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Citibank in Asia Pacific. Introduction Citibanks branch banking business conducted operations in 15 countries throughout Asia Pacific and the Middle East.

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Presentation on theme: "Citibank in Asia Pacific. Introduction Citibanks branch banking business conducted operations in 15 countries throughout Asia Pacific and the Middle East."— Presentation transcript:

1 Citibank in Asia Pacific

2 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

3 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.

4 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

5 Acquisition Costs Break Even Analysis Break Even - Sensitivity Analysis Unit CostProspectsRRQualifyCardsCard CustomersAcq Cost/Card Direct Mail1.5300, Direct Sales225,00030, Take One0.252,000, Bind In0.153,000, Revenue Per Customer Scenario I425,892340,713283,928243,367212,946 II692,283553,827461,522395,590346,142 III937,317749,853624,878535,610468,658 IV1,200,217960,173800,144685,838600,108 ScenarioTarget No Fixed Costs VC Total CostsRev/CustBreak Even # Acquisition Advertising Support ($25/card) I250,0007,857,0002,000,00035,000,0006,250,00051,107, ,928 II500,00016,574,0004,000,00050,000,00012,500,00083,074, ,522 III750,00027,228,0006,500,00060,000,00018,750,000112,478, ,878 IV1,000,00040,026,0009,000,00070,000,00025,000,000144,026, ,144

6 Market Entry – Game Theory Source: Demisch, McGarry, Mukhtar, Rajbansi; Feb 2008 Citibank AMEX

7 Conjoint Analysis Build ideal mix of product attributes Determine customer segmentation Identify cannibalization & competitive response Joining FeeAnnual FeeBrandServicesIncremental Revenue None Citi (Visa, MC)Card replacementCash advance Low AmexLoss/misuse liabilityPre-payment High Visa/MCSpending limitAdvance ticket sales Diners ClubCash AdvanceProduct warranty extension Local BankYear-end summaryProduct/Travel insurance

8 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…

9 Cross-Sell Value Calculation Relative Year 1 (phased launch) AustraliaHong KongSingaporeTOTAL Total # cards10.5M2M630K13.1M Proj. # Citi cards Yr 11M150K25K1.75M Proj. Citi card customers588K88K15K691K # of Citibank customers85K130K18K233K Net Revenue from Fund$59M$67M$16M$142M NRFF per customer (exact figure)$694.12$515.38$ N/A Card holders w/ 2nd product35.3K5.3K0.9K41.5K Incremental NRFF (cross-sell value)$24.5M$2.7M$784K$28M Assumes 1.7 cards per customer and 6% of card holders will purchase 2 nd Citi product as result of cross-sell efforts. Percentage based on 6% of Hong Kongs Citibank customers also owning Citi card. Total Relative Yr 1 value for all 9 Asia markets would be $29M

10 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.

11 Market Segmentation


13 Customer Lifetime Value (CLV) Source: CLV Calculator- HBR Assumptions Years of Customer Life5 Annual Discount Rate15% Item 1Item 2Item 3 Initial Purchase Price $ $ $ Annual Product Inflation7%5%2% Margin per Product25%15%10% Retention Rate Year 195% Retention Rate Later Yrs.80% Years between Purchase Value of Purchase Profit per Acquired Customer Item 1 Item 2 Item 3 Item 1 Item 2 Item 3 Year Year Year Year Year Net Present Value Item 1 Item 2 Item Total NPV81.53 Discount Rate(%) $101.60$90.57$81.53$74.03 Customer7$117.58$102.12$90.00$80.33 Life Years10$127.91$108.88$94.51$ $140.63$116.01$98.63$85.83

14 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$14M15%(10)/(1+0.15)+ (14)/(1+0.15) 2 $19.27M High Price Strategy $6M$4M5%(6)/(1+0.05)+ (4)/(1+0.05) 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

15 EV of Entering a Test Market in Singapore Using Real Options

16 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!

17 Compensation - Period 1 Australia vs. India example NPV Operations NPV Tax Shield Real Options Compensation Recommendation AustraliaHigh ($59M)HighLow 25% Base Salary 37.5% NPV Operations 25% NPV Tax Shield 12.5% Real Options IndiaLow ($6 M)LowHigh 50% Base Salary 12.5% NPV Operations 6.25% NPV Tax Shield 31.25% Real Options

18 Compensation - Period 2 Australia vs. India example NPV Operations NPV Tax Shield Real Options Compensation Recommendation AustraliaHigh (>$59M)High withdraw 50% Base Salary 25% NPV Operations 25% NPV Tax Shield IndiaLow (>$6 M)Lowremain 50% Base Salary 25% NPV Operations 6.25% NPV Tax Shield 18.75% Real Options

19 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

20 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.

21 Questions

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