Case

VISO

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Problem Definition

Your client is a big bank that issues credit cards with a €100 annual fee. Recently, a supermarket entered the credit card business. The supermarket’s credit cards do NOT have an annual fee. Your client wants to know how they should react to this new competitor.


Comments

Since this is an interviewer-led case, the interviewer should guide the candidate through the interview.

After the first few questions, the interviewee should calculate the average revenue per card for the client and the new competitor. Afterwards, the interviewee should think of at least 3 different solutions for the client.

The questions in the big boxes should be read to the interviewee.


Short Solution (Expand)


Detailed Solution

Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.

Paragraphs highlighted in blue can be verbally communicated to the interviewee.

Paragraphs highlighted in orange indicate hints for you how to guide the interviewee through the case.

The following structure provides an overview of the case:

Case-Structure

I. Background

1. What areas would you like to further investigate?

The interviewee should first outline a structure that can be used to derive potential solutions. At this point, details are NOT recommended.

The general structure could be the 4P framework (Product, Price, Place, and Promotion). The candidate’s structure (eg: the 4P framework - product, price, placement, promotion) should compare the difference between our client’s product and the competitor’s product.

The interviewee may suggest other analyses such as comparisons from a customer’s point of view. However, push the interviewee to compare products.

Information to be shared if inquired by the interviewee:
  • The only difference between both credit cards is the annual fee.
  • No other information is available.

II. Analysis

2. First, we should focus on the revenue. What are the credit card’s main revenue streams?

The interviewee should identify three main revenue streams:

  • Annual fees
  • Interchange fees for retailers (when a customer uses their credit card at a retailer, the retailer pays the bank a percentage of the transaction)
  • Interest on credit card balances

For this case, we can ignore all other revenue sources (e.g. cross-currency payment fees, cash withdrawal fees and lost card fees)

Share Table 1 and ask the next question.

First, let the interviewee come up with assumptions to estimate revenue!

Information that can be shared after the interviewee has completed first estimates:
  • Annual fee for the client is €100
  • Average interchange fee is 1% of the total amount paid
  • The average annual income of our client’s customers is about €30,000
  • The average interest on credit card balances is 10%

Annual fee

The annual fee is €100.

Interchange fee for retailers

The interchange fee per customer is the average amount paid via credit card multiplied by the interchange fee percentage.

The average amount paid via credit card is equal to the percentage paid by card of the customer’s average income per year.

This excludes amounts not paid by credit card such as taxes and rent. Assume a customer spends 45% of his/her income via credit card.

Average annual credit card expenditure

= Average income * 45%

= €30,000 * 45% = €13,500

Average interchange fee for retailers

= Average amount paid via credit card * % of transaction

= €13,500 * 1% = €135

Interest on negative credit card balances

This is equal to the value of a loan multiplied by the interest rate. The interest rate is 10%. Negative credit card balances are 20% of the average amount paid via credit card.

Interest = average amount paid via credit card * interest rate

= (€13,500 * 20%) * 10 = €270


The average yearly revenue per credit card is €505 for VISO and €405 for the supermarket. (The €100 annual fee is the only difference.)

VISO revenue streams = Activation fee + Payment fees + Interest
= €100 + €135 + €270 = €505 per year

Competitor’s revenue streams = €505 – activation fee
= €505 – €100 = €405 per year

Table 2 shows an overview.

Removing the €100 annual fee results in a huge (20%) revenue loss for VISO.

III. Conclusion

4. Can you give VISO three different recommendations?

The candidate does not need to further analyse each recommendation. However, the candidate should state the assumptions that must be true in order for a recommendation to be reasonable.

Suggested recommendations:

  • Do nothing. The new competitor targets a different customer segment. Alternatively, customers are not price sensitive.
  • Remove the annual fee. Increase other revenue streams to compensate for the loss in revenue.
  • Other methods
    Bundle
    the credit card with other products such as savings accounts.
    Waive the annual fee after the customer has paid a certain amount each year via the credit card.

5. ​If VISO removes the activation fee, how would you compensate for the loss in revenue?
Mention possible drawbacks.

Possible answers:

Amount paid

Encourage customers to use VISO more often (e.g. increase the number of retailers accepting VISO cards or introduce a rewards system)

Increase the interchange fee percentage

A higher fee percentage may cause fewer retailers to accept VISO. This will decrease the total amount paid via VISO.

Increase interest rate on credit card balances

Since not many customers know about the interest rate on credit card balances, they should not be price sensitive to the interest rate. However, high interest rates may negatively impact VISO’s image.

Increase the amount customers owe on their credit card balance

This is risky because customers with higher debt levels are more likely to default.


Difficult Questions

What problems does a bank face when non-banks compete in the credit card industry?

Possible answers:

  • Reduced profits
  • Less customer information due to lack of payment data
  • Current accounts and payments are the starting products for customers

More questions to be added by you, interviewer!

At the end of the case, you will have the opportunity to suggest challenging questions about this case (to be asked for instance if the next interviewees solve the case very fast).

Related consulting question(s)
Business situation framework
Francesco updated the best answer on Mar 27, 2018 - 1 answer
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Hi Elisey, I would personally not recommend to use a single framework for all the so-called business situations (M&A, Entry, New product, Operations etc). Although this would help to more easil... (more)

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Vlad gave the best answer on Jul 21, 2017 - 1 answer
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Hi, The general framework for pricing is: Cost base - Value based - Competitor based - pricing strategy 1. Cost based - you actually check what are the costs and apply standard industry / target... (more)

How to structure this case?
Ian
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gave the best answer on May 04, 2019 - 3 answers
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Hi, Before I frame, just want to point out that this case is a PERFECT example of why it's so important to be well-read. If you've been following the news, you'll know that the Marriott has recentl... (more)

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Alessandro
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gave the best answer on Jul 13, 2018 - 4 answers
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Broadly agree with Jonathan. A couple extra suggestions: 1) Subscribe to Finimize: They will send you daily updates with recent business/finance news, and explain what is happening (and why) in Lay... (more)

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Vlad gave the best answer on Jul 15, 2018 - 2 answers
McKinsey / Accenture / Got all BIG3 offers / More than 300 real MBB cases / Harvard Business School
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Hi, There are two ways to use the hypothesis: First - presenting a structure using the hypothesis. For example, if you are having a PE (private equity) case, you should do the following: 1) M... (more)

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Case exhibits

Case-Structure


Revenue overview


Revenue overview detailed