Citibank's credit card expansion strategy in the Asia-Pacific market

Marketing Analysis

Situation Overview

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.

Problem Statement

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.

Alternative Options

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 no point in changing a state of things as long as they function correctly. Further more, the bank seems to have succeeded to manage and overcome the difficult legislative and regulatory problems that some of these countries had and has implemented quite well on the banking market.

On the other hand, the NO solution would have several important disadvantages. The main one, in my opinion, is the fact that such a solution does not provide a sustainable plan for long-term growth. Indeed, it is viable to believe that the banking market, profitable as it may be, will still be reaching a certain saturation level at a point or other. This level will not necessarily mean that banking will become unprofitable, but simply that revenues will tend to remain at a certain given level.

Additionally, this solution has the disadvantage that it keeps Citibank out of a market that will constantly develop in the future, with the increase of the middle income category in the Asia-Pacific area, and the overall disadvantage that it is simply too inclined towards risk aversion.

The solution that implies entering the credit card business has several advantages and disadvantages worth mentioning. First of all, mainly all the disadvantages for the non-entry situation can be called for here as advantages. The most important one, in my opinion, is the fact that Citibank will be able to develop a long-term revenue growth, by diversifying its business. Additionally, it will be able to profit from a constantly expanding credit card market in countries that have a growing economies and great potential.

In terms of disadvantages, there are several worth mentioning. First of all, the costs associated with such a move. In the case of a failed situation, these are simply too great and the entire Citibank operations in the Asia-Pacific may be affected by overall profit decrease. In this unwanted alternative, a possible loss occurring from the credit card market may destabilize the banking activities.

On the other hand, the area we are referring to comprises a set of different countries, with different backgrounds and cultures. This means that the credit card program and its implementation needs to be carefully evaluated for each country in part. It is most likely that you are not going to enter the credit card market the same way in India as you would in Hong Kong. There are too many differences to be taken into consideration, related to infrastructure, population, etc.

Another issue worth considering is the existence of the upper and middle income consumer category that Citibank will be targeting. Indeed, looking at Exhibit 8, we may have the general impression that the majority of the population in the Asia-Pacific area has an income below $2,000 per year. This is the case for India and Indonesia, where 90% of the population is in this situation, and also for countries like Thailand or Singapore, where the level is up to 55%. So it seems to me that the existence of the market segment that the bank is targeting may be rather questionable.

This is why I am proposing a third alternative solution that may be used instead of the other two. Citibank may enter the credit card market in specific countries of the Asia-Pacific area, countries where the conditions for this are right and where the maximum benefit may be obtained. Australia seems the best choicer in this sense, for example. The country has a developed infrastructure and a solid segment of consumers with high income (most of them over $6,000 per year), so it is quite obvious that it would be a profitable action. Taiwan and Malaysia also seem natural choices, in terms of income level and infrastructure.

The most important disadvantage I see for this solution is the fact that, generally, the poorer countries with a low income level, also have a high population, which represents an excellent potential market. This is the case both for India and Indonesia. We can only imagine the Indian market, with over 1 billion consumers, while Indonesia ranks in top ten in terms of population.

So, where on one side more economically developed countries are an excellent place to launch the credit card operation, these generally may prove less profitable than the poorer, more populated countries. Citibank will need to make clear evaluations on the opportunity cost before adopting this third alternative solution.

There are also several decisions to be made in terms of pricing, market entry, etc. In terms of market entry, the bank can decide on a greenfield operation or by acquiring an already existing card portfolio or something in between. The acquisition decision would facilitate an easier penetration and would benefit the bank from a set of already existing relations formed and brand. On the other hand, the portfolio that will be acquired may not fully match the bank's existing needs and its targeted market.

The Greenfield market development solution is possibly more costly, because Citibank will need to invest in the marketing program and the infrastructural support. However, in my opinion, the main advantage would be the ability to decide from the very beginning a course of action and a mechanism that is viable for the bank and its activity.

The pricing strategy for Ciribank's credit card seemed to be the most controversial issue. The premium pricing strategy implied a tough competition with local actors, who generally gave away at very low prices or for free credit cards. On the other hand, Citibank was Citibank and premium pricing did not necessarily mean offering more services, but respecting a brand and entering the low paying market zone would perhaps somewhat reduce this.

Optimal solution

In my opinion, the third alternative solution may be adapted to fit the other issues at hand here. According to this, the penetration strategy should be adapted to each market in part and, in some cases, the respective markets may even be avoided.

Citibank needs to perform a keen evaluation of what each market represents and what its characteristics are. For example, I have mentioned India. The country has a large population, which means a large potential market. On the other hand, there are infrastructural problems, instability in several regions, etc. Do these problems represent a higher cost than the benefit deriving from the positive aspects? These are questions that Citibank needs to find answers for in the case of each country in the region.

Additionally, for each country in part the penetration strategy needs to be adapted. For example, in India, one may decide upon starting a Greenfield market development, because it is to be expected that costs are somewhat lower here than in other countries in the area. On the other hand, Hong Kong may perhaps be a place to purchase an already existing business.

So, in my opinion, the key word for Citibank's future strategy should be adaptation. Every market has specific conditions to which the bank needs to find the appropriate solutions.