Timothy Kolk is the owner of TRK Advisors, a consulting and advisory firm that focuses on helping financial institutions improve their credit card programs.
Lydia Cole: Who at the credit union should be responsible for credit card profitability? What resources do they need to be successful?
Timothy Kolk: At the highest level, it is the president and the Board who are responsible for card profitability. That doesn't mean they should manage the program on a day-to-day basis, but they do need sound and consistent program reporting so they are aware of profit and risk levels and can react to warning signs.
On a day-to-day basis, there needs to be a card manager who knows the industry, generates the performance reporting – profitability and otherwise – and is a good multi-discipline team player. In a smaller portfolio this can be part of a larger job description, but once the portfolio reaches a few thousand accounts, then a full-time card manager is often justified. This manager needs to work across various functions, such as marketing, underwriting, collections, finance, and compliance to make sure all of the pieces are aligned and working toward the profit and member-value goals of the program. This works best when senior management communicates their support of the manager to the organization. The credit card portfolio is typically one of the smaller loan portfolios, and without commitment at the highest levels it can easily end up a low priority.
LC: If a credit union is considering switching its card type (from vanilla to rewards or vice-versa), what long-term effect will that have on the profitability of the product?
TK: A key way to ensure a card program is generating profitability is to make sure each member segment has access to the type of credit card they want. Different members use credit cards for different reasons. Some like the ability to borrow money month-to-month; others like to get reward points and not pay interest. So, as related to this question, a one-size-fits-all change in card type – such as from vanilla to rewards – can have negative impacts on profitability when appropriate member needs and behavior segmentation is not taken into account.
Determine what member segments your card product appeals to and develop the product with those segments in mind. There is too much competition to take a 'build it and they will come” profit approach. Blanket changes can often alienate some strong, long-time card holders and damage profitability for years to come. But carefully designed and segmented changes can add to the bottom line while also ensuring as many member needs as possible are met.
LC: What types of member behaviors affect credit card profitability?
TK: Just about every member behavior effects profitability. If members spend more or less, if they decide to pay down card balances or need to borrow for unexpected expenses, if they have a change in their life that impacts their risk levels...all of these things impact profitability. The challenge comes in first measuring all of these moving parts, and then in developing program management plans to respond to those changes as they occur. This is the heart of the opportunity of this product: When a card program is managed well and good profitability reporting is in place, then a credit union can comfortably ensure it is providing strong value and a fair product to its members. In those cases a program can grow soundly and strengthen the overall member relationship.