Credit unions that issue credit cards might be experiencing a sense of déjà vu this year. With credit loss levels at record lows; consumer spending rising, particularly among higher end demographics; and card program profitability at record highs, the card market has become maniacally competitive again.
Major banks, after getting slammed around during the recession, have emerged leaner and with card portfolios largely purged of high-risk accounts. As a result, they are marketing more, offering better card products, and working to again capture as much market share as possible.
This chart shows the balance growth of the bank versus credit union segments for the national credit card market:
Change In Card $: Banks Vs. Credit Unions
© Callahan & Associates | Data as of 9.31.14
Source: Federal Reserve Report G.19 and NCUA 5300 Call Report
The performance of each industry is pretty clear:
Before the recession, banks captured the majority of market growth while credit unions added a few balances at a steady, modest pace.
Bank program growth took off in the two years before the recession. Bubbles are easy to see after they burst, aren’t they?
During the recession, bank programs shrank materially. The popular press reports this is because banks cut credit lines and treated customers badly. In reality, bank card programs shrank because banks charged-off approximately 30% of all their credit card loans from 2008 to 2011. Loan portfolios shrink when lenders write off 3-in-every-10 dollars.
During this time, credit unions charged-off approximately 14% of their card balances, plus they remained in the market for their members — so they kept growing during challenging times. In terms of competing with the banks, credit union card programs had never done better.
Bank card programs started to grow again in 2011, but credit unions kept going as they had been. Since 2013, bank programs have well outpaced credit unions in capturing the majority of the market growth.
See — déjà vu all over again. Before the recession, the general fear among credit unions was that they could not match the scale and skill of the large issuers and keep their card programs relevant to their members. The recession was a strange kind of blessing for credit union card programs, but now credit unions can expect to once again face difficult and perhaps existential questions about the viability of their card programs as banks ramp up the competition. (Okay, “existential” might be an overstatement, but the risk of becoming uncompetitive is real and credit unions must actively address it to keep their card program engaging for members.)
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The 2015 Credit Card Management School kicked off on Feb. 12. Tim Kolk and Callahan & Associates hold five sessions dedicated to helping credit unions better understand and manage their card portfolios. A recording of the first session is now available.
As with any competition, it is critical to study the actions of your opponent, identify their strengths, and decide how to respond based on your own advantages.
First, let’s understand the competition. Here are the top three things banks are doing that credit unions need to be aware of:
Banks have dramatically increased the value of their reward points to their cardholders. No fee cash back rewards have reached the previously unheard of level of 2% — not tiered, not for some categories, simply 2% on every purchase. Points programs have become more flexible, offer more than 1 point per $1, and provide significant up-front incentives. Any credit union point program set up two or more years ago almost certainly lags the market.
Banks are seeking credit unions’ most important credit card users (or potential members). Time and again when analyzing our clients’ portfolios we find that more than 50% of active credit card accounts have credit scores of 760 or higher. And these accounts generate two-thirds of all spending in these programs. If a credit union fails to protect these relationships, an entire card program can erode. Declines can be slow and are hard to recognize, but rebuilding lost accounts can take even longer.
Banks are integrating technology that embeds their card programs into how their customers behave, whether promoting usage bonuses through technologies like mobile wallets, incenting customers to put their card as first choice in the ApplePay list, or allowing novel and demographically attuned reward redemptions on the fly. If banks succeed in making sure their card is the default choice without a need to pull out a wallet, then they will have a clear advantage in retaining their customers. Even if a credit union credit card is in the wallet, it will move to second-tier status.
But wait, the news is not all gloomy.
Sure, competing will require a credit union to build its team’s skills and pay daily attention to its card programs, but credit unions still possess significant advantages that enable them to outcompete the banks for the hearts, minds, and wallets of their membership.
These advantages include an ability to accept lower program returns, cheaper account generation channels, lower credit risk levels within membership ranks, and lower funding costs. Plus, the Durbin Amendment gives them a critical advantage in building relationship reward programs. All of these enable credit unions to build competitive and successful card programs despite the level of bank competition.
But to be successful, credit unions must build out some critical management discipline and skills within their programs. Here are four essential suggestions for 2015:
Ensure you have actionable and reliable program reporting, most critically a reliable Profit & Loss statement for the program as a whole as well as for all products separately.
Knowing what each card program brings to the bottom line is necessary to understand how much a credit union can invest in marketing for new accounts, how much value it can provide to cardholders to engage and keep them interested, and how important the card program can be to the overall health of the credit union. Credit unions need several other reports as well, but it all starts with a credible P&L that isolates all the important line items and the relationships among them.
Build loyalty programs that are more engaging and broader than spend-focused credit card components.
Going head-to-head with banks on cash back programs or trying to outspend them on points programs is a fool’s game. That’s fighting banks on their terms against their strengths. The most successful small issuers should develop loyalty programs that look at an entire relationship, incent behavior that deepens their most valued relationships, and provide their members with the ability to interact — not just transact — at the place, time, and method of their choosing.
Ensure underwriting and pricing policies properly balance risk with reward for today’s market realities.
Too often, issuers set card rates, risk tiers, and underwriting policies for years at a time. But when credit risk hits historic lows, often those policies can drive programs to be uncompetitive in hidden and dangerous ways, and an uncompetitive program is one where competitors love to start a fight. Programs where rates are well below market might be a good deal for members, but this provides benefits to one segment (borrowers) while limiting the revenue generated to support another set of members (transactors). This limits growth and threatens member relationships.
Build and maintain a rolling 12-month marketing calendar for both new account generation and program management.
Card program marketing is not like a faucet you turn on and off as the mood suits. Whether setting up new account initiatives or marketing to existing cardholders, each issuer needs to maintain a fresh12-month marketing calendar. Issuers must target each effort to a specific purpose and appeal to defined segments with relevant value propositions and messaging. The banks are targeting your most important members, so you need to target them too.
Ultimately, to stay competitive as a credit card issuer, start with concerns and market challenges. Credit unions that take the time and commit the resources to compete and grow their programs become success stories. Success is possible, whether you do what it takes is up to you.
About The Author
TimothyKolk is the owner of TRK Advisors and brings more than two decades of credit card experience and expertise to his clients. Kolk has helped credit unions across the United States improve their card programs, better serve their members, and create long lasting, high performing card programs. He can be reached at firstname.lastname@example.org or (603) 924-4438.
About TRK Advisors
TRK Advisors brings unmatched expertise to any card issuer. Areas of expertise include program performance analysis and opportunity identification, market and member segmentation, product design, processor RFPs, marketing program development, affinity/cobrand programs, de novo (startup) programs, and much more.