I am often asked to lecture on credit card analytics. Invariably, it becomes difficult to figure out where to start this talk. If I spend time on common lingo used, I lose out on time to focus on the analytics . But then , without understanding the lingo it is impossible to do the analytics !! This is primarily because credit cards are the most complicated retail lending product.
So what are the common types of cards that a bank can issue?
Technically a ‘bank card’ is a card issues by a bank which can perform any one or more of these functions – ATM / Cash card, Debit card or Credit card.
- If you have a Cash Card you can only take out money from a cash machine, and only as much as you have in your Bank Account.
- If you have a Debit Card you can take out money from a cash machine and you can use your card to pay for things such as shopping at the supermarket.
- If you have a Credit Card, you can pay for items from shops and, at the end of the month, you will be sent a bill. You then have to pay this bill – if you do not you will be charged interest.
Which are the common Credit cards that the bank issues ?
Credit cards can be slotted into 3 broad categories :-
- PLCC :- Private Label Credit cards :- Retailers prefer to have their own card because it offers customers another way to shop with them, thus increasing sales. Private label credit cards are cards branded for a specific retailer, independent dealer or manufacturer. Generally the retailer does not manage the private label card and a third-party (ie, a bank / financial institution) issues the cards and collects the payments from cardholders. Terms and conditions for private label credit cards are made by contracts between the retailer and the third party. Eg :- Walmart credit card, Target credit card etc.
When a third party, such as a bank, manages a private-label credit program for a retailer or manufacturer, it will perform several functions :-
- the issuance of cards
- funding of credit
- collection of payments from customers
The criteria for credit are jointly established by the service provider and the retailer and can include , depending on the agreement , the following clauses
- Reward points and its management
- Underwriter liability with a downside protection clause (to protect bank against loss)
- Upside profit sharing clause (to benefit the retailer for good performance of portfolio)
- Minimum approval rate SLA (to help retailer drive sales)
- Bounty for acquisition -per customer (to benefit the retailer as the sourcing cost for bank becomes low)
- Co-brand / Affinity cards:- Any credit card that is offered by a credit card company that is jointly sponsored by both, a bank AND a retail merchant. This type of card can generally be issued more cheaply than private label retail cards. This type of card is designed to give the issuing bank access to the retailer’s customer base. Co-branded cards often come with a variety of incentives, such as discounts or rebates of various types. Cards of this genre are affiliated with specific merchants, and not general professional groups or other types of associations. Thus , the rewards are linked to spend on the brands which are a part of the branding / mentioned in the rules related to the card. However, co-branded cards can also be used with other merchants.
(Note :- Co-branding is an arrangement that
- associates a single product or service with more than one brand name, or
- associates a product with someone other than the principal producer.
The typical co-branding agreement involves two or more companies acting in cooperation to associate any of various logos, colour schemes, or brand identifiers to a specific product that is contractually designated for this purpose.
The object for this is to combine the strength of two brands, in order to increase the premium consumers are willing to pay, make the product or service more resistant to copying by private label manufacturers, or to combine the different perceived properties associated with these brands with a single product. )
In India , the ICICI Bank Big Bazaar Shakti Credit Card is a co-brand card .
- Bankcard Credit card :- This is the common credit card that all of us know. The terms and conditions are decided by the issuing bank / financial institution which is the issuer.
Common terms- Credit Cards:-
- Cardholder: The holder of the card used to make a purchase; the consumer.
- Card-issuing bank: The financial institution or other organization that issued the credit card to the cardholder.
- Merchant: The individual or business accepting credit card payments for products or services sold to the cardholder.
- Acquiring bank: The financial institution accepting payment for the products or services on behalf of the merchant.
- Independent sales organization: Resellers (to merchants) of the services of the acquiring bank.
- Merchant account: This could refer to the acquiring bank or the independent sales organization, but in general is the organization that the merchant deals with.
- Credit Card association: An association of card-issuing banks such as Discover, Visa, MasterCard, American Express, etc. that set transaction terms for merchants, card-issuing banks, and acquiring banks.
- Transaction network: The system that implements the mechanics of the electronic transactions. May be operated by an independent company, and one company may operate multiple networks.
- Affinity partner: Some institutions lend their names to an issuer to attract customers that have a strong relationship with that institution, and get paid a fee or a percentage of the balance for each card issued using their name.
- Insurance providers: Insurers underwriting various insurance protections offered as credit card perks
- APR/ Nominal APR : annual percentage rate (APR), is the interest rate (finance charges) for the whole year (annual) . also called IRR in the Indian market.
- EAR /Effective APR: Effective / actual interest rate for a whole year (annualized)
- The nominal APR is the simple-interest rate (for a year).
- The effective APR is the fee+ compound interest rate (calculated across a year).
These are commonly used terms and you can view detailed descriptions of each these at http://en.wikipedia.org/wiki/Credit_card / http://www.investopedia.com/university/credit-cards/.
In the next post we will explore more about metrics that are used to track credit card portfolios …