All signs point to credit cards continuing to be an important and high contribution product for credit unions in 2012. Not only is there market demand for credit cards, but credit cards can generate attractive net interest margin, fee income and net income when properly designed and managed. However, managing a credit card program is difficult. Regulatory and competitive pressures are significant, and assuming that what worked yesterday will work tomorrow is not a prudent strategy.
The best performing issuers commit to supporting several core skills and approaches. Smaller institutions looking to strengthen their credit card programs and provide as much as value possible to members should understand what these best-performers are doing:
Don’t think of credit cards as one product.
Many credit unions view credit cards as one loan product, but members don’t. Some members will use credit cards primarily for their borrowing function – to fund purchases for which they don’t have immediate funds. Other members see credit cards as convenient transactional vehicles, viewing them as easier to use than checks or cash. Those members likely also want to leverage rewards. Others members value the fraud limits or purchase protections on products. Consumers’ motivations differ, so credit unions should develop different approaches to providing value targeted to each consumer’s expectations of their credit card products.
This can be complicated, and it’s easy to make mistakes. For example, we recently encountered an issuer who rolled out a balance transfer campaign that seemed very attractive: 0% rates for an extended period with no transfer fees. However, they also wanted to reduce credit risk, so they limited the offer to very high scoring accounts. As a result, they made an offer with a value proposition that most of the targeted prospects had no interest in and their results were lackluster.
Do the work required to get to the data.
Credit card program data is among the most difficult data to integrate into internal data warehouses and then access for marketing and portfolio management purposes. The majority of credit unions use third-party processors in a full-service capacity for their credit card programs, and getting current account level data required for segmentation work can be difficult. While many processors can help credit unions run stand-alone card promotions like balance transfer campaigns or reward promotions this is a step short of best practices. Credit unions must integrate data from all elements of the member relationship and carefully target a variety of value propositions to different member expectations. Otherwise, results can be bad – bad enough to demoralize the entire team. And once credit card programs lose support and energy they are hard to reinvigorate.
This may seem like swinging for the fences, and sometimes even we at TRK Advisors can accept a solution that is only ‘good enough’ to keep things moving, but understand that the largest issuers have developed deep expertise in data segmentation and target marketing. Large banks are back into the market in force and, though they bring many negatives and less trust among consumers than credit unions, their ability to target who they want from your member base, make specific offers against their likely desires, and incent a switch of cards will relentlessly poach existing and potential accounts.
Put credit cards in a relationship context.
This year is a great time to leverage all that credit unions stand for: trust, fairness, cooperative structures, and member value. That message resonates best when discussing overall relationships and the value of membership across many products.
Credit unions often fall a little short when considering credit cards in the context of relationships, but they are the ideal products to demonstrate your relationship-focused approach to members. There are many ways you could to do this. Could you provide long-term members with advantaged pricing over newer members? Could you identify your top 5% of spenders and send them a year-end gift card to a local coffee shop? Or could you run special promotions for bonus points with local retailers (especially if you are trying to build business relationships with them)? The possibilities are limited only by the creativity of your team or advisors.
Critically, this may be the year to develop your total relationship reward programs as large banks can no longer do so due to debit card interchange reductions. But with credit unions' advantaged interchange rates on debit cards and carefully calibrated point awards for other products, a total relationship rewards program can be economically viable for many smaller institutions. Credit cards typically serve as a delivery vehicle and such a program can really help build and strength the credit card program. It’s unusual for the regulatory and legislative environment to provide specific competitive advantages to smaller institutions, but it did in 2011. This advantage may erode over time, but it’s here now and ignoring it would be a shame.
We all know that credit unions occupy a special place in this highly competitive environment. When it comes to issuing credit cards, members and members-to-be will gain great value from a properly designed, marketed and managed credit union credit card program. Getting all the elements right is not easy, and it does not happen without ongoing commitments and investments in your staff and the program. But that’s kind of your purpose, isn’t it?