Improving Profitability in Financial Services Operations

Executive Summary:

This case study explores how a financial services company used a business transformation team to find and diagnose a profitability problem that went unseen by finance, sales and marketing team.

II. Introduction:

A financial services company must find ways to improve revenue while maintaining or growing margin. That is a delicate balance – to offer customer value while ensuring you make a profit doing it. In some cases, this balance can be out of a company’s favor.

III. Problem Statement:

Despite growing charge volume, a financial services company in an Asian market was losing money on every transaction because the cost of the offer was more than the profit.

IV. Detailed Analysis:

a. Situation Analysis: Detailed analysis of each spend category revealed one vertical was mispriced because it offered more benefit than the discount rate could pay for causing each dollar spent to be negative value to the financial services company.

b. Stakeholder Analysis: Key stakeholders included senior leadership, loyalty and rewards, finance and marketing each having a touchpoint to the core commercial payments customer.

c. Data and Evidence: Data showed each transaction generated a gross margin of negative 23 basis points (bps) on roughly 18% of overall charge volume (US$1.2B). This was a new spend category – the impact was immediate.

d. Problem-Specific Analysis: Strengths included Brand value and customer loyalty; weaknesses included negative press as a result of the ensuing action.

V. Solution Exploration:

a. Proposed Solutions: Reduce the value of the membership rewards offered in this spend category to a level that made it net positive by 22bps

b. Implementation Plan: Marketing team to send communication of reduced benefits change to all impacted customers with date it takes effect. Membership rewards team flipped a switch on that day making all future transactions in spend category, margin positive.

VI. Results and Impact:

a. Outcome Analysis: Post-implementation, there was a +45bps swing in margin improvement making each transaction profitable.

b. Long-term Effect: We knew reduced benefit would mean less customers using our payment option for this spend category. Modeled three levels of impact and found the impact was not as severe as best case (25% reduction in charge volume)

VII. Lessons Learned:

The project highlighted the importance of ensuring the finance team had better visibility to profit and losses data to dissect and investigate potential risks to profit margin should sustained decrease ever happen again.

VIII. Conclusions and Recommendations:

The case study concludes that business transformation is a core skill to embed in any organization – a person or team that can come in and diagnose an issue and offer a resolution for financial and operational challenges.