Alpen Bank: Launching the Credit Card in Romania

Summary
In 2006, as a result of Romanias imminent entry to the European Union, Gregory Carle, the country
president of Alpen Bank in Romania wondered whether he should launch a credit card in the domestic
market. Although, income per capita was low, infrastructure was limited, and the country in general
lacked experience in consumer credit, marketing research showed there was potential to launch a
profitable credit card in Romania.
In addition to economic concerns regarding profitability of a credit card program in a small country with
a total population of 7.7 million households`. Gregory Carle also faced general lack of trust from the
corporate office since launching the card had failed in the past, in large part due to the economic
recession at the end of the 1990s.
Problem
Alpen Bank operated in Romania as a premier class financial institution. The Bank ran a profitable
business for the wealthy. It had a market share of 200,000 customers. As of 2006, the top 10% of
households by income had nearly 24% of the wealth. Although the size of middle class income earners
was increasing, Alpen Bank faced the challenge to create brand dissonance by serving a new consumer
segment considered less prestigious than its premier clientele. In addition, most businesses preferred
cash as a method of payment rather than credit.
However, market research of total financial cards in 2006 showed that credit and debit card usage had
grown over 35% compared to the previous year. Data also showed that there were about 9.5 million
cards circulating in the country and that automated teller machines (ATMs) and credit card terminals
were becoming more popular.
Thus, Gregory Carle, in order to recommend a course of action needed to answer the following
questions. Could Alpen Banks credit card generate 5 million in Revenue in the first couple years? What
level of customer acquisition would be necessary to break-even? How fast could the company generate
profits beyond break-even? Finally, how should the credit card be positioned given the current
consumer base?
Market Analysis
The credit card industry was composed of four major parties which provided card transaction networks.
Namely, networks or card association which were the backbone of the payment system. Network card
associations enabled transactions to clear by connecting with the other three players who were
merchants, merchant acquirers, and card issuers. Merchant acquirers were the distribution network
and the sales branch of the payments industry. Merchant acquirers were in charge of signing up
merchants for card acceptance and provide support services to merchants. Merchants were the
businesses such as restaurants, gas stations, and establishment who accept credit as a method of
payment. Finally, Card issuers were almost always the banks or financial institutions who owned a
relationship with cardholders. Banks were in charge of establishing reward systems with clients, and to
establish the branding positioning, and pricing of credit cards.

Alpen Bank planned to launch a credit card with three possible consumer segments, Middle Class,
Affluent, and More Affluent. The least disruptive entry method would be with the existing clientele
which tends to be Affluent. However, given the small population and the limited infrastructure scale in
the credit card industry, it may take some time to start earning profits -- The financial analysis on each
segment will answer this topic more in detail. While Alphen Banks revenue streams have increased year
after year, growing into the credit card business may be a necessary risk to increase competitiveness
seeing how other European countries had recently started adopting credit cards. According to Ansoffs
product/market matrix the new product would grant Alpen new distribution channels via ATM
machines, it could establish to new geographical areas by establishing new branches or ATM machines
in places where there wasnt access before.
Revenue in the credit card industry is derived from transaction volume. A percentage of every
transaction, called the merchant discount is taken and split between the network association, the
merchant acquirer, and the card issuer. Thus, Merchant acquirers are always looking for attractive
vendors who sell large ticket items such as upscale hotels, travel agencies, electronic stores, computer
accessory stores, large or high volume restaurants, among others. Merchants gain from frequent
transactions and high per-ticket spending. By contrast, companies like American Express, Visa, and
Master Card gain from every purchase. Merchants pay a merchant discount fee as a percentage of the
transaction spend, which includes the interchange rate that is paid to the card issuer. Premium cards
carried by affluent card holders, such as those who owned American Express or Diners Club, are more
attractive to merchants and card issuers because, issuers may charge a higher interchange rate and thus
generate higher profits from premium card holders.
Banks derive revenue from different streams such as annual fees, penalty fees on late payments,
interest payments, and interchange. Because Alpen Bank is a premier institution, the country manager
considered an annual fee would be acceptable for possible consumer groups. Affluent and More
Affluent buyers would use the card on large ticket items, and middle class customers could afford an
annual fee. In addition, although in Romania people had less financial credit cards per household 1.2
versus 5.3 in Croatia. According to official statistics four banks had taken the lead in Credit card issuance,
Romanian Commercial Bank (RCB) for example, issued 180,000 credit cards in 2006 and had a utilization
rate of 10%, Raifeissen Bank issued 200,000 cards and had a 70% utilization rate. Bancpost had issued
29,000 cards and had the lowest utilization rate out of all companies at 6%, finally, the Romanian Bank
for Development (RBD) had issued 606,000 cards and had a utilization rate of 27%. Thus, Alpen Bank had
the potential to launch a credit card program with its existing consumers and possibly step into new
segments such as middle class credit card holders. Figure 1 shows a perceptual map of current credit
cards in Romania.
Most Prospective customers will fall in one of two categories: Transactor Spenders use their cards for
cashless transactions and most often only use it to accumulate reward points. Transactor Spenders pay
their full credit card balance at the end of the month. Revolvers by contrast, are customers who use
their card but dont pay it in full. Thus, the revenue sources for each segment would be interest fees for
revolvers and interchange fees for transactors. Alpen Bank has considered offering a low interest rate to
attract new clients, with strong competition from Raifeissen Bank, although at the low end of the
spectrum since credit unions are not known as premier financial institutions, Alpen needs to launch an
aggressive marketing campaign.

Alpens Bank new credit card would be a necessary extension of the brands prestige, although credit
cards are not accepted everywhere, generally( although not always) only people who have a stable job
and excess cash to spend on leisure activities have access to a credit card. To entice customers to
increase the usage rate, Alpen Bank may implement a reward system that grants customers points such
as travel miles, visa gift cards, large department store gift cards, among others. This in turn, would also
encourage large vendors to accept credit cards as a method of payment and increase the number of
registers with abilities to process credit and debit card payments at the point of sale.

Middle Class
Middle Class households were composed of young professionals who were at the start of their careers
and families that valued quality but due to economic constraints were willing to sacrifice luxury items
and make price-driven decisions. Monthly income for this economic segment was about 200, and
according to statistics from 2005, 18.2% of the population fell in this category.
Carle thought this consumer segment might be important given the fact that todays middle class may
become the affluent customers of tomorrow, and also as European trends showed. Consumers in
neighboring countries tended to develop brand loyalty to innovative companies who were first in the
market. If Alpen bank didnt cater after this group now, later it may be too late to gain their business.
Based on projected consumer Revenue as of 2007, Alpen considered middle class people who earned
between 3000 and 4000 per year. Projected Annual interest revenue for this group was estimated at
37.13 per cardholder, and other revenue at 23.5other revenue was made up of annual fees,
merchant fees, etc. This added up to a total annual revenue of 60.63 per cardholder ( see figure 2 for
details). Assuming adult statistics are correct, there are 18.6 million prospective customers, by
capturing 18.2% of the adult population, Alpen could gain 3.9 million middle class customers at an
estimated annual gross revenue of 203.4 million.
Concentrating in all three consumer segments, would yield revenue of 122.78 per cardholder per year
versus 163.31 if Alpen concentrated its efforts in the Affluent and Most Affluent segments ( see figure
2 for calculations).However, to gain new customers, Alpen Bank must also incur customer acquisition
costs and fixed advertising expenditures of 2 million. Table 2.1 shows the different marketing tools at
the management teams disposal and the total cost for using each tool. Table 2.1 shows unit marketing
costs per customer which are 32.68 for Direct Mail, 15.69 for Take Ones, 13.07 for FSIs, 3.92 for
Direct Sales, and 2.61 for Branch Cross Sales. Utilizing all 5 tools would bring in 91,163 customers in the
first year, and Alpen would spend 18.7 per new cardholder( the total marketing cost if all 5 tools were
used divided by 91,163 customers). However, further cost considerations must be taken into account to
make a final decision. Based on ranges of consumers possible contribution margin per segment are:
122.78 for existing customers versus 84.08 for new customers ( see table 2.3).
The projected Income statement in figure 2.4 indicates that by pursuing middle class customers. It
would be necessary to obtain between 100,000 and 150,000 new customers to break even. To calculate
the breakeven point, we will take the fixed costs in year 1 which are 7million (5 million from
infrastructure expense, and 2 million from Marketing), dividing this by the unit contribution margin of

84.08 yields a total of 83,254 new customers to breakeven ( note that in year 2 there is a loss a result
of the increased variable and fixed cost to serve customers). To calculate a breakeven point with a
target profit of 5 million, using the formula :
Units to Achieve Target Income= (Total Fixed Costs + Target Income)/ Unit Contribution Market.
Results in (7,000,000+7,750,000+8,500,000 + 5,000,000)/245.64*= 113,993 customers

*this number represents the sum of contribution margins in years 1, 2 and 3.

Based on Financial Projections, Middle Class consumers dont meet the initial requirement by the
corporate office. The following section analyses the market potential and the financial viability of
Affluent consumers.

Affluent Cardholders
Affluent potential customers have a net income of at least 500 per month and are typically
professionals who purchase items to match their economic status. Affluent consumers tend to buy high
ticket items, have low levels of debt and are less price sensitive than middle class income earners.
Thanks to their low level of price sensitivity, Carle thought the bank could charge higher interchange
rates to this consumer segment. According to Projections in figure 2, Interest revenue estimates per
affluent cardholders would be 86.67 in interest alone, and 36.75 in other revenue. This came to an
estimated annual income of 123.38. However, in order to enter the credit card market, Alpen Bank
also had to incur costs such as investment in direct marketing, advertising, and support infrastructure.
Among some of the direct marketing efforts to gain market share in the project Carle considered direct
mail, take ones, free-standing inserts, direct sales, and Brach cross-selling. Direct Mail has the potential
to send credit card applications to the intended audience, which can result in higher yield, however, it
has a high unit cost, a 3% response rate, and a qualification rate of 60%. Take ones are countertop
brochures offered to customers when they shop at retailers and stores. Although this option has a low
per unit cost of .10 euros and a potential broad audience, the estimated response rate is only 2.5 % and
its qualification rate is roughly 30%. Free-standing inserts are newspaper and magazine inserts that cost
about.05 cents to run, has the potential to reach about prospects 3,500,000, but out of all options has a
1.5% response rate, and a qualification rate of 30%. Direct Sales, would be direct telemarketing efforts
that would target existing and high-potential customers, but require fixed salary costs for each
salesperson estimated at $3000 euros per month. Yet, this option has the potential to reach 60,000
prospects, has a 25% response rate, and a 60% qualification rate, which could account for 19,125
successful new converts.
As shown in figure 2, by specializing in the Affluent and More Affluent customers, Alpen Bank could
generate a projected 163.31 Revenue per customer. By looking at the Financial Statement in Figure 3,
contribution margins are calculated for acquiring different number of customers over a four year period.
The Projected Income Statement in figure 3.1 shows the projected profit levels over the next four years.
While net income is negative in the first year at (769,500), in year 2 income starts to become positive
which indicates the required number of affluent customers lies between 50,000 and 100,000. By

Calculating the breakeven point, the actual number of customers to breakeven would be 56,175
customers (7million in fixed costs in year 1 divided by the Unit contribution margin 124.61).
To adjust this figure for the target profit of 5 million, and using the following equation,
Results in (7,000,000+7,750,000+ 5,000,000)/261.07*= 75,650 customers

*this number represents the sum of contribution margins in years 1 and 2.

Alpen Bank could exceed the required Profit in less than 2 years, and could start earning profits beyond
5 million well into its second year of operations.

Recommendation
As a result of the financial analysis performed. Alpin Bank should launch a premier credit card in
Romania with Affluent Customers. The Bank will be able to generate 5 million profits a few months
after the second year starts. There is sufficient market potential to successfully sign up 75,650
customers in 2 years. The company should initially position the card as an exclusive and innovative
product. Alpin Bank is already highly regarded by the population in general, thus a new premier product
will be seen as attractive to the evolving affluent class who due to joining the European Union will have
greater access to new markets closed by. In addition, the credit card will be of particular use to large
ticket purchases , instead of carrying cash, now customers will be able to use a worldwide accepted
method of payment. The card have an annual fee and a rewards system based on consumer behavior.
For example, it will grant credit for points or it will have perks such as fixed interest rates for highly
valued customers.
By channeling their marketing strategy efforts in direct marketing, direct sales and cross selling, Alpin
may minimize customer acquisition costs, and achieve greater market penetration at a lower cost.
Moreover, by capturing core consumers, the company could entice customers to increase credit card
usage rates and earn profits in the meantime. In the same vein, to avoid losing middle class customers, it
can try to capture middle class customers after it has achieved the profit target in the first two years of
operations. If the premier card is successful , it may then launch a second tier card based on credit
worthiness.
Through product Innovation, Alpin Bank may increase its competitive advantage and gain a first mover
advantage in the newly developed credit segment. Educating customers on how to use new tools and
ATM machines will prove successful for the company in the long run, since credit and debit is the way to
go in most developed countries. By keeping in line its brand positioning and the companys mission
statement hand in hand Alpin Bank can maintain its great image intact and avoid losing customers for
not keeping in pace with technology and convenience.

Appendix

Perceptual Map

| High Return |

Low Cost

| High Cost

| Low Return

In this perceptual Map it is important to note that Raiffeisen Bank is a European Credit Union which has
the largest distribution Network. Utilization rate for Raiffeisen Banks cards is 70%.
Romanian Commercial Bank (BCR) is the largest financial institution in the country, it is well known, yet
credit card utilization in 2006 was only 10%.
Bancpost is one of the top 5 banks in Romania, it was established in the early nineties and has grown to
a considerable scale in the domestic scope.

Romanian Bank for Development is the countrys bank in charge of financial reforms. It is by far the
largest credit card issuer of 2006 with 606,000 and a utilization rate of 27%.

Figure 2

Segment
| Total Annual Revenue per Cardholder | % of total population | Total Adult Population
| Projected New Customers
| Estimated Revenue |
Middle Class |
205,244,676.00

Affluent
|
344,230,200.00

Most Affluent |
503,274,150.00
Total |
|
|

60.63

| 18.20%

| 18,600,000

3,385,200

123.38

| 15.00%

| 18,600,000

2,790,000

209.75

| 12.90%

| 18,600,000

2,399,400

8,574,600

393.76

Projected Revenue per cardholder (All groups) |

1,052,749,026.00

122.78 |

Projected Revenue per cardholder ( Affluent + Most Affluent)

163.31

Figure 2.1
Marketing Tools
Marketing Tool | Unit Cost
| Qualification Rate

| Prospective Adults
| Cost |

| Prospects Reached

| Response Rate

Direct Mail

| 0.50 | 18,600,000

2,500,000

| 3.0% | 60% | 1,250,000

Take One

| 0.10 | 18,600,000

2,000,000

| 2.5% | 30% | 200,000

FSI's

| 0.05 | 18,600,000

Direct Sales
|

| 0.50*

3,500,000

| 1.5% | 30% | 175,000

| 18,600,000

60,000

| 25.0% | 60% | 30,000

Branch Cross Sales

|

| 1.00 | 18,600,000

50,000.00

| 50.0% | 90% | 50,000

Total | 2.15 |

8,110,000

| 1,705,000

* Assuming each sales person reaches 6000 people per year

Figure 2.2 ( derived from table 2.1)

Marketing Tool | Prospects qualified

| Conversion Rate (85%)

| cost per customer

Direct Mail
|

45,000

38,250

32.68

Take One
|

15,000

12,750

15.69

FSI's

Direct Sales
|

15,750
|

Branch Cross Sales

2.61 |

13,388

9,000
|

Total |

7,650

22,500
107,250

13.07
|
19,125

91,163

|
3.92

67.97

| 200,000

Table 2.3
Contribution Margin per Unit
Number of Customers | 50,000

| 100,000

Revenue per customer | 122.78

122.78 |

122.78 |

122.78 |

Acquisition Cost

18.70 |

18.70 |

18.70 |

Direct Cost

17.50 |

15.00 |

12.50 |

Total per unit Variable Cost

New Customer Cost

18.70

38.70

Existing Customer Cost | -

Unit Contribution Margin

| New Customer

| Existing Customer

191.86 |

84.08

36.20 |

17.50 |

84.08

| 150,000

33.70 |

15.00 |

31.20 |

12.50 |

|
86.58 |

105.28 |

89.08 |

107.78 |

196.86 |

91.58 |

110.28 |

201.86 |

This table shows projected revenue if middle class customers are included. Variable costs are the per
unit acquisition cost plus the direct cost associated with service and maintenance. Notice that New
Customer refers to the additional number of customers acquired over different periods, the row
existing customers refers to the cost associated with current customers, however, since this is a brand
new product, we wouldnt incur any costs at the start, only for subsequent years as consumers keep
increasing.

Figure 2.4
Income Statement for Middle Class
| Year 1 | Year 2 | Year 3 | Year 4 |
Customer Additions per Year
|

Contribution Margin(CM)

Addt'l new Customers |

4,579,000
|

4,204,000

Existing Customers*
|

| **

Total CM (Unit) |
10,093,000
|

4,204,000

|
|

5,000,000

|
Fixed Cost
7,250,000

| 50,000

Advertising Expense
2,000,000
|

| 50,000

| 50,000

4,329,000

5,264,000

2,000,000

5,514,000
|

5,750,000

6,500,000

7,750,000

(2,796,000)

1,843,000

(2,796,000)

Cumulative Profit
3,139,000
|

9,843,000

4,454,000

7,000,000

Profit |
|

5,389,000

9,593,000

|
|

| 50,000

2,000,000

2,000,000

8,500,000

9,250,000

1,343,000

843,000

(953,000)

2,296,000

* Existing customers refer to the first 50,000 users that would be acquired in year 1, in year 2 they
would be considered existing customers |
** In the first year there would not be any existing customers since Alpen Bank would venture into a
new business. |

Figure 3
Number of Customers | 50,000

Revenue per customer | 163.31

163.31 |

163.31 |

163.31 |

Acquisition Cost

18.70 |

18.70 |

18.70 |

Direct Cost

17.50 |

15.00 |

12.50 |

| -

Total per unit Variable Cost

New Customer Cost

Existing Customer Cost |

| Total VC per unit
Unit Contribution Margin

18.70

|
38.70

|
|

100,000 |

200,000 |

36.20 |

17.50 |
38.70

150,000 |

33.70 |

31.20 |

15.00 |

12.50 |

53.70 |

48.70 |

43.70 |

129.61 |

132.11 |

|
|

127.11 |

| New Customer

| 124.61

| Existing Customer

145.81 |

148.31 |

150.81 |

272.92 |

277.92 |

282.92 |

| 50,000

| 50,000

| 50,000

| Total CM

| 124.61

Figure 3.1
| Year 1 | Year 2 | Year 3 | Year 4 |
Customer Additions per Year
|

Contribution Margin

| 50,000

Addt'l new Customers |

6,605,500
|

6,230,500

Existing Customers*
|

| **

7,290,500

|
6,355,500
|

7,415,500

6,480,500
|

7,540,500

|
|

6,230,500

Fixed Cost
7,250,000.00

Profit |
|
|

|
(769,500)

Cumulative Profit
15,418,500
|

| 2,000,000.00

| 7,000,000.00
|
|

|
|

5,750,000.00
|

7,750,000.00

13,896,000

14,146,000

2,000,000.00

6,500,000.00
|

2,000,000.00

8,500,000.00

9,250,000.00

5,396,000

4,896,000

|
|

| 5,000,000.00
|

Advertising Expense
2,000,000.00 |

13,646,000

5,896,000
|

(769,500)

5,126,500

10,522,500

* Existing customers refer to the first 50,000 users that would be acquired in year 1, in year 2 they
would be considered existing customers |
** In the first year there would not be any existing customers since Alpen Bank would venture into a
new business. |