After a few years of wild swings in credit card program performance and quickly changing member needs, most credit unioncard programs are once again producing reliable profits as the economy improves and regulatory changes are locked-in.
We’re back to a time when:
- Big banks are again sending out billions of mail pieces to your most valuable members.
- Rates are decreasing and price competition is back.
- Data management skills and marketing rigor are proving driving growth.
- CARD Act has leveled the playing field and hurt your ability to demonstrate the advantages of credit union card products.
- Reward program value propositions are getting ever richer and more expensive, but they are where most new cards are being generated these days.
We’re not exactly giddy about the good old days’ when it comes to making sure credit unions grow and manage their credit card portfolios. The good old days weretough for smaller issuers, but for the most part big banks loved them. Here’s how program growth in the first half of the last decade compares to more recent years:
|Change In Unsecured Revolving Consumer Portfolios: Credit Unions Versus All Others|
|Source: TRK Advisors.|
When banks were gung-ho to grow their card businesses, they outpaced credit unions two to one. But, once financial hard times began, the banks pulled back and their overall card businesses shrank. (Of course, the fact that they charged-off almost 40%of their card portfolios over that second time period had an impact too.)
Recent data speaks great news for the credit union community, but it will take renewed focus and work to keep it going and there is abundant opportunity to do that. Even with the growth success from 2006 through today, credit unions still own less than 5% of all U.S. credit card balances, meaning credit unions can still reach out to 95% of the market.
Here’s what credit unions can do to maintain the positive momentum in credit cards:
Almost everyone who qualifies for a credit card has one, so growing a card program requires careful data mining to determine who is eligible for credit and whether they’re within your comfort zone. Ensure that you reach them with messages they willrespond to and, like it or not, a value proposition that is competitive with some very aggressive large issuer marketing campaigns. The good news: you don’t have to match big issuers point-by-point.The credit union industry’s position gives you a great advantage.
Card programs have to serve several types of card users. Some value cards for their convenience, others for their credit functions, others for reward propositions, and so on. Today’s card programs have to anticipate different consumer desires anddeliver different value propositions across a few different products. Ensuring each product meets member needs while also properly balancing risk and profitability is more complicated now.
Managing a program’s credit risk is trickier now and requires card-specific tools and processes both at origination and on an ongoing basis during a card’s lifetime on your books. The CARD Act increases the risk of mismanaging risk: ratescannot be changed except over the course of several years, yet card holder risk can jump around rapidly. If a cardholder starts to trend downhill, a late reaction can be disastrous and cost your other members.Or, just as importantly, if a cardholder’s risk level improves, they become susceptible to poaching from others unless you initiate proactive measures to keep them satisfied.
Reinvest (Some) Profits
After a few years of either fixing underperforming card portfolios or relying them to support the earnings of other, more challenged productsm, there is a danger that a card portfoliowill not receive the investments required to keep it on track. Not only are ongoing investments in marketing, information technology,and program analytics critical (of course), but it’s also important to invest in your people. Front-line personnel need to be regularly educated about the program’s value to your members to be the advocates you need them to be. Programstaff need to receive educational and information resources to stay abreast of industry changes. Senior management and the Board need to be properly briefed and informedto develop realistic plans and controls. In the context of a program that likely has the highest returns of any lending product (with an average ROA of 2%-5%) such investments are modest and pay off for years to come. After all, what other loan account has the potential to stay with you forever?
So, yes, these are the days are looking more like the good old days, when banks ran the credit card show. But with concerted efforts and a willingness to resource your program and your people, these next few years may indeed become the new’good old days for credit unions.