The line item some card issuers (still) don’t get right

(February 17, 2014) --  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 an opportunity as we see it.”

“Where’s the ‘R&D Line Item’ in your FSI – Buried or Exposed?”
Every year we analyze this metric, and some issuers respond that they do invest in R&D (Research and Technical Development); it’s just plugged into other larger areas of the P/L, like “G&A,” or “Operating Expense.”  Yet, if it is so important to the long term survival of any organization, why is it “buried,” or “plugged;” why not exposed to the light of day?  A buried expense cannot be a function truly (or well) managed.

“The last time we looked (12/13),” notes Hammer, “we found the top companies (of all types) in the U.S. based upon their level of R&D spend:  most of the top tier were in computing/electronics, health care, auto, and pharma; ...  not one card company or bank or credit union in the list.  Exactly why is that, we wondered, again?”

“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 card issuers exposing their R&D to greater levels of investment.  Yet, it is still a reoccurring disappointment every time we examine R&D.  Moreover, some who do report it seem to be investing meagerly.”

“Milking the Card Business for Profit” Not a Very Prudent Way to Grow
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 sustainability 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 deals only with R&D; it is spread throughout the company for most of us.  The exercise, though, would not have to be that difficult to calculate accurately.

The R&D Calculus is Really Not 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 in a separate line item 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 referenced earlier…the average annual R&D investment for card companies who did invest there was less than 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 Intensity” Be
What is a more effective level of R&D Intensity investment?  In our 2014 model, 10-25 basis points of outstanding card loans, at a minimum. The greatest amount of R&D Hammer has seen in his years in business was over 8% of their top line, 800 basis points; but that was for a global electronics giant, a leader to this day in tech and innovation.  There’s a connection there somewhere.

For a quick take-away to compare your own card organization, check the R.K. Hammer 2014 R&D scale here to see where your company stands, with respect to annual R&D investment levels.