No one would suggest the past two years have been normal. Everyday lives have been disrupted, and the day-to-day work in managing credit card programs has been impacted in some fundamental ways.
Of particular note, a significant drop in consumer spending coupled with a pullback in borrowing led to the single largest decline in credit card balances in history in 2020. An avalanche of new purchases in 2021 then followed, even if balances did not rebound.
All in all, there has been a lot to react to and manage through in an environment heavy in remote work and personal challenges. So, is 2022 the time to relax?
If you are prepared for what this year will bring, yes. If you’re not, things could get even more difficult.
This year and beyond, managing a card program will require addressing specific challenges. Failing to prepare could result in a damaged future for the credit unions card program. Looking forward, program managers need to be thinking about the moving parts that drive card programs and consciously planning how to adapt to the current environment.
The State Of The Economy
First, the overall state of the economy matters. Inflation is the headline topic. In some ways, inflation is a positive for card issuers. Higher prices mean larger transactions, which means more interchange. Inflation might lead some consumers to cut back on purchases, but signs so far are quite the opposite purchase volumes continue to grow after a historically strong 2021.
Inflation also means to expect a series of rate increases by the Fed, which started with a 25-basis-point change on March 16. But rate hikes, too, are a positive for almost all card issuers, at least on first impact. A rising rate environment drives up APRs on all variable rate products, increasing interest revenue.
So, all in all, the economy is driving up the revenue lines of card issuers. Good stuff for us.
Credit Risk
Second, credit card program managers need to think about credit risk. One of the most surprising outcomes of the past two years was that credit losses dropped. For credit unions, losses dropped to near historic levels.
This was totally unexpected. In early 2020, experts were in near agreement that charge-offs would drastically rise, some predicted charge-offs would soar to rates near 10%. Amazingly, charge-offs settled in at 2.8% for credit unions. Then they declined even further to 1.8% in 2021. More good stuff.
Expecting charge-offs to continue to drop, however, would hardly be prudent. Few performance measures, in any business at any time, ever stay at such historically favorable levels for long. A prudent issuer will begin to plan for increasing charge-off rates going forward.
Credit Card Balances
Third, let’s think about balances. Culturally, and within most internal measurement systems, credit unions focus their card programs on balances the most. Are balances up? By how much? How can we get more? Grow balances!
2020 was not good for balances. Overall, credit card balances declined by 11% or $117 billion in 2020. They only rebounded by 7% or $68 billion in 2021. Credit union performance during these periods was decidedly mixed. In 2020, credit union balances declined by 6% which was better than banks. In 2021, they increased only by 4% which was worse than banks.
That last figure is worth staring at for a moment: For the first time since 2004, banks outperformed credit unions on balance growth. This is not good stuff.
Consumer Behavior
Fourth, its instructive to look at how consumer behavior has changed over the years. Consumer use of credit cards has changed in ways that are hard to identify by looking back only one or two years.
A fundamental longer-term change is that large percentages of cardholders now strive to put every purchase possible on their cards for rewards value. This has changed the competitive dynamics in undeniable ways. As recently as 2009, cardholders spent less that $2 per $1 in balances over the course of the year. In 2021 they spent $4.60 per $1 in balances. Said another way: Since 2009, balances have grown by 14% while purchases have grown by almost 180%. This dynamic might be why credit union balance growth lagged the bank segment last year. A credit union-focus on balance-driven value (i.e. low rates) has been out of tune in a market where consumers borrow less but spend very aggressively.
Although overall purchase volume was up approximately 23% in 2021, few credit unions have achieved comparable results.
All of this leads to my suggestions for areas that credit unions should focus on in 2022: Staff and management skills, capturing purchases volumes, and investment in upcoming challenges.
Staff and management skills. Too often when things get distressed (ahem, the past two years), issuers discover staff members have not been properly supported and developed for such moments. Its all too easy to ignore staff development when times are good. But without a firm grounding in performance reporting, an understanding of all the levers that move in a card program, knowledge about the competitive market, and established trust with senior management, it can be difficult to feel in control even in good times. When the environment becomes challenging, the costs are particularly high. Decisions are hard to make or worse, are made badly morale suffers, programs fall behind more capable and agile competitors, teams don’t function well, and long-term performance can be damaged. Develop your organizations skills before the tough times come.
Spend time thinking about capturing purchases volumes. Credit unions have long done relatively well attracting those who use their cards to carry balances. Its fundamental to the credit union culture lower rates and fees will attract those who value such things. There’s nothing wrong with that, and a whole lot that is right. But there are large numbers of consumers who prioritize credit card spending for reward earnings. A reward programs structure (how are rewards earned and at what rate), value (what rewards are worth when redeemed), and breadth (what can cardholders get with their rewards) should be on a continuous review-and-update cycle. Benchmarking to market levels cant be delayed. Potentially new cardholders wont pick you card hoping you’ll get to where they want at some later day.
Invest for more challenging times to come. Revenue will rise with spending and prime-driven APR increases. Cost of funds will most certainly not rise as fast, so margin will expand. Credit losses remain favorable. All of this creates positive upward pressure on the bottom line, and profitability in 2022 will exceed 2021 for most. To simply bank this will lead to a worse tomorrow. Use the good times today to make the investments needed to better weather the tougher times. Too many didn’t prior to 2020-2021, and that is why credit unions were outcompeted by banks last year on both balance and purchase capture.
As is always the case, card programs don’t coast well. They slow down, get less interesting to your members, and, ultimately, decline or offer worse-than-average growth. This is why 75% of all credit unions grow at below-market rates every year. If you aren’t prepared to overcome inertia this year, its unlikely more favorable circumstances will come by later.