As consumers and lenders rethink how they use or issue credit cards, you’d think credit unions would have much to lament.
But two experts say credit card profitability for many credit unions is surprisingly robust, and the techniques for attaining healthy returns aren’t difficult to learn and employ.
Mitch Raymond, senior vice president of credit products at TNB Card Services, a Fifth Third Processing Solutions LLC Company, says it’s easy to list factors causing a drop in credit card issuance or use.
“The first is unemployment, which is still relatively high, especially depending on your geographic region,” Raymond says. “Being located in a high-unemployment area affects an issuer’s ability to find qualified credit applicants.
“Then there’s the housing market,” Raymond continues. “A recent federal bulletin estimates that 20% of consumers’ net worth has evaporated since the housing market crash. This has greatly affected consumers’ confidence and ability to pay, and has delayed the purchase of big-ticket items.”
Raymond says credit issuers have been digesting recent regulatory changes brought about by the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act, and repositioning their products accordingly. Consumers ultimately will bear the brunt of reduced credit lines, new fee structures, modified reward programs, and higher overall costs for risky cardholders.
He says credit unions, however, have been relatively fortunate. They weren’t participating in unfriendly practices disallowed by the CARD Act so they attracted new cardholders who were leaving the major issuers.
“They haven’t had to make significant adjustments,” Raymond says. “Before the CARD Act, credit unions often offered credit cards to members that major issuers wouldn’t underwrite, and they did so without accompanying losses due to their strong ties to their members. Therefore, their losses are much lower compared with banks.
“Many credit card users already saw credit unions as safe and secure places to have accounts, where they would be treated fairly,” he continues. “Credit unions weren’t doing double-cycle billing, and they charge fair and reasonable fees based on fair risk analysis.
As a result, when the CARD Act took away many of the lucrative billing practices of the larger issuers, credit unions were right there to provide an alternative to consumers.”
While positive member attitudes toward credit union credit card practices are gratifying, Kenton Potterton, vice president at PSCU Financial Services, cites hard figures that show just how rewarding a successful credit card program can be.
When a member has the credit union’s card, that household also has more services—3.64 vs. 1.75—more deposits—$20,000 vs. $13,000—and higher profitability per account—$119 vs. $71, according to Raddon Financial Group.
“This increased revenue and profitability helps the credit union fund more research and development, improve member service, and grow capital,” Potterton explains.
He says almost all credit unions offering credit cards make money on them, “although our experience is that most don’t look at the profitability of their portfolio. They may look at outstanding balances, revenue, and credit losses, but they don’t examine the amount of net income the portfolio generates. While the economy has hit everyone, the return on assets for most credit card portfolios is 2.5% to 4%.”
Next: Consultants can help
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:
“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
Grow Your Card Portfolio
Elan Financial Services—a provider of end-to-end credit card, debit, merchant, and ATM programs; regional and surcharge-free networks; technology leasing; lending programs; and correspondent services—deploys best practices to help clients boost penetration into the member base, and then uses advanced lifecycle marketing tools to ensure cardmember loyalty.
It does so via:
• Direct mail acquisition marketing. Elan leverages its state-of-the-art database to integrate member and credit information, and make the right offers to members.
Targeting models predict response rate, risk, and the likelihood that a potential cardmember prefers rewards or nonrewards credit card products.
• Branch promotions. Elan provides turnkey branch promotions that include sweepstakes, prizes, and gift card incentives for top cross-sales performance. The company provides easy enrollment into these quarterly promotions, along with new account tracking.
• Specially priced employee cards. Financial institution employees can apply for a special card available only to them with no annual fee, preferred rates, and rewards.
• Existing cardmember marketing. Engaged card members are more loyal and generate more revenue. Elan employs a data-driven lifecycle approach to manage existing account performance. Accounts are segmented by lifecycle and cardmember behavior to ensure members get the right offer at the right time.
• Ongoing marketing planning and support. Elan provides ongoing marketing planning, as well as regular reviews of portfolio performance and account growth. It works collaboratively with clients to identify opportunities for member penetration and account profitability.