Citibank Essay

1. Evaluate the performance of Citibank’s credit card business relative to the industry as a whole.  Based on this evaluation, are there areas of concern for Citi?

Exhibit 9 in the case shows Citibank’s key performance indicators related to the industry.  The first thing to note is that Net Sales Volume has more than doubled in the industry.  However, Citibank has been a significantly behind the industry average as shown in the graph below.

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Given that Citibank’s strategy since 2008 has been to focus on two of four segments, the super-affluent and affluent, in the top 8 cities in India, it is not surprising that the net sales volume is smaller.  This is because these two groups make up only 7.58% of households in the population in the top 8 cities and only .68% of all households in India.  This segmentation strategy leaves a very small group of potential customers.

It is remarkable that the Net Sales Volume is so high for Citibank given the small number of potential customers.  So, it must be that the super-affluent and affluent customers in the top 8 cities have a much higher level of spend per customer than those in other groups.  For this to be the case, Citibank’s customers must have a much higher credit limit on average which is roughly 40% higher over time.

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Given the Growth in Net Sales Volume translates into revenue through the interchange fee, card fees, and revolving interest payments.  Interchange fees can be compared between Citibank and the industry average since these are just a fee per sale, which can be roughly compared by thinking of the interchange fee as a fee on total sales volume.  Considering it this way, it is clear that the industry average firm generates more interchange fees.  

As for revolving credit fees, the following graph shows that the industry average is growing their potential interest revenue faster than Citibank because they interest is paid on the outstanding balance.

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Citibank targets affluent customers to keep delinquency under control at the expense of increasing net sales by providing cards to other financial and geographic segments.  However, the following two graphs show that even with this restriction, Citibank is no better off than the industry average in payments as a percentage of outstanding or delinquency.

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The above graphical comparisons show that Citibank’s strategy of focusing on the affluent segments in the top 8 cities does not seem to be a growth target. Considering the growth of the population in the rural and “second rung” cities and the corresponding growth in the emerging affluent and mass market segments, it is not surprising that Citibank is doing well but appears to have flat growth.  This is, or should be, a concern for Citibank.

1. Analyze the relative attractiveness of the various affluence-based consumer groups (remember this is a descriptor variable depending upon differences in usage, revenues, delinquency costs, acquisition costs, etc.).  For this, compute the annual revenues and costs associated with each group and then come up with the value (i.e., profit = revenue – cost) over 8 years (ignore time value and growth rates), i.e., on an 8 year horizon (corresponding to the 12% attrition rate mentioned in the case).  Consider the costs of acquisition and account maintenance as well.  What is the percentage of the profit potential across the 4 groups that they are targeting right now?

The card issuer makes money three ways; fees, interest on revolving balances, and interchange fees on transactions.   The revolving interest rate is 3% and the interchange fee is 1.39%.  Costs are estimated for each category.  For the one-time acquisition cost, we use  INR 5000 for super-affluent, INR 2500 for affluent, INR 1000 for emerging affluent, and INR 1000 for mass market.  We also estimate an annual servicing cost of INR 1500 for super-affluent, INR 1250 for affluent, INR 1250 for emerging affluent, and INR 1000 for mass market.