Alpen Bank
International Business Case Analysis 1 Alpen Bank: Launching the credit card in Romania Name: Xiao Zheng #701369253 Subject: Alpen Bank: Launching the credit card in Romania Course Number: IB207 Instructor: James Neelankavil, PH. D. Date: 09/25/2011 Problem Definition In 2006, the country manager for Alpen Bank in Romania, Gregory Carle, considers whether to recommend the launch of a credit card business and add 5 million of annual profit to the Consumer Bank segment within two years.
The firm rejected the idea several years earlier because of poor economic conditions in Romania. However, Romania is experiencing a period of economic growth after joining the European Union and Carle believes it is time to reconsider the opportunity despite continued skepticism within the company. Carle faces several important decisions before he can present his plan to the head of International Consumer Businesses. He must decide whether to launch a credit card business in Romania, how to position the credit card, and how to acquire new customers most effectively.
Historically, Alpen management had balked at launching a card business due to low per-capita income levels, a poorly developed infrastructure of point-of –sale terminals, and the population’s inexperience with consumer credit. The country’s imminent entry into the European Union had led to a reassessment of this decision. Hence it is critical to consider whether Alpen Bank should approve the proposal of Carle’s, which is whether to launch the credit card business in Romania market.
Meanwhile, Carle should consider the case rest on the analysis of the economic opportunity and demonstrate the generating 5 million in profit within two years was a realistic objective. Beyond this, we should also identify why Alpen bank would raise this consideration. And the statements are as follows. Firstly, after a tough three-year recession, macroeconomic trends during the first half of the decade were encouraging. Rapid economic growth and rising incomes, particularly among the emerging middle and upper-middle class, had dramatically increased total disposable income.
And a consumer behavior research also showed that consumers in Romania were likely to purchase branded imports, it is a good sign for Alpen Bank to see that the utilization rate of the credit card would be high enough to earn the profit that Alpen has expected. Secondly, consumer behavior in Romania has changed; they used to prefer to spend their spending largely cash-based. However, consumers were also increasingly likely to use cards instead of cash, so it is a great timing for Alpen Bank to launch their new business. Following questions are also need to be answered as to solve the primary problem.
The first one is which level of customer should Alpen Bank position its credit card business. It is important to decide Alpen Bank’s target customer, middle-class customers or affluent customer, if the credit card positioning did wrong, the expected result which is 5 more million profit within two years won’t turn up, or even create more losses for Alpen Bank. Other problem also can be listed. Such as what level of customer acquisition would be required to break-even, and how quickly would the business generate profit beyond break-even?
How would the credit card opportunity compare to focusing on the core business of banking services for the affluent? Situation Analysis In this part, Alpen Bank’s internal strengths and weakness need to be considered to decide whether to launch the credit card business. We can use the SWOT analysis to state Alpen’s situation. Which are stated as following. Strengths Strengths are characteristics of the business or team that give it an advantage over others in the industry. 1. Alpen Bank’s existing customer base was affluent and was likely an easier segment to target.
These potential customers were the most attractive for credit card issuers. 2. Affluent customers were less price- sensitive, about annual fees and more likely to be experienced with low levels of consumer debt. 3. Affluent customers were also likely to use their cards with greater frequency and for higher –average tickets, and premium cards carried by the affluent could command higher interchange rates. From the exhibit Table A, Net Revenue Impact Estimates, 2007. We can see that affluent and most affluent customers of Alpen Bank take over the most part of the revenue of Alpen Bank, which total interest revenue was 235. 3 and total annual revenue was 333. 13. Weaknesses Weaknesses are characteristics that place the firm at a disadvantage relative to others. 1. If Alpen Bank decide to launch the credit card business in Romania market. Alpen should first understand the target market economic position. Romania lacked credit card growth potential relative to other emerging markets. Moreover, Romania consumer spending was largely cash- based, and merchant acceptance of card payments was low. 2. Furthermore, the Romania consumer lacked experience in managing credit.
This made it difficult to determine credit limits and set interest rates that would attract customers, yet fully protect Alpen Bank from default risk. 3. In 2000, Romania was suffered from a tough three-year recession. The average income was relative low, which was 3,500 RON, although the middle class household was growing, it was still very small, and less than half of the population was urban. 4. The vast majority of cards in circulation were debit cards, and many cardholders used their cards exclusively for cash withdrawals, rather than the purchases needed to drive up revenue for card issuers.
Consequently, if Alpen Bank wants to launch the credit card, the cardholders may rarely use the card to cash advance or use it to make expense, the bank may hard to make the profit from the credit card business, because there is little interest revenue and other charge fees for Alpen Bank. 5. The costs for Alpen Bank to enter the market included investments in direct marketing, advertising, and support infrastructure. The investment in marketing has both advantages and drawbacks. However, the most efficient one such as direct mail has a higher yield, yet it tends to be more expensive than other methods.
However, the cheaper method would have lower respond rate and many applicants would not qualify for bank credit. In addition to this, Alpen Bank needs to invest in an in-country infrastructure support, and incremental fixed overhead costs were substantial. Opportunities Opportunities are external chances to make greater sales or profits in the environment. In this case, it seems that the macroeconomic environment is relative positive to Alpen Bank to launch their credit card business. And the statements are as follow. 1.
The macroeconomic trends during the first half of the decade were encouraging. Rapid economic growth and rising incomes, particularly among the emerging middle-class and upper- middle class, had dramatically increased total disposable income. 2. There was also an independent consumer behavior research indicate that over one- third of Romania households were likely to purchase branded imports, which means that the consumption will increase after the recession. And it is possible to make a profit from the credit card business. . Consumers were also increasingly likely to use cards instead of cash. In 2006, total financial cards, including both debit card and credit card, grew by 35% over the prior year. Consequently, we can estimate that in the following years, the credit card markets will still grow, and it was also a great opportunity for Alpen Bank to grab the market share. 4. Though the majority existing customer base was affluent and was likely an easier segment to target, middle-class households was also a big cake for Alpen Bank to grab.
Many of middle-class households were interested in having credit cards. If Alpen Bank would like to position its credit card to middle-class customers, it would be a great opportunity for it. Threats Threats are external elements in the environment that could cause trouble for the business. There are strengths and opportunities existing for Alpen Bank to launch a credit card business, however, the threats are also there. 1. During the tough three year recession in Romania, although the middle-class was growing, it was very small, and less than half of the population was urban.
If Alpen Bank target on middle-class customers, it would be a little risk. 2. Although the vast majority consumers were increasingly willing to use card to spend money, not only Alpen Bank want to launch this business, it was evident that other banks were bullish on the prospect of a Romania credit card business. 3. While Alpen bank decides to launch the credit card business, Alpen will find that the entry cost would be really expensive. Including investment in direct marketing, advertising, and support infrastructure.
The costs were estimated at 5 million annually to support the first 50,000 customers. For every additional 50,000 customers, Alpen need to spend 750,000 oer year for overhead. Otherwise, Alpen should consider whether the profit would cover the cost for Carle to make his promise that credit card business would add 5 million profits within two years. 4. When doing the customer acquisition, one of the customer acquisitions is advertising in the public, it can raise the interest among the prospective card applicants, but also help convert prospects already in the sales pipeline.
How to position Alpen Bank’s credit card If Alpen Bank decides to launch its credit card, we should lay out the details of this choice. First is how should Alpen Bank position its credit card business. After scrutinize the details in the case and exhibit and data used in the case, I think Alpen bank should position its credit card as a high end premium product as its existing customers belong to the affluent class and it would be easier to establish itself in this segment. Furthermore, this class represents the top 10% of population which has about 24% of wealth.
They are less prices sensitive and more conscious of their image so positioning the card on high end would be more beneficial for the bank. This segment includes professionals who would like to purchase products and services through credit card considering it a status symbol. In Romania, it is seen that credit cards are somewhat stickier as compared to the developed countries. This shows that if Alpen positions its card as a high end product, it will gain a share of market which would stick to its card.
The middle class also has a huge potential especially in terms of the size of market however they are more price-focused and would only welcome this new credit card if the interest rates are low. They also have a monthly income which supports them to have a credit card. Based on the attitudes of customers in other emerging economies it can be said that customers in middle-income class have a lower actual utilization rate when compared with affluent class. As a consequence, serving the middle-class customers could mean lower interests income and interchange for the banks.
Customer acquisition break-even As already discussed previously, the expected increase in annual profit is 5 million within two years. Now let’s figure out what is the break-even of Alpen Bank’s customer acquisition. From the table, we can see that the unit cost of the customer acquisition was separated in 5 parts. The unit cost of direct mail is 0. 5, and the Take-One Sale is 0. 1, the Free-standing inserts is 0. 05 per unit, unit cost of direct sales is 3000/rep, and that of branch cross-sell is 1 per unit. We can calculate the break-even point of each marketing plan.
The function of the break –even point is: Break-even point= Fixed cost/Unit selling price- variable cost When the customer scale is under 50,000, the fixed cost will be 7million including advertising and investment infrastructure overhead, the variable cost will be 20. If the customers scale over the 50,000, the fixed cost will be 7,750,000, and the variable cost will be 17. 5 because the economic scale. Customer Acquisition| Break- even point(50,000)| Break- even point(+50,000)| Direct Mail| 358,974| 455,882| Take One| 351,758| 445,402| FSIs| 350,877| 445,402|
Direct Sale| 2348| 2598| Branch Cross-Sell| 368,421| 469,696| Above is the break-even point that under each marketing method, how many customers does Alpen Bank need to achieve to make a break-even, which means no profit, neither loss. Alternatives Gregory Carle, the Alpen’s country manager for Romania, wants to launch the credit card business to the Romania, by doing this, he hopes that the new business would add 5 million of annual profit to the Consumer Bank segment within two years, but the problem is how to position its credit card and acquire new customers effectively.
If not to launch the credit card, how can Alpen Bank achieve the 5 million more annual profits within two years goal? Following may be the alternatives that Alpen Bank can do. First, as I discussed in the problem definition part, if Alpen Bank launch the credit card, they’d better position its credit card on its high-end customers, however, the alternative is to position its credit card on the middle-class customer also, which means it need to acquire new customers and achieve affluent customers from its existing customer base.
Second, Carle may expect to use the most effective way to acquire new customer, which means to be selective by using several avenues, or just one of the marketing method. The alternative is to be aggressive and use all five avenues. Consequently, we have four alternatives that Alpen Bank can choose, as described below. Alternatives| All Five marketing avenues| one direct marketing avenue| Affluent and middle-class customers| 1| 2| Affluent customers| 3| 4| Evaluation of Alternatives By evaluating the alternative, we should support the arguments with quantitative analysis and discussed the four alternatives separately.
Alternative 1: Target on both affluent and middle-class customers and using several marketing avenues. Total Profit for Alternative 1 = Total Annual Revenue – Total Annual Costs As described in the Table B, we can figure out how many customers that Alpen Bank expect to reach. | Total cost of each direct efforts| Prospects Reached| Total cardholder obtained| Direct Mail| 1,250,000| 2,500,000| 45,000| Take One| 200,000| 2,000,000| 15,000| FSIs| 175,000| 3,500,000| 15,750| Direct Sales| 30,000| 60,000| 9,000| Branch Cross-Sell| 50,000| 50,000| 22,500| Total| 1,705,000| | 107,250|
Infrastructure Cost is 5,858,750, Direct Variable Costs is 20 * 107,250 = 2,145,000 Reduced Variable Costs due to economies of scale = 2. 50 * 107,250 = 268,125 Total Annual Revenue = Revenue per Cardholder (Middle Class) * Total cardholder obtained (Middle Class) + Revenue per Cardholder (Affluent)* Revenue per Cardholder (Affluent) + Revenue per Cardholder (Most Affluent)*Total cardholder obtained (Most Affluent) = 60. 63 * (107,250*39. 48%) +123. 38*(107,250*32. 54%)* + 209. 75* (107,250*27. 98%) = 13,167,364. 14 Total Annual Costs = Total Direct Market Efforts Cost + Total Advertising
Cost + Infrastructure Cost + Direct Variable Costs + Reduced Variable Costs due to economies of scale = 11,565,625 Profit for Alternative 1 = Total Annual Revenue – Total Annual Costs = €1,601,739. 14 Alternative 2: Target on both affluent customers and just use one marketing effort from the five avenues. Using the same method that already discussed in the Alternative 1, we can calculate the annual revenue of each marketing method. The table below is the annual revenue that each effort can generate. Annual Revenue| Direct mail| 5,524,768. 09| Take One| 1,841,589. 36| FSIs| 1,933,668. 83| Direct Sales| 1,104,953. 62| Brach Cross-sell| 2,762,382. 04| The table below is the cost of each method. | Direct Marketing Costs| Advertising Costs| Infrastructure Costs| Direct Variable Costs| Direct Mail| 1,250,000| 2,000,000| 5,000,000| 900,000| Take One| 200,000| 2,000,000| 5,000,000| 300,000| FSIs| 175,000| 2,000,000| 5,000,000| 315,000| Direct Sales| 30,000| 2,000,000| 5,000,000| 180,000| Branch Cross-Sell| 50,000| 2,000,000| 5,000,000| 450,000|
Consequently, the profit of Alternative 2 would be as shown below. | Total Profit| Direct Mail| -3,625,231. 91| Take One| -5,658,410. 64| FSIs| -5,556,331. 17| Direct Sales| -6,105,046. 38| Branch Cross-Sell| -4,737,617. 96| Alternative 3: Target on only affluent customers and using all five marketing effort to acquire customers. Using the same calculating method Total Annual Revenue = Revenue per Cardholder (Affluent)* Revenue per Cardholder (Affluent) + Revenue per Cardholder (Most Affluent)*Total cardholder obtained (Most Affluent) = 123. 38*(69,375*53. 67%)*+ 209. 75* (69,375*46. 4%) = 11,322,447. 19 Total Annual Costs = Total Direct Market Efforts Cost + Total Advertising Cost + Infrastructure Cost + Direct Variable Costs + Reduced Variable Costs due to economies of scale = 10,334,687. 5 Profit for Alternative 3 = Total Annual Revenue – Total Annual Costs = €987,759. 69 Alternative 4: Target only on affluent customers and using only one marketing effort to obtain the customers. | Total Revenue| Total Cost| Total Profit| Direct Mail| 3,674,643. 48| 9,150,000| -5,475,356. 52| Take One| 1,224,881. 0| 7,500,000| -6,275,119. 00| FSIs| 1,282,042. 28| 7,490,000| -6,207,957. 72| Direct Sales| 1,469,857. 39| 7,210,000| -5,740,142. 61| Branch Cross-Sell| 3,674,643. 48| 7,500,000| -3,825,356. 52| Recommendation After an exhaustive evaluation of all the alternatives, and a thorough business situation analysis, it is apparently that alternative 1 would be the most profitable one to enter the credit card business into Romania, which means to target both affluent customers and middle-class customers, and meanwhile using all the five marketing efforts to enter the credit card market.
As we can see from the alternatives evaluation part, the profit of alternative 1 is 1601,739. 14, profit of alternative 3 is 987,759. 69. However, the profit of alternative 2 and alternative 4 is negative, so it is unadvisable to just use one marketing effort to acquire the customer. Considering the economic and market conditions as explained in the case, Alpen should launch a credit card. Economy is growing rapidly with increasing incomes and making upper middle and middle class a substantial part of the society. Moreover disposable income is also increasing dramatically.
The country has 10% households who have 24% of the wealth so they have sufficient income per month. They are conscious about their social image and are less sensitive to prices. The middle class is also a potential market for the credit card. This class includes young professionals who make price driven decisions so the bank might think about lowering the interest rates for them. The credit and debit card market of Romania also grows at a pace of 35% in 2006 and about 9. 5 million cards were being used in the market.
Romania has ATMs and point of sales terminals for card transactions too. On the other hand, the majority of the cards being used by customers are debit cards, people use cards generally for withdrawing cash, it is an opportunity for Alpen to cash on the credit card. Therefore, it is recommended that Alpen Bank can launch the credit card business to the Romania market, Alpen should position its card on both affluent and middle-class customers, and when doing the customer acquisition, Alpen should use all five avenues as described in the case to marketing the credit card.
Plan of Action It seems that the opportunities and strengths are convictive enough for Alpen Bank to launch the credit card, the weaknesses and threats are still exist and need Alpen Bank to make more special efforts to enter the new market. Firstly, the majority of the cards that are used by customers are debit cards, which means Alpen has to make more efforts to convince customers to use credit cards. Currently, people in Romania use cards generally for withdrawing cash rather than for buying products or services, so there is less revenue driven from transactions.
Moreover, most of the merchants are not accept credit cards and prefer cash payments. All these facts show that Alpen would require efforts in marketing the card and convincing people realize the utility of the card. This would also cost them in the beginning as customers need awareness but as the market would grow it will become a profitable business. More specialized employees will be required because they have the knowledge about credit cards operations. Marketing and R&D departments would require effective implementation of marketing techniques and research respectively to make credit card a big success.
