Case Study for EDHEC Business School

TI&CD Assessment Centre

IMEX Card’s Future in the Hungarian Credit Card

Market

Written by László Tsonio Avramov

*The names, figures and companies in this case are fictional but based on a real business situation
Background Information on IMEX - Overview & History

IMEX (International Money Express) is an American credit card provider headquartered in

New York City, NY. The business was founded over 160 years ago and has developed into
one of the major credit card issuers and card associations globally.

IMEX is one of the largest international issuers and operators by card payment value. Within
financial products, the corporation is best known for its charge and commercial cards aimed
at affluent consumers and international companies. In 2013, the financial services provider
relaunched its online payment platform and increased its pre-paid offerings.

Globally, IMEX currently has over 107 million cards in force and made USD $33bn in the last
year.

What makes IMEX different?

IMEX is the world’s largest card issuer, the premium network for high-spending card
members, a processor of millions of transactions daily, and a partner that provides business-
building services to a worldwide merchant base.

It is one of the few credit card providers that issues its card directly to its customers without
intermediary banks and also has one of the most established network systems for payments.

Focus on Spending rather than Lending

Unlike other card issuers, IMEX earns most of its revenues from card member spending and
the business IMEX drives to merchants rather than from lending fees and revolving credit
balances. The spend-centric model, lower reliance on lending and broad portfolio of
products and services for consumers and B2B customers position it to earn attractive
returns.

Premium Customers

IMEX possess the best customer base of any payments company. On average, card members
spend about four times more than those of FasterCard and three-and-a-half times more
than LisaCard holders. IMEX also has the highest credit quality among major card issuers.
Customer loyalty of high-spending customers is earned by providing them with industry-
leading products, services, rewards and benefits.

Superior Service

IMEX is a global leader in customer service and has earned several awards for highest
customer satisfaction among credit card companies.

A trusted brand

Today IMEX is one of the world’s most trusted and powerful brands, which stands for
security, service and personal recognition. Forged over 160 years of doing business, the
brand continues to set itself apart from the competition.

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Community

The card provider has built a strong community amongst its customers and calls its card
holders “Cardmembers”. Cardmembers receive different forms of personal recognition,
starting from the “Member Since date” on their cards to exclusive concierge services for
higher tier Cardmembers such as Platinum Card holders.

All these factors have helped IMEX to fortify its two key strong points in the past year:

High spending by card members:

Spending on IMEX cards rose by 7% for the year, and the company continued to generate
one of the highest economic growth rates among major credit card issuers globally.

Excellent Credit Quality:

The major card-issuing competitors were outperformed especially in past due and write-off
rates. This is due to both the customer base as well as the lending strategy.

IMEX has been well reputed for these two key strong points and the priority is to pay
attention to these especially in case of expansions into new markets or countries.

The General Issues of IMEX

The main issues IMEX is facing are two-fold:

First, IMEX is still too Americas and Western Europe centric. It has a strong presence in the
western regions and metropolitan cities, but is not represented enough in many emerging
markets such as Eastern Europe.

Second, the acceptance of the IMEX card amongst merchants is much lower especially with
small and medium sized businesses as well as emerging countries, due to its high fees.

A Background on the Credit Card Industry

The credit card industry consists of four key parties that work together to provide card
transaction services: networks or card associations, merchant acquirers, merchants, and
card issuers:

Networks/card associations are the backbone of the payment system and facilitate
transactions to be cleared by connecting merchants, merchant acquirers, and card issuers.
The network associations set the operating rules by which all parties in the system abide.

Whilst IMEX offers as well as uses its own network and is a major player in terms of card
network providers, Lisa and FasterCard are the two most widespread networks especially
outside western countries.

Merchant acquirers are the distribution and sales arm of the payments industry and are
often associated with banks. They sign up merchants for card acceptance and offer the

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support that merchants need to process card transactions: point-of-sale terminals, data
transmission, payment authorization, and payment settlement.

Merchants are the hotels, stores, petrol stations, etc., that accept card payments.

Card issuers are predominantly banks, and they own the relationship with the cardholders
themselves. These issuers authorize payments and charge cardholders. As members of the
Lisa/FasterCard or IMEX associations, banks must adhere to the card-logo design standards,
but it is up to their own discretion to decide on attributes such as positioning, branding,
pricing, and any kind of loyalty programs.

In comparison to Lisa and FasterCard, which are solely focused on operating the card
networks, IMEX is also a card issuer and issues its cards directly to its customers. IMEX
always maintains a direct relationship with its clients and there is no bank involved.

The transaction volume is the determining factor for revenue in the card payments industry.
A certain percentage of every transaction, referred to as the “merchant discount,” is taken
and split among the card issuer, merchant acquirer, and the network association.

Since IMEX operates as both the card issuer and as a network association it receives a larger
portion of fees.

Merchant acquirers seek to sign up attractive merchants with frequent transactions and high
per transaction spending, while Lisa and FasterCard’s strategy is to promote their cards for
customers to use for every purchase. Card issuers profit from the amount spent by the
cardholder, receiving a portion of the merchant discount known as “interchange.”

From a merchant’s point of view, it is preferable (as it is without any fees) if their clients pay
by cash, except when card acceptance will encourage their customers to spend more (see
Exhibit 1 for a representation of a typical transaction cycle).

Besides interchange revenue, card issuers also generate revenue by charging interest
income, annual fees and penalty fees. Cardholders who do not pay off their full balance each
month, but instead use their credit cards for “revolving” financing, are charged interest
income.

These “revolver” customers are profitable to card issuers and one of the strategies is to
attract customers by offering temporary low-interest financing.
However, and this is pivotal to IMEX’s strategy of securing premium clients, this source of
profit must be managed against the risk of default, which can be significant and costly.

Credit Card Client Segmentation

The card industry is targeting two types of customers, private individuals and business
customers.

Private Individuals

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This category is sub-divided into two segments:

1) Personal clients, who are working professionals or in certain cases students

over 18 years of age with a pre-defined minimum household income.

2) Premium clients, consisting of affluent individuals with significant savings and

elevated household incomes.

Business Customers

This category consists of companies, providing their employees with cards for business
transactions. Most card issuers divide and offer services to two different sub-client
segments.

1) Small Business clients: who constitute businesses with around 100 employees or
less.

2) Large Corporations: any company with over 100 employees up to large multinational
companies.

Credit Card Products

Charge Cards are payment products, which require the customer to repay the full balance of
transactions at the end of each month.

Credit cards, in contrast to charge cards that require the balance to be repaid in full each
month, allow the consumers a continuing balance of debt, subject to interest being charged.

Prepaid Cards, are preloaded cards, which means they do not have overdraft facilities or
possibilities to pay for transactions at the end of each month or at a later stage. These cards
can be loaded through direct deposits or transfers at any time and used for payments. The
advantage is that card providers usually don’t conduct any credit checks, require any
minimum balances or incomes nor annual fees, which makes the card attractive for younger
individuals or people without any regular household income.

Advanced Functionalities of Cards

One of the newest products of credit card issuers are payback or so called reward cards.
The idea of these add-on services is to encourage customers to increase their spending and
use their cards more frequently for payments.

Card issuers offer a small percentage of payback to the cardholder for every purchase or
transaction. Whilst the exact percentages and limits vary by issuer, customers receive up to
3% of their transactions credited back in terms of statement credits onto their cards.

Some credit card issuers offer reward programmes in conjunction with hotel, airline and
retailer partners. These collected points can then be transferred to the partner programmes
and redeemed in the form of airline miles, hotel reward points or any other partner rewards
points.

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IMEX offers one of the most globally comprehensive payback and reward programmes and is
leading in partnering and offering transferrable reward points to customers.

Given the fact that most rewards are in conjunction with airlines, hotels and car rentals the
services are especially appreciated by business clients as well as affluent clients, which due
to their frequent travel make significant use of these services.

IMEX’s History in the Hungarian Credit Card Market

To better understand the current weak positioning of IMEX in the Hungarian market, Zoltan
looked into the company’s internal reports as well as consulted with several researchers to
get a better understanding of the growth figures in Hungary. The research yielded the
following:

When in 1999 IMEX initially moved into the Hungarian market, the IMEX executives in the
NYC headquarters felt that Hungary lacked credit card growth potential in comparison to
other emerging markets. The main factors for this assessment were the fact that the
consumer spending in Hungary was mainly cash-based and merchant acceptance of credit
card payments was low. Also, due to the fact that the Hungarian consumer lacked
experience in managing credit, it was difficult for any financial services provider (especially
for a foreign provider) to determine credit limits, to set appropriate credit rates or to protect
IMEX from a potential default risk.

For this reason the strategy was to move into Hungary with a small representative office and
offer the basic IMEX card to the most important customers (mostly affluent foreign
customers only) who had been expatriated to Hungary. IMEX wanted to continue its
business with these valued customers by offering them IMEX cards in Hungary and keep the
ties in case they were repatriated into another western country.

As a consequence, the IMEX Hungary office has stayed small and due to the lack of attention
and investments, marketing efforts as well as endeavours to increase the acceptance of the
IMEX card (besides the airport and certain western stores) have remained limited.

In the meantime, there were two significant developments taking place. First, IMEX missed
the shift of Hungarians starting to use cards more frequently for payments. This was due to
the lack of management attention to the Hungarian operations, which was a result of the
stagnating usage of IMEX cards as well as passive management. As a consequence the local
banks established a significant market share with the Lisa and Faster Card networks, and
IMEX remained practically unknown in the Hungarian market.

During this time, between 2003 and 2007, the total number of payment cards in Hungary
increased at a compound annual growth rate (CAGR) of 18.3%. By 2007, OTP Bank (National
Savings & Commercial) held the highest share, accounting for 56.7% and 19.9% of the total
debit and credit cards market, respectively.1

Second, by the time the IMEX management had realised the increased credit card potential
in Hungary, the financial crisis had hit Hungary. This resulted in a general aversion to credit-

1 Based on Research by Datamonitor (2012)

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fuelled spending. Increased declines in the credit and charge card categories were the
consequence. Subsequently credit card growth in Hungary declined during the crisis at a
CAGR of -3.70%, and charge cards at a CAGR of -1.23%.2

Current Credit Card Developments in Hungary

The latest political and macro-economic developments as published by a reputable research

company have led IMEX board members to reconsider their view on the company’s position
in Hungary before exiting the market completely.

Increased card payments due to new sector-based tax

The government introduced and then increased the tax levied on money transfers and cash
withdrawals. This new factor pushed cost-sensitive Hungarians towards choosing cheaper
banking services. The transaction tax had a positive impact on card payment habits and also
forced Hungarians to use less cash and decrease the frequency of cash withdrawals. It was
also an incentive for direct debit payment and online shopping.

Students and younger generation as a new target

Card operator FasterCard launched an intensive marketing strategy to address the younger
generation – teenagers and university students. With the cooperation of OTP Bank
(Hungary’s leading bank) it sponsors major music festivals and offers discounts with its
festival cards. The speciality of these closed loop pre-paid cards is that they can be
transferred to debit cards linked to a current account.

Distrust of banks keeps cash important to Hungarians

Although cash payments continued to slightly decrease in 2013, Hungarians still
predominantly use this payment method., They generally keep their bank account to receive
their salary, withdraw it in two or three instalments and pay with cash whilst shopping. Cash
is also important amongst the under-served or un-served population, especially in the
countryside. Cash payment is the most common payment option amongst retired, poorly
educated people and those on low or no income.

The key factors in choosing a bank are banking fees, discounts and add-on services
Competition between banks is getting fiercer in Hungary thanks to the lengthening economic
and financial crisis and worsening financial situation of Hungarian families. As a direct
negative impact of the transaction tax, Hungarians choose their bank carefully based on the
overall banking fee on one hand and the potential gains they can get at the chosen bank.
These gains can include cash withdrawals, cheaper money transfer, same-day bank transfer,
reliable and client-friendly customer service and transparency of fees.

Premium and private banking is in focus for banks

Premium and private banking is one of the market segments on which mainstream banks
focused in 2013 and which can grow in the near future. The main target market for premium
banking is the new 25-40-year-old generation with average savings of HUF2-3 million (USD
$9,000-$14,000). This is a general entry requirement for premium banking. A sign of market
development for this segment is new products such as zero-fee current accounts with
improved online services. In 2013 the premium banking clientele was offered free banking

2 Based on Research by Timetric (2012)

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services, combined saving services and innovative digital platforms for convenient and
customer-friendly banking.3

Expected Growth Rates in Hungary till 2018

In addition, improved GDP growth, rising per capita income and low inflation are expected
to raise consumer confidence and increase spending, resulting in an increased scope for
card-based transactions.

Currently Hungary has 9 million cards in circulation and an overall growth of 6% CAGR till
2018 is forecast.

Table 1

Debit Cards
The debit cards category held the highest share with 85.8% of the cards in circulation in
2013. It is expected to maintain the highest share of the overall payments channel despite
the slow CAGR (2014-2018) of 1.57%, rising from 7.8 million cards in 2014 to 8.3 million in
2018.

Credit Cards
The credit cards category had the second-largest share with 13.2% in 2013 and has a strong
anticipated CAGR of 22% till 2018. This is due to the improved economy and Hungarians’
decreased risk aversion to credit cards.

Prepaid Cards
Prepaid cards currently only represent 0.8% of the Hungarian market share, which is an
equivalent of 73,000 cards. By 2018 this number is expected to increase at a CAGR of 32% to
220,000 cards.

Charge Cards
The charge card category held the smallest industry share of 0.2% in 20134, but is due to
grow very significantly (CAGR 61%) till 2018 to 120,000 due to the demand of students and
low-income families who want to avoid the transaction tax newly introduced by the
government.

3 The above are the results of a research conducted by Euromonitor (2014)

4 Based on Research by Timetric (2014)

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Challenging Times for IMEX in Hungary

Besides the positive developments in Hungary, IMEX currently has several problems.

IMEX’s market share as a credit card network

As a credit card network, IMEX currently has 1% market share, well behind its competitors
FasterCard (52%) and Lisa Card (47%).

Table 2

Card Issuance – IMEX is virtually unknown

From a credit card issuer perspective in terms of numbers of cards issued, IMEX is also
practically unknown and is lagging behind the local competitors.

Table 3

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Card acceptance amongst merchants

The IMEX card is exclusively accepted in Budapest at selected western hotel chains,
department stores and the airport.
No small or medium-sized merchants accept it and IMEX is unknown in the countryside.

IMEX charges the merchants comparably more than the Lisa or FasterCard networks do.
Hence it will be difficult to push for the usual fees IMEX charges to expand with smaller and
medium-sized merchants.

As a card issuer, IMEX is currently only offering one card in Hungary, which is its basic Blue
Charge Card to both individual as well as corporate clients. Almost all current IMEX
customers are either expatriates from Western Europe or the US, or western companies in
Hungary, who have already had agreements with IMEX abroad.
All other IMEX cards such as the Gold, Platinum, Business Cards, Reward, Payback or Reward
Cards are neither offered nor marketed.

Both individual clients and business clients are dissatisfied with IMEX Hungary, given its
limited network and high fees, and with only the biggest retailers accepting IMEX cards,
making it very hard to pay anywhere with the card.

This has led to a very limited usage of IMEX cards in Hungary, both in terms of frequency and
volumes.

Table 4

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IMEX’s Potential Positioning

Besides the question of whether IMEX should expand further in Hungary at all, a
recommendation for the future positioning of IMEX will be required.

Several factors need to be considered, starting with the market size. Hungary has around 10
million citizens of which only a certain percentage are working professionals or prospects
that would qualify for an IMEX card. Also it’s questionable whether all qualifying prospects
would be interested in applying for a card.

Table 5

Although IMEX’s existing customer base is affluent and is an easier segment to target, Zoltan
is unsure whether a credit card business could be viable without marketing to the broader
middle class.

The other concern was that the competing local banks that were much better established in
the credit card market in Hungary also started marketing to the affluent and potential
middle-class customers. How could IMEX set itself apart while being in line with its global
value proposition?

In terms of sales it was clear that for credit and more premium cards, which would
ultimately make the most revenue, only the middle class with earnings of USD $10.000 per
year and above would qualify.

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IMEX’s Two Sources of Income

IMEX’s Earning Potential as a Network Association

There is a need for IMEX to develop its own card association network in order to operate its
cards. As a network association IMEX charges a percentage of 5% for every transaction (for
further information see Exhibit 1).
If IMEX manages to win significant market share as a network association in Hungary, this
percentage could become a lucrative overall source of income.

Currently the overall Hungarian card payments channel has annual revenues of HUF 0.81
trillion (USD$3.62 bn), and is anticipated to grow at a CAGR of 10% till 2018.

IMEX holds a market share of 1% of USD$3.62bn, which after 5% incoming fees accounts for
USD$1.8m revenues. An increase of IMEX’s market share could mean a significant income
stream.

IMEX’s Income from Credit Card Issuance:

In the credit card issuance business there are several different streams of income, such as
joining and annual fees, interest payments, interchange and fees for penalties.
Whilst the tendency in Hungary, especially after the government introduced taxation on
several transactions by debit card, is that most customers are looking for the cheapest
alternatives, Zoltan thinks the extra services and benefits IMEX offers could balance this.

Based on his experience in other Eastern European markets he has estimated the following:

Table 6

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Market Entry Strategy and its Costs

Zoltan knew that the two key components of growth would be for IMEX to increase its
customer base and grow its card network by negotiating with merchants to accept its cards.

This included investments in direct marketing, advertising and support infrastructure and a
viable business plan.

Growth Plan for Card Issuance – Raising Awareness amongst Customers

In order to evaluate the best mix of instruments to attract prospects and convert them into
customers, Zoltan hired a market research agency to estimate the costs for the number of
prospects reached and their conversion rate (see table below).

Table 7

Direct mail campaign could target credit card applications to the intended audience,
resulting in a higher yield, but it tended to be more expensive than other methods. Also
there were several options available and Zoltan wondered which customer segment was the
best suited for IMEX to approach or whether he should send the direct mail to every contact
listed.

Flyers were the typical leaflets offered via countertop displays at different retailers and
offered a broad reach. The drawback to this was that this marketing option gave little
possibility to target a specific audience; many of the applicants would not qualify for a card
or at least not for a credit card.

Inserts in magazines were newspaper and magazine ads that were inexpensive to circulate,
but tended to have a very low response rate.

Direct sales efforts through telemarketing as well as through stands in airports, and events
targeting affluent clients meant for IMEX targeting existing high-potential and new
customers, but required considerable investment in each salesperson.

Zoltan estimated he needed a team of 20 sales representatives, each targeting 15 clients per
day.

Up-selling through the representative office was a targeted sale to existing customers who
entered the IMEX rep office. This could leverage the existing office facilities, but Zoltan knew
that if IMEX wanted to expand, additional office space would be required.

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Targeting either affluent customers or business clients only with a more premium card
would reduce the available direct mail prospects significantly. Additionally, the agency
anticipated that the qualification rate for leaflets and over the counter brochures would also
be reduced by 50 percent, especially because these marketing efforts could not be targeted
specifically at the affluent.

IMEX’s experience in other European markets was that using several direct marketing
channels was necessary to build a customer base. Given IMEX’s poor market share and lack
of brand awareness in the Hungarian market, direct sales had to be complemented by
advertising.

Zoltan calculated a $3 million budget for targeted magazine advertisements and 30-second
television spots during prime time TV. The television and magazine advertising would not
only increase interest among prospective card applicants, but also help to convert prospects
already in the sales pipeline.

Another question to consider was whether it made sense to be aggressive and use all
marketing tools, or whether there were meaningful savings in being more selective.

Growing the Card Network – Increasing Card Acceptance with Merchants

Beyond the customer acquisition and advertising costs, AMEX had to hire merchant
acquirers to negotiate partnerships with merchants in order to increase the acceptance of
IMEX cards.

Additional investments in in-country infrastructure support, and incremental fixed overhead

costs were substantial. Based on his experience Zoltan modelled the following:

Table 8

The first step was to rapidly increase the acceptance of IMEX amongst merchants. The only
viable rate was to sign 100,000 merchants yearly till 2018. Given that one merchant acquirer
representative signs on average 500 merchants per year, 200 of these negotiators had to be
hired to fulfil this goal.

In addition costs associated with new staff, computer systems, customer support and other
overhead costs for the card issuance were estimated at USD$5 million annually to support
the first 50,000 customers. For every additional 50,000 customers, Zoltan would need to

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spend USD$1 million per year for overhead. The direct variable costs associated with each
cardholder included billing, loyalty program administration, collections, fraud and loan
default and were estimated at USD$30 per customer. With every additional 50,000
customers, economies of scale would reduce the direct costs by USD$2.50 per card.

The Decision on the Future of IMEX in Hungary

Zoltan was certain that the board would be willing to consider investing, but a strong
business case would be required if IMEX was to remain in Hungary, given that this region has
been loss-making since its opening.

From a financial perspective Zoltan knows that the managers in the headquarters will not
expect Hungary to return high profits, given its size and income, but he does know that
should IMEX invest, a break-even and a subsequent profitability in 4 years time would be
required upon investment.

Whilst Zoltan was going repeatedly over the information above, several further questions
came to his mind. He wondered what signal it would send to the shareholders if IMEX was to
exit Hungary completely and what it would mean for the rest of its business in other Eastern
European countries.

Inversely, how much time and investment would it take to gain a significant market share in
Hungary? Was the market worth the investment, and how would a successful positioning in
Hungary meaningfully impact IMEX? Would it help to grow its business in the neighbouring
countries?

One thing was certain, a decision needed to be taken and a comprehensive business case
was needed for that.

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Appendix

Exhibit 1:

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Exhibit 2:

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