Competitive Pressures Mandate Better Tracking And Reporting On Card Programs

As credit union and bank credit risk levels draw closer, credit unions must use better analytics to maintain their advantage over banks.

The difficulties of the recession are increasingly in the rearview mirror, and the risk profile of credit unions credit card programs is likewise improving. Charge-offs reached uncharted territory in 2009 and 2010, topping 4%, but the industry has now posted two years of improvement. Credit union card portfolio charge-offs declined to 3% in 2011 and have declined further this year to an annualized rate of approximately 2.5%, helping card managers and senior executives sleep easier.


Still, card charge-offs have not yet returned to their 2% pre-recession level, and it is unlikely they will. As credit unions incorporate looser membership profiles and attract new (i.e. unfamiliar) members, it is inevitable their credit card portfolios will have a hard time returning to sub-2% charge-off rates. Even if that does happen, such additional improvement is immaterial compared to the improvement already achieved.

More interesting than comparing industry averages over time, though, is comparing credit union performance against big bank competitors. Banks control 95% of the credit card market, with a high degree concentrated in the top handful, and their performance defines the competitive environment.


At first blush this information looks reassuring: Banks charge-off at a higher rate than credit unions. That must be good, right? But credit unions must not get complacent. This initial observation masks three important developments:

1) Bank charge-offs are more than 500 basis points lower than they were in the recession. The banks are minting money in their card programs and growing their businesses. And, although national mailings and solicitations continue, the large issuers are more focused than ever on growing their card businesses within existing relationships and through their branch networks. Does this strategy sound familiar?

2) The spread between bank and credit union charge-off rates has narrowed. In fact, banks have never before come as close to credit union charge-off performance as they are today. This weakens one of the most important credit union competitive advantages with lower charge-off rates credit unions can offer lower interest rates than banks and still maintain a healthy bottom line. As the charge-off gap narrows, so does the pricing advantage. Larger sophisticated issuers have many advantages of their own; it’s disheartening to see a credit union advantage erode.

3) Banks are closer to approaching their all-time-low for charge-offs than credit unions. Only time will tell if this means the market is converging. As long as banks focus on relationship marketing and credit unions grow through new members and new member credit card accounts, the conversion will continue. And as it does, credit union and bank credit risk levels will draw ever closer.

Where does this leave credit unions? They’re pretty much where they’ve always been; fortunately, there’s more to it. There are more than 10,000 financial institutions in this country and more than 4,000 offer credit cards. Intense competition is the norm and the consumer is in the driver’s seat. To continue as viable sources of fair, valued, and growing credit card businesses, credit unions must clearly understand their card program performance. Analytics matter.

For example, credit unions must have an understanding of current profitability levels and long-term pressures. A profit-and-loss report provides the clearest single picture of program performance and health and allows the issuer to better understand the impact of program changes. Tracking P&L allows credit unions to not only offer the fairest, broadest, most-valuable products but also provide comfort to regulators and boards who want to see a risk-management discipline is in place.

Step 1: Portfolio Behavior
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Step 2: Earnings & Returns Measures
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A credit union must measure product risks including credit risk, adoption, usage, growth, and profitability if it wants to thrive into tomorrow.

May 30, 2014

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