Citibank ranked number one in the United States and on the eleventh spot in the world on the largest banking companies list, with an estimated asset value of $228 billion. Initially started as a commercial bank, Citibank adapted its offer to the market's demand and had begun to offer, during the 90s, a series of products to individual consumers, most notably credit cards, where it already counted 27 million customers by 1987.
Citibank had extended its business into the Asia-Pacific area for several reasons, most notably the increasing potential of these markets and the growing economies of the rising South East Asian economies, that would provide a stable middle an upper income class, the perfect target market for Citibank's services and products. The markets Citibank targeted included Taiwan, Thailand, Malaysia and Korea, but also Australia and some of the countries in the Persian Gulf area.
Even if there were several reasons for investing in these countries, Citibank needed to consider serious impediments, many of them brought about by the conditions specific to each state. Indeed, national regulations somewhat limited the extent to which a foreign owned banking business could develop and, besides this, Citibank began to feel the serious competition, as other banks began to see the potential of these new growing Asian markets.
As such, diversifying its business in the Asia-Pacific area came as a necessity and Citibank contemplated the opportunity of extending its credit card business to this area.
In my opinion, we have a large problem/issue here and several smaller ones that derive and are closely related to it. As such, it is best to present the problem and than analyze the underlying aspects linked to it.
As such, Citibank is facing a strategic decision that will most likely affect its future evolution in the Asia-Pacific area. It needs to decide whether to enter the credit card market or not and, if so, how to solve specific issues related to this, such as how to enter the market and where it would be best to start the credit card operations.
The decision needs to be reasoned with regards to several key issues. First of all, an expansion and a diversification of the basic banking business will mean an increase in revenues for the next years (notice that the bank has a goal of $100 million in earnings for 1990), but also a well defined plan for future strategic and sustainable economic growth. Indeed, it is likely, in my opinion, that remaining with the current operations will have the tendency to level down Citibank's earnings in Asia-Pacific, as in this sector we may expect competition to have become quite high and markets are no longer incumbent. Further more, as we have seen, national regulations were quite tough on banking operations and it was not to be expected that Citibank could gain more access in this area.
On the other hand, the credit card market is still young and has an enormously high potential. The analysts had speculated that the economies in this area would continue their growth during the 90s and this would lead to the creation of a stable and well represented middle income class that would provide, together with the upper income consumers, the appropriate target market for credit cards.
On the other hand, entering the credit card market in Asia-Pacific had several disadvantages and brought about additional problems. First of all, as Bob Thornton, country manager at Citibank Indonesia was keen to notice and mention, these countries were characterized, among other things, by high levels of fraud and "poor consumer payment," which had affected Citibank's operational activities. This was mentioned in Indonesia's case, however, we should expect the situation to be much the same elsewhere in the area as well.
Further more, the legal system and legal infrastructure were still inadequate and provided cumbersome operations when money and debts needed to be collected. Or the credit card concept itself is based on debt and credit and Citibank needed to be able collect its money when dealing with slow payers.
In other countries, there were other problems. In India, for example, infrastructure was generally lacking and launching a credit card operation in a country so large and with a population that was so different from one place to another could have brought the bank higher costs than it could hope to later regain through increased revenues.
Additionally, India and Indonesia did not qualify, in my opinion, from an income point-of-view. Indeed, as we can see from Exhibit 8, these were the only two countries in the area where 90% of the population had an average annual income of below $2,000. In my opinion, not only the targeted middle income population did not exist, but, further more, there were no real prospects that it would be created in the coming years.
On the other hand, there was the competition on the credit card market that was already successfully operating in the area. Indeed, as we have seen from the case study, American Express already had a strong presence in Singapore and it may also have been the case elsewhere.
Citibank needed to be able to bring a more attractive product to the market in order to be able to penetrate where the competition's presence was already strong.
The paragraphs here above presented an overview of the pros and cons of the decision Citibank is facing on whether to enter the credit card market with its product or rather remain with its basic core activities.
If it decides to enter, there are several issues related to market entry, market entry costs, as well as the countries it should approach first, how to price its product and how to apply customization and differentiation aspects to its credit cards. Basically speaking, as we can see, this are general issues that any company needs to analyze before releasing a new product onto the market. These will be discussed in the alternative options section.
The nature and complexity of the operation and of the market makes this a decision where several constraints may be involved. First of all, the usual and most obvious constraint is money related. As we will further analyze in the alternative option section, whether Citibank decides to enter the credit card market and the way it decides to do it. As we have seen, for Citibank, the long-term goal is to increase its revenues and overall profits. However, a costly credit card campaign will most certainly reduce profits, so Citibank needs to keenly evaluate and take into consideration the money constraint.
A second constraint we need to refer to is time. As we have seen in the case study, in Singapore, for example, American Express already "had the market in its pocket." If Citibank does not move quickly on the markets where it wants to implement its credit card operations, it may be put in a position where competitor brands already have a strong position on the market. In this case, rather than a long-term implementation, Citibank may need to resort to skimming strategies, which would not serve its long-term prospects. Competition was also strong from local banks, especially because of the smaller merchant discount they charged. This was around 1.5-2%, as compared to Citibank's that was 3%.
Additionally, we need to refer to infrastructure constraints, here including legal infrastructure. Admissibly, some of the countries in this area have a poorly developed infrastructure. We had the example of India, a large country with poor infrastructure, but we can also mention areas from Thailand or Indonesia. Besides this, Citibank needs to cope with different regulatory constraints that each of the national governments tend to impose on the banking and financial market, as well as on the credit card market. This may have a negative impact on Citibank's penetration.
Finally, we should also briefly refer, in my opinion, to several psychological constraints. I am discussing here the populations' attitude towards credit card payment, given the overall level of education and the populations' openness towards the new. The fact that fraud is quite common in the Asia-Pacific area we are referring to, we may assert that the overall perception would be against card payments.
The first set of solutions we need to present are related to the overall problem, whether Citibank should be entering the credit card market in the Asia-Pacific activity. The viable solutions are to enter or not to enter, however, in my opinion, there is also a nuanced approach I will be referring to here below.
So, the first alternative option would be to abandon the credit card market and stabilize the bank's activity on the traditional finance and banking segments. This solution would have several advantages. First of all, from the bank's results and the figures presented, Citibank seems to have done quite well in this area, with its traditional activities bringing several years of consecutive high revenues. As such, we may have the situation where there is…