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*The conventional wisdom throughout retail-industry circles is that it costs significantly more to acquire new customers than to retain old ones. In fact, among financial-services companies, there is reliable evidence that it costs five times more to acquire a new customer than to retain an existing one. (1)

Perhaps this emphasis on the value of existing customers has been partially a response to (or even justification for) the intensive focus financial institutions have placed on customer relationship management (CRM) strategies and related technologies over the past dozen or so years. (2) During that period, CRM investments have not been small; indeed, they have reportedly amounted to tens of millions of dollars annually. (3)

Missing from most discussions surrounding possible investments in technology or marketing intended to keep existing customers are the answers to a number of vital questions:

* How much should a bank invest in a customer who is unlikely to leave?

* How much should a bank invest in a customer who is currently unprofitable?

* How much should a bank invest in a customer who is currently unprofitable but who could become highly profitable in the future?

By combining data analytics and knowledge of payments, a team from MasterCard Advisors devised solutions that helped a large Australian bank answer these questions. On behalf of the bank, our team created a number of behavioral models that identified which customers were most likely to be at risk of attrition; these models also provided actionable insights into cardholders' potential present and future profitability to the bank. Using these insights, the bank tailored its retention programs to drive down its attrition rate by double digits--to below market average. (4) The method we developed holds important and valuable lessons for financial institutions globally.

Deregulation Leads to Deteriorating Portfolio Performance

Until the early to mid-1980s, banking in Australia was characterized by state-owned institutions that had little incentive to compete either on product differentiation or customer service. The rates and terms on most deposit and borrowing products available in major cities were remarkably similar. The Big Four banks (Australia New Zealand Bank, Commonwealth Bank, National Australia Bank and Westpac) were protected from competitive pressures by a long-standing government policy against mergers that would result in the combination of any two of them.

Deregulation and conversion to publicly listed companies significantly affected how all banks competed. During 2003 and 2004, a large Australian bank began to notice that its credit cards portfolio was losing customers at an alarmingly higher rate than its competitors. Profitability was also deteriorating. An internal review indicated that while there were some product gaps in the bank's offerings, that factor alone could not explain such a rise in cardholder attrition. Further reviews suggested needed improvements in training and scripting for the bank's retention unit, but implementing such improvements did not stem the flow. The bank also noticed that in the months immediately after customers had closed their credit card accounts, many of them moved other banking products and services to competitors.