http//hbswk.hbs.edu/archive/1436.html
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Long Run Effects of Risk on Marketing Policies
Expected Cash Flow Period 1 Expected Cash Flow Period 2 Discount Rate NPV Calculation NPV
Low Price Strategy 10M 14M 15 (10)/(10.15) (14)/(10.15)2 19.27M
High Price Strategy 6M 4M 5 (6)/(10.05) (4)/(10.05)2 9.34M
Coordinate finance marketing functions to
select appropriate discount rate, marketing
policies and resource allocations after analyzing
the risks and returns from different marketing
policies.
Reference Sharan Jagpal (2008) Fusion for
Profit pp 26
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EV of Entering a Test Market in Singapore Using
Real Options
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Country Managers

• Risk-averse and reluctant to handle card product
• Tie compensation to product
• Compensate for long term vision
• Local currency (Jagpal, NB chapter 23)
• 4 Component Parts of Compensation
• Base wage
• Share of NPV of after tax operating cash flow
• Share of NPV of tax shield
• Share of real options of product
• Above mix changes per country and per period!

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Compensation - Period 1

• Australia vs. India example

NPV Operations NPV Tax Shield Real Options Compensation Recommendation
Australia High (59M) High Low 25 Base Salary 37.5 NPV Operations 25 NPV Tax Shield 12.5 Real Options
India Low (6 M) Low High 50 Base Salary 12.5 NPV Operations 6.25 NPV Tax Shield 31.25 Real Options
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Compensation - Period 2

• Australia vs. India example

NPV Operations NPV Tax Shield Real Options Compensation Recommendation
Australia High (gt59M) High withdraw 50 Base Salary 25 NPV Operations 25 NPV Tax Shield
India Low (gt6 M) Low remain 50 Base Salary 25 NPV Operations 6.25 NPV Tax Shield 18.75 Real Options
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Recommendations

• Use a staged roll out plan introducing each of
  three groups at 6-9 month intervals (Australia,
  Singapore, Taiwan first).
• Opt for a test market initially, followed by
  multi-country entry.
• The presence of cost and demand dynamics must be
  considered when formulating pricing strategy, and
  Citibank may choose to learn from first movers
  errors.
• For uncertain marketplaces, use Real Option
  Valuation model.
• Build centralized data processing center before
  entering test market. (Citi absorbs initial 35
  MM investment)
• Establish specific credit card business
  independent from other business units in each
  country
• Charge country managers usage fee based on either
  computational usage, dollar usage, or user (per
  merchant/cardholder) continue to charge until
  investment recouped
• Allow country managers to set join fee

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Recommendations (contd)

• Features of credit card program should match the
  brand positioning and corporate image. Include
  gold features for premium clients and
  regular/base features for others.
• In saturated markets grow through acquisition,
  and use green field approach in emerging
  countries.
• Capitalize on cross-selling and foreign currency
  exchange arbitrage opportunities.
• Structure flexible country manager compensation
  to encourage elements of shared risk and long
  term focus on available marketing options.
• Compensate country managers in local currency.

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Questions