That was the challenge facing HSBC UK Card Services, one of UK's largest card issuers. HSBC's rates were competitive in comparison to their "peer group" of other traditional card issuers in the UK. But competition from the new non-traditional players entering the market threatened to increase attrition rates.

Rather than implement across-the-board interest rate reductions that could unnecessarily erode profitability, HSBC called on the champion/challenger capabilities of TRIAD's Performance-Based Pricing (PBP) module to "try out" new ideas. TRIAD PBP offers lenders complete functionality in creating, testing, implementing and tracking finely segmented pricing strategies.

"The test results showed us just how the flexible use of account level pricing management would improve business profitability at HSBC," says Rick Odd, Strategy Implementation Manager at HSBC UK Card Services. "It also showed us that customers do not always behave in the way we may sometimes expect."

The challenger tests: Does an interest rebate work?

Working with Fair, Isaac, HSBC determined that a rebate strategy, which offered an interest rebate rather than an interest rate discount, would be an excellent promotional tool to encourage usage and build relationships in order to improve retention and therefore business profitability.

Such a strategy would allow the card issuer to keep its existing pricing terms and conditions while being able to highlight the actual savings to the customer during the promotional period. To illustrate, a cardholder statement might show: Interest charged as £18, minus a promotional interest rebate of £8, resulting in a net interest charge to the customer of £10.

Excluding risky accounts, then using TRIAD decision keys such as "average interest billed," "months since interest billed," and "days since active." HSBC segmented their portfolio into three groups: revolvers, occasional revolvers (those who borrow from time to time), and those card holders who never revolved. Multiple challenger tests were carried out within each of these three groups. Doing this, analysts were able to identify both the most appropriate amount of rebates (those that would stimulate demand, without being excessively expensive) and how long the promotional period needed to last to obtain desired results.

TRIAD Performance-Based Pricing module was used to test strategies on different segments of the portfolio. For "occasional revolvers" the first test group showed that the cost of a too high rebate outweighed the related gains from increased use, which could lower net profits. The most successful strategy in terms of net profitability proved to be the one with the lowest rebate (Test 3).

Testing reveals opportunities for 'bottom line' improvements

HSBC expected that the bigger the rebate in these test groups, the higher the measured response and associated retention. This, however, was not the case.

Interestingly, the tests showed the attrition rate did not vary by size of the rebate, and customers do not always perform to expectations.
The biggest surprise came with the results from the "revolver" segment. The gross profit from the retained balances did not exceed the cost of the rebate. While the outcome was unexpected, the value of TRIAD's testing capabilities was very apparent, says Odd. "The insight into customer behavior was invaluable; and we clearly benefited and protected our portfolio by initially testing on only a small scale."

By contrast, in the "occasional revolver" segment of the population, challenger tests showed that the right amount of rebate would result in improved profitability. As can be seen in Figure 1, with the champion strategy as 0% baseline, the lower rebate was most successful at building balances.

Finally, in the "never revolved" segment, tests also showed a small increase in balances.

The new strategy was also easy to carry out. An integral part of the rich functionality of TRIAD PBP at First Data (HSBC's UK credit card portfolio processor), is the ability to control the timing of ongoing customized messaging of rebate offers on cardholder statements.

"The TRIAD capabilities allowed us to roll out — with confidence — new strategies with the customized pricing that would build relationships with different kinds of cardholders," Odd sums up.

For more information, contact your Fair, Isaac representative, visit our Web site at www.fairisaac.com or email us at info@fairisaac.com