Consultants can help
Credit unions looking to take advantage of the credit card market’s high returns often turn to outside sources for help.
One thing companies such as TNB Card Services and PSCU Financial Services offer is a comprehensive view of the elements necessary for a successful program.
CU Credit Cards at a Glance
• Percent of CUs offering: 52.2%
Source: 2011-2012 CU Environmental Scan
“We have a team of consultants with deep credit card portfolio management experience from some of the largest financial institutions in the country,” says Potterton. “We help clients structure their programs for risk-based pricing, credit line management, and important product features such as rewards and premium cards. We run several marketing campaigns each year focused on targets such as account acquisition, account activation, and increased use.”
The marketing campaigns, he says, typically are on a pay-for-performance basis so credit unions pay only if they’re successful. “We also have an outstanding antifraud group that has kept fraud losses below industry averages,” Potterton adds. “And we deliver best-in-class tools for target marketing, risk management, and technology.”
Raymond says his first question when dealing with new clients is, what are their goals? “These include growth within the program, acceptable risk, and yield. Based on their answers, we can create specific action programs. But we don’t offer or sell specific products until we’ve established a client’s needs. Once we bring them on, they can have us take on as much or as little as they want.
“We can provide billing and account tracking, websites, card design and issuance, fraud detection, marketing, and risk management services,” he continues. “One of the main benefits we offer is helping credit union clients achieve the same look and efficiency as the larger issuers.”
Advice to CUs
Whether a credit card program is established or new, consultants urge credit unions to follow certain management principles and practices.
“Among the recommendations we make to clients about how to better manage their credit card programs is to purge rolls of dormant accounts,” Raymond says. "Otherwise they pay a residency fee to store data on members who generate no return. Also, offer reward programs, but don’t apply them to every credit card product. Apply them only to accountholders who want rewards or where rewards will make a difference—typically higher-rate accounts. Don’t apply them to members who are looking for a low-rate, no-frills account.
“Finally, always go green,” he adds. “Give people incentives to switch to paperless billing. Aside from conserving resources, it gives you greater protection against fraud.”
Potterton advises credit unions to watch out for hindrances to profitability, such as not pricing properly for risk or, conversely, being overly conservative about credit lines.
Another mistake is what he calls “too soft” collection practices, where attempts to contact members in arrears are only made Monday through Friday during regular working hours.
He also says credit unions generally need a stronger understanding of the credit card portfolio’s profitability. “While credit cards may only comprise 5% to 10% of assets, they typically represent 25% to 40% of net income. If this is the case, investment in marketing the card program is easily justified.
“Implement risk-based pricing, and periodically review and automate credit line increases—and decreases, as appropriate—to ensure timely recognition of cardholders who have improved or maintained their good credit ratings,” Potterton continues. “Change your collection practices or outsource to someone who can. Credit unions can serve more members with their credit cards if they’re willing to take on additional risk. But they have to price properly for it, and they must have effective collection practices in place.”
Potterton says, in most cases, credit unions haven’t invested heavily in their credit card portfolios so there aren’t many meaningful expenses to cut. A better approach is to increase card use by:
- Not being cheap with rewards. Watered-down rewards won’t attract many users;
- Keeping credit lines high enough so good members aren’t restricted from using the card;
- Reminding cardholders regularly of the value of your card, whether it’s in the form of lower rates, lower fees, better rewards, or better service;
- Not imposing an annual fee; and
- Segmenting your portfolio between transactors (members influenced by rewards) and revolvers (members influenced by rate).
“Given credit unions’ solid reputation and practices, and the fact that cards are traditionally the highest-yielding asset in any financial institution, this is a good time to grow a program,” says Raymond.
“Remember to design it properly, manage it actively, and create ‘stickiness’—incentives that keep members loyal. Otherwise other financial institutions will come of the woodwork to poach your accounts.
“You can’t have a credit card program and be passive,” he adds. “You have to actively manage rates, fees, income drivers, underwriting, penalties, marketing, risk analysis, and back-office practices.”
Next: Grow your card portfolio