To meet members' demands in the increasingly competitive credit card marketplace,
many credit unions have added, or are considering adding, a rewards component
to their credit card programs. Over half of credit unions responding to a recent
Callahan & Associates survey currently provide usage-based credit card rewards,
mostly in the form of travel or merchandise benefits.
However, the credit unions that responded to the survey are reporting mixed
success from rewards programs overall. Some managers said that providing rewards
have resulted in more frequent card usage, leading to higher interchange income,
while others are considering discontinuing the programs because of the high
cost and large contingent liability of the outstanding points.
For $847 million Baxter Credit Union, a rewards option has been an important
aspect of their credit card program's success. Baxter's credit card portfolio
grew by 5.5% during the 12-month period ending June 30, 2003, compared to 1%
growth among all credit unions nationwide. The card program also boasts high
penetration, as over 35% of members have a credit card account.
Depending on a particular member's needs and preferences, he or she can choose
a Platinum, Gold or Classic credit card with or without rewards points at a
fixed APR, or a non-rewards card at a variable rate APR. The rewards program
is one of the factors that has driven usage levels to among the highest in the
industry, according to the credit union's vice president of risk management,
Kenton Potterton. ''Our cardholders are purchasing an average of $8,000 per
year on their cards, compared to the industry average of $2,000.''
For credit unions looking to enhance their credit card programs, Potterton
stresses the importance of finding the right mix of products and features that
will appeal to your members. He also advises that credit unions considering
rewards programs conduct a thorough financial analysis before launch, considering
the impact of the type of rewards on annual points redemption. ''About 30 to
35% of points will be used in a merchandise or travel rewards program. You'll
see higher redemption on a cash-back program or one that offers gift certificates.''
Fewer points will be redeemed annually for merchandise and travel rewards because
cardholders tend to save up for large purchases. Thus, credit unions offering
these programs will see higher liabilities for the unredeemed points.
In addition to the rewards program, the credit union stimulates usage by giving
cardholders regular credit line increases. ''We're also looking at giving smaller
increases more frequently. For example, we could increase the credit line by
an extra $100 every few months, instead of a larger increase every 18 months.''
In addition to encouraging purchases with the card, this strategy could be an
effective retention tool, a way of showing appreciation to cardholders.
Looking for ways to improve the performance of your credit card program? Or
has your credit union considered selling its credit card portfolio? Callahan
& Associates now has two new resources to help credit unions explore the best
options for managing their credit card programs.
Our JUST-RELEASED research report, Strategies
for Credit Card Portfolio Growth, combines an analysis of industry performance
and best practices, including guidelines on whether to keep or sell your portfolio.
You can also order a CD recording of our recent webinar on Effective
Credit Card Portfolio Management. The program includes presentations from
3 different credit unions, including Baxter CU, that have implemented effective
strategies for portfolio growth