R.K. Hammer Founder and CEO Bob Hammer commented “In over three decades in the card business, and having read an estimated 67,000 card financial statements during that period, I have seen very few card financials that displayed R&D spending as a separate line item. That’s a problem, as we see it.”
“Where’s the R&D in your company?”
Some issuers respond that they do spend on R&D; it’s just plugged into other larger areas of the P/L, like “Operating Expense.” If it is so important to the long term survival of any organization, though, why is it “buried,” why not exposed to the light of day? A buried expense can be a function truly unmanaged.
“The last time we looked,” notes Hammer, “we found the top companies in the U.S. based upon their level of R&D spend: most were high-tech companies and some were pharma; ... not one card company or bank or credit union in the list. Exactly why is that?”
“The answer,” responds R.K. Hammer, “remains as unpleasant to hear today as it was the first time we looked into this metric over a decade ago. Every year we hope to see more and more issuers exposing their R&D to greater transparency and higher levels of investment. Yet, it is still a reoccurring disappointment every time we examine R&D. Some who do report it seem to be investing meagerly.”
Hammer asserts, “It is our belief that the reason why most card companies and their financial institution parent companies do not devote more to R&D is that as an industry we are often simply “milking the card business” for profits, and then taking those profits to invest elsewhere often by the parent company; all of which have little to do with long term card enterprise survival, or card member value created, or product line enhancements, or even the competitiveness of the card business itself.”
Admittedly, the difficulty of tracking/reporting this metric is that there is often no central budget Cost Center in most card companies that deal only with R&D; it is spread throughout the company for most of us. The exercise, though, would not have to be that difficult or cumbersome to calculate accurately.
The R&D”Fix” is Really Not All That Complicated
After first arriving at an agreed organizational definition of what you define as “R&D Spend,” have each major operating division in the organization extract from their budgets what they spent on that R&D (of all types) for the last calendar year, and roll them up in Admin to a company-wide total; then dividing that sum by the outstanding card loans at the EOY period being examined. If one does that annually, it won’t take long to see whether the level of R&D investment you truly make over time is fixed, rising or shrinking, and what percent of outstandings is being invested there.
Those 67,000 card financial statements R.K. Hammer spoke about earlier…the average annual R&D investment for card companies who did invest there was about 10 basis points on outstandings loans; after dollars, this method (bps on EOY Loans) is the 2nd most common way we measure P/L line items.
At What Level Then Should R&D Realistically Be Funded
What is a more effective level of investment? In our model, 25-50 basis points of outstanding loans, at a minimum. The greatest amount of R&D Hammer has seen in his years in business was over 8%, 800 basis points; but that was for a global giant, an enormously successful German electronics enterprise.
For a quick take-away to compare your own card organization, check the R.K. Hammer R&D scale here to see where your company stands, with respect to annual R&D investment levels.
R.K. HAMMER CARD R&D – 2013 SCALE
Best-Practices Level: >100+ bps on outstanding card loans
Moderate-Performer Level: 50-100 bps
Minimum-Performer Level: <25-50 bps
Note (a): All research and development expense generally cited: existing product improvement research, new product design and development, pricing research, continuous card member satisfaction research, new scoring technology research, new distribution channel expansion research/improvements, and process analysis and improvements throughout the enterprise.
Note (b): The key here we believe is: “Your assembled Cost Center data from your pre-agreed R&D definition, consistently applied.” Whether your company goal is to be a low cost provider, best quality provider, or a leading innovator...Whatever best satisfies your stated card strategy will either propel or stall your level of R&D and ultimately, your future competitiveness in this business.”
R.K. HAMMER/CARD KNOWLEDGE FACTORY® 2013
Will the credit card business R&D in the U.S ever match other countries or other industries? As 2013 rolls out and we get ready to check again soon – Hammer concludes, “Hope springs eternal – but don’t hold your breath.”
More information may be viewed by going to: rkhammer.com or cardknowledgefactory.com.