At the end of November 2014, local businesses across the country received a one-day, $14.3 billion boost in purchase activity asa result of Small Business Saturday, the day-after Black Friday holiday started by American Express in 2010 and billed as a way to counterbalance the big-box shopping sprees typical of the winter season.
But many institutions also sustain their support of small businesses via payment programs that run all year long and reward close-to-home spending.
One such example is Vermont State Employees Credit Union ($650.3M, Montpelier, VT), which offers a discounted credit card rate for in-state purchases.
VSECU benefits by giving more grassroots spending power to members. Other credit unions can learn from VSECU and do the same.
ANOTHER PERSPECTIVE
Across the country at Rogue Credit Union, similar efforts take the form of a local partners network, where purchases made with any of the credit union’s debit or credit cards receive special merchant discounts. Click here to read a three-part breakdown of its strategy.
The Problem
After converting from a SEG to a statewide community charter in 2012, and subsequently rebranding,VSECU wanted to reinvent what we did on an everyday basis, in a way that created extra value for members and the state economy, says YvonneGarand, chief marketing officer.
The credit union channels dollars and employee volunteer hours in support of various philanthropic causes, but it also wanted a product-based option that would give members more control and accountability.
For cards, specifically, there was a lot of interest in rewards, but VSECU had several reservations.
CU QUICK FACTS
VERMONT STATE EMPLOYEES Credit Uniondata as of 09.30.14
- HQ: Montpelier, VT
- ASSETS: $650M
- MEMBERS: 55,651
- 12-MO SHARE GROWTH: 6.83%
- 12-MO LOAN GROWTH: 5.15%
- ROA: 0.32%
We wanted to avoid options that would mainly benefit people outside of the end user and outside of the state, Garand says. Rate discounts or rebates were another popular idea, but they were typically organized around the type of retailer.
Also, VSECU’s standing credit card is already one of the most competitively priced offerings in the market. Combined with the credit union’s low fee income and late payment penalty forgiveness, VSECU knew it would have to cautiously examineany variations to its pricing structure to avoid undercutting profitability.
Lastly, the credit union prefers streamlined product suites, so adding additional card categories or creating too many hoops for members to jump through was a nonstarter.
We offer one card, one checking account, and one saving account because we believe every hard-earned dollar should be treated the same and go toward the best product we can offer, Garand says.
The Pitch
After a thorough credit card pricing examination, VSECU hit upon the idea of offering members a discounted rate on in-state purchases as well as balance transfers.
Vermont is a very rural and organic state,Garand says. That message of supporting the community is something that immediately resonates.
The credit union determined what percentage of purchases historically occurred with the state roughly 56% and looked at four different pricing scenarios ranging from 11.5% APR to as low as 5.5% APR. It then forecasted the lift it wouldreceive in interest income and interchange income under each scenario.
After these calculations, Garand and her team decided a rate of 6.5% for local purchases and 10.5% for those outside the state which amounted to a 4% discount on in-state purchases was the sweet spot in all respects.
The credit union also decided it would not limit the processing merchant’s size, so members did not have to change their behavior and could embrace a more holistic view on local investment.
Vermont is a very rural and organic state. That message of supporting the community is something that immediately resonates.
There are not a lot of big box stores here, Garand says. But those that are here employ hundreds of Vermonters; we wanted to support all our local individuals regardless of where they work or shop.
From an internal workload standpoint, the credit union can silo all transactions with a state zip code and apply the discounted rate without making major changes to its back-end systems. However, VSECU does have to manually add the few few mom-and-popshops that piggyback out-of-state companies for their card processing as the credit union encounters them.
The Results
Since launching this product in 2012, we have increased our number of cards from 8,414 to 11,684, Garand says. According to third quarter 2014 data from Callahan & Associates, the number of credit cards accounts at VSECU has grownmore than twice as fast annually as those at similar-sized credit unions 15.4% versus 6.6%.
It addition, the credit union has also started a card recapture campaign that it predicts will push these numbers far higher in 2015.
If we sit down with a member and we pull their credit report, those card balances are low hanging fruit, Garand says. It’s easy for us to demonstrate that they’ll be saving money and supporting the community by switchingover.