1. Adding Value to Your Card Products - Building a Business Case for Rewards Dan Thompson JHA Payment Processing Solutions

2. Agenda Defining Rewards Defining Rewards Competition Competition Research Research Successful Program Components Successful Program Components Cost/Benefit Analysis Cost/Benefit Analysis Case Study Case Study Q&A Q&A

3. Defining Rewards A permanent or long-term incentive offered to participating cardholders in order to achieve commitment and primary-card usage status Loyalty points represents the second-largest currency in issue, behind the US dollar. More than 100 million consumers receive promotional currencies (i.e. points)

4. Defining Rewards Reward types: Reward types: Points-basedPoints-based Cash rebate Cash rebate Travel Travel Gift/gift certificate Gift/gift certificate Discounts Discounts Cash backCash back Co-brand/partner-basedCo-brand/partner-based OtherOther

5. Competition Top Bank Issuers Top Bank Issuers All offer a rewards cardAll offer a rewards card All offer cash back or cash rebateAll offer cash back or cash rebate Non-bank Issuers Non-bank Issuers High Performing Credit Unions High Performing Credit Unions 9 of 10 top credit unions by asset size offer a rewards card9 of 10 top credit unions by asset size offer a rewards card 7 of 10 top credit unions in credit card penetration offer a rewards card7 of 10 top credit unions in credit card penetration offer a rewards card 6 of 10 top credit unions in growth in outstanding credit card balances offer a rewards card6 of 10 top credit unions in growth in outstanding credit card balances offer a rewards card 5 of 10 top credit unions in average credit card balance offer a rewards card5 of 10 top credit unions in average credit card balance offer a rewards card Relationship Strategy Relationship Strategy

6. Competition 1.4 billion card solicitations in 2 nd quarter 2004, 52% were rebate/reward offers 1.4 billion card solicitations in 2 nd quarter 2004, 52% were rebate/reward offers 53% cash back53% cash back 37% non co-brand cards37% non co-brand cards Rewards cards are growing faster than co-branded cards Rewards cards are growing faster than co-branded cards Synovate/CCM

7. Competition AMEX Everyday Promotion gives double and triple points – non-travel purchases account for 2/3 volume AMEX Everyday Promotion gives double and triple points – non-travel purchases account for 2/3 volume Providian allows cardholders to buy-down APR or waive fees with points Providian allows cardholders to buy-down APR or waive fees with points Discover offers up to 5% cash back at supermarkets, drug stores and gas stations Discover offers up to 5% cash back at supermarkets, drug stores and gas stations Chase offers 3% cash back on all gasoline purchases Chase offers 3% cash back on all gasoline purchases Citi offers a full 5% cash back or 5 points per dollar spent at supermarkets, drug stores and gas stations Citi offers a full 5% cash back or 5 points per dollar spent at supermarkets, drug stores and gas stations

8. Competition - Debit ¾ of debit cards carry no incentives ¾ of debit cards carry no incentives Debit rewards issuers charge an annual fee ranging between $19-$65 per year Debit rewards issuers charge an annual fee ranging between $19-$65 per year

9. Opportunity 50% of credit card used in 2004 were not in the cardholders wallets a year ago The average monthly new charges in the first quarter for a rewards card were $943 compared to $360 for a non- rewards card – Synovate Inside Track The average monthly new charges in the first quarter for a rewards card were $943 compared to $360 for a non- rewards card – Synovate Inside Track 2004 TNS Global Study 2004 TNS Global Study Reasons for opening a new account Rewards ranked 2 ND for all reasons listedRewards ranked 2 ND for all reasons listed Rewards ranked 1 st for most important reasonRewards ranked 1 st for most important reason Most important reasons for making card primary Rewards ranked 1 st – 27%Rewards ranked 1 st – 27%

10. Research Visa Credit Card Commitment Study Visa Credit Card Commitment Study CommittedCommitted OpenOpen UnavailableUnavailable UncommittedUncommitted Offer most potential Offer most potential The cost to acquire a new customer is six times the cost of maintaining existing ones.The cost to acquire a new customer is six times the cost of maintaining existing ones. A 5% increase in customer retention yields a 75% increase in customer value.A 5% increase in customer retention yields a 75% increase in customer value. Young 18-24 Young 18-24 Rewards is trigger Rewards is trigger

11. Credit Card Commitment Research Individual card commitment First card ever owned Tenure Innovative/Unique Features Cross-relationship Rewards Communication Multi-card accounts Incentive for everyday purchases Superior service Internet access Higher credit limits Bill payment Member focus Visa USA

12. Research 2/3 of consumers say theyd prefer to have all their financial needs met by one institution 77% use a credit card issued from another FI #1 reason cited -> lack of incentives offered by their primary institution 50% of debit cardholders surveyed said they would spend more on cards with rewards - Edgar, Dunn & Co.

13. Research Rewarded cardholders are more profitable Rewarded cardholders are more profitable 80% of reward participants do more business as a result of the program80% of reward participants do more business as a result of the program Membership in a rewards program makes these groups more likely to do more business with that company:Membership in a rewards program makes these groups more likely to do more business with that company: 89% of consumers 18-24 years old 89% of consumers 18-24 years old 86% of consumers w/ income $75k-$100k 86% of consumers w/ income $75k-$100k 86% of consumers w/ income over $100k 86% of consumers w/ income over $100k 60% of American Express cardholders are enrolled in one or more Membership Rewards programs, up 30% from 199860% of American Express cardholders are enrolled in one or more Membership Rewards programs, up 30% from 1998 54% lower attrition 54% lower attrition Spend 40% more in 1 st year Spend 40% more in 1 st year Have ½ credit loss rates Have ½ credit loss rates Pay bills faster Pay bills faster Average profitability is 5-times that of non-rewards Average profitability is 5-times that of non-rewards

14. Research 60% of consumers said that a rewards program influences their decision of which credit card to use 60% of consumers said that a rewards program influences their decision of which credit card to use 75% of redeemers indicate a rewards program influences their decision 75% of redeemers indicate a rewards program influences their decision ½ of all adults participate in some type of rewards program ½ of all adults participate in some type of rewards program 4 of 10 have opted out of a program4 of 10 have opted out of a program 74% of the drop outs do less business with the company74% of the drop outs do less business with the company

15. Successful Program Components Uncomplicated & Clear Uncomplicated & Clear Relevant Relevant Affordable Affordable Attainable Attainable Value perception Value perception Credit limit Credit limit Marketing Marketing

16. Successful Program Components Uncomplicated & Clear Uncomplicated & Clear Rules and RegulationsRules and Regulations 22% dont know all the rules 22% dont know all the rules 58% understand them somewhat 58% understand them somewhat 19% understand them very well 19% understand them very well 89% more likely to do business89% more likely to do business 4 out of 10 have opted out of a program4 out of 10 have opted out of a program #4 – rules kept changing (or unclear) #4 – rules kept changing (or unclear) Internet impactInternet impact

17. Successful Program Components Uncomplicated & Clear Uncomplicated & Clear Relevant Relevant 27% of affluent travelers carry a air miles card, compared to 7% of non-affluent27% of affluent travelers carry a air miles card, compared to 7% of non-affluent 69% of affluent use a rewards card, compared to 37% of non-affluent69% of affluent use a rewards card, compared to 37% of non-affluent 4 out of 10 have opted out of a program4 out of 10 have opted out of a program #3 – rewards werent relevant #3 – rewards werent relevant 90% of rewards card offers have a cash back or cash rebate component90% of rewards card offers have a cash back or cash rebate component

18. Successful Program Components Uncomplicated & Clear Uncomplicated & Clear Relevant Relevant Affordable Affordable 4 out of 10 have opted out of a program4 out of 10 have opted out of a program #1 – high fees#1 – high fees 74% of the drop outs do less business with the company 74% of the drop outs do less business with the company 80% of rewards card offers fell under 9.99% APR in 1 st quarter 200480% of rewards card offers fell under 9.99% APR in 1 st quarter 2004 90% of rewards card offers had no annual fee90% of rewards card offers had no annual fee

19. Successful Program Components Uncomplicated & Clear Uncomplicated & Clear Relevant Relevant Affordable Affordable Attainable Attainable Maritz: Length of time it takes to build up point is primary reason consumers leave a rewards programMaritz: Length of time it takes to build up point is primary reason consumers leave a rewards program 4 out of 10 have opted out of a program4 out of 10 have opted out of a program #2 – inability to redeem #2 – inability to redeem Redeemers outspend non-redeemers by as much as 355% - ESCRedeemers outspend non-redeemers by as much as 355% - ESC The average monthly new charges in the first quarter for a redeemer were $943 compared to $360 for a non- redeemer The average monthly new charges in the first quarter for a redeemer were $943 compared to $360 for a non- redeemer

20. Successful Program Components Uncomplicated & Clear Uncomplicated & Clear Relevant Relevant Affordable Affordable Attainable Attainable Value perception Value perception

21. Loyalty Programs - Consumer Preferences Preference Preference DiscountsDiscounts CashCash MerchandiseMerchandise Gift certificatesGift certificates TravelTravel Behavior Behavior Gift certificates Cash Discounts Merchandise Travel Source: Maritz

22. Card Rewards – Payment Processing Solutions Experience

23. Successful Program Components Uncomplicated & Clear Uncomplicated & Clear Relevant Relevant Affordable Affordable Attainable Attainable Value perception Value perception Credit limit Credit limit Average credit line = $7,699Average credit line = $7,699 Balance rises by 13% relative to credit line increaseBalance rises by 13% relative to credit line increase

24. Rewards – Case Study Is a rewards program affordable? Is a rewards program affordable? Card Program Profile Premium credit cardPremium credit card Full selection of reward typesFull selection of reward types Competitive award levelsCompetitive award levels Mature program 5+ yearsMature program 5+ years Over 100 million pointsOver 100 million points

25. Cost/Benefit Considerations Pts-based rewards programs yield between 10 to 25 transactions per active account each month Pts-based rewards programs yield between 10 to 25 transactions per active account each month Cash-back rebate cards average between 10 to 18 transactions per active account each month Cash-back rebate cards average between 10 to 18 transactions per active account each month Premium card w/ rewards exceeds 75% active Premium card w/ rewards exceeds 75% active

26. Cost Analysis – Case Study Average Rewards 11.8 trans $80 ticket 75.8% active (3306) Average Non-rewards 7.25 trans $80 ticket size 63% active (2748)

27. Cost Analysis – Case Study Average Gold Card $1,593,840 sales X.0175 interchange rate $27,892 interchange income Awards$0 Adjusted interchange $27,892 $10.15 per active account Rewards Card $3,120,864 sales X.0175 interchange rate $54,615 interchange Awards $687 admin fees $20,215 redemption Adjusted interchange $33,713 $10.20 per active account

28. Cash Back Case Study 1% Cash Rebate Card 18.22 trans/active 591 active accounts (83%) $73 average ticket Interchange$13,756 ($7,860) cash back -------------$5,896 No Cash Rebate Card 7.5 trans/active 435 active accounts (61%) $82 average ticket Interchange$4,681

29. Marketing Success Balance Transfer Program summary: Product use: Visa Gold credit card Value: 9.6% APR Appeal: 1% cash back on minimum $1000 balance transfer Promotion period: 11/20/2002 offered for a *limited time (ended January 1) Acceptance options: return completed self-mailer, calling the service center, or visiting Web site. Results Response rate: 3.09% (new and existing cardholders) 227 transfers Cost: $2.84 per piece including 1% pay out $1,274,201 million new balances

30. Marketing Success Incentives Program summary: Product use: Visa Gold credit card Value: 10.9% APR Appeal: Lowered interest rate and double reward points when use card for 12 or more purchases each month Promotion period: July and August Acceptance options: Use the card Results Response rate: 852/833 Average spending per qualifying account: $1900+ $1.6 million in sales each month Recorded 2 nd and 3 rd highest total purchase volume, active accounts and total transactions (9/02) 7% increase each month in interchange income (compared to 6/03)

31. Final Words 6 of 10 cardholders polled said they chose a card with rewards as their preferred card 6 of 10 cardholders polled said they chose a card with rewards as their preferred card 90% stated they would not reduce usage or cancel their preferred card 90% stated they would not reduce usage or cancel their preferred card - Edgar, Dunn & Co.

32. Questions