Credit cards possess a dual nature unlike other banking products. Do your members consider their credit card a loan that bridges cash flow shortfalls or a spending product that consolidates transactions while offering rewards? Individuals shopping for the loan generally focus on two items — the APR and the simplicity of the account terms. Such consumers with good credit are attracted to cards with strong introduction rates, as these products offer access to cheap credit. Individuals shopping for the everyday spending tool are drawn to a card’s financial leverage — i.e., short-term free loan — and the long-term rewards value the card generates.
So where does consumer sentiment stand today? Since 2008, the credit card industry has seen a significant amount of consumer deleveraging. Total credit card loan volumes currently stand at approximately 80% of their 2008 high, down to approximately $675 billion. A conservative shift in consumer attitude as seen in the graph below appears to have depressed willingness to borrow via credit card debt versus historical levels.
Source: The Department of Commerce and the Federal Reserve
Despite trending that suggests lower credit card usage as a loan product, there exists substantial positive momentum behind credit cards being used as a spending tool. The following data (Figure B) shows annual credit card purchase volumes benchmarked to 2008, the previous historical high, and suggests actual purchase volumes are up 14% over the historical high point.
With these macro level shifts in behavior, where should a financial institution look to generate solid returns? Approximately 40% of account holders have revolving balances while 30% are pure transactors that pay off the card in full each month. A sample analysis of loan-centric versus spend-centric customers reveals the following:
Source: Elan Financial Proprietary Information
Although spend-centric accounts display the most financial efficiency based on ROA, loan-centric accounts offer a strong return even after considering introductory APRs, lower average FICOs, and higher long-term charge-off rates. Therefore, how do financial institutions use their product sets to attract either spend-centric or loan-centric credit card users? When looking at a handful of the national issuers’ websites versus about a dozen large credit union card issuers, the following comes to light:
Source: Elan Financial Proprietary Information
Larger credit unions offer a lower number of total credit card products with less of a concentration on reward products, but all issuers see the need to offer a full spectrum of credit card products. No one seems to be giving up on spend or loan centric consumers. Overall, financial institutions are doing a good job differentiating product types based on the audiences they serve.
How might you want to position your organization?
Hold the viewpoint that changes in consumer behavior have created both new risks and new opportunities.
Maintain a full suite of credit card products to meet diverse needs.
Given the growth in purchase volume, make sure your reward product suite contains a strong value and multiple redemption options to capture your members’ share of this trend.
Credit cards as a loan product still create value to the card member, your member base, and your organization
In conclusion, an institution would be wise to consider that, in general, every member carries no less than three credit cards in their wallet, and the battle for top-of-wallet status has never before had such a significant meaning. Offering a strong product with a value proposition that drives the desired behavior is a necessity in capturing a level of stickiness with your membership. Providing value and leveraging the trend of increased awareness better positions your institution for a long-term relationship with each and every member.
Elan Financial Services is one of America’s oldest and largest agent credit card providers for credit unions. For more than 47 years, Elan has delivered a proven partner-based solution, offering best-in-class products and unwavering commitment to service to credit unions across the United States. Elan's base of more than 2,000 employees are dedicated to helping credit union clients reduce costs and risks associated with managing and growing their credit card portfolios. For more information call us at 1-800-223-7009, or visit www.cupartnerships.com.
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