What started out as an already challenging year for credit card issuers has now become almost impossible to wrap one’s head around. As we entered March we already knew that the interest rate environment had moved dramatically against credit card issuers, and that credit loss pressures continued their five year creep toward levels last seen in the Great Recession. All of this on top of the familiar, mundane pressures of maintaining a competitive product set, ensuring that members are provided the technology and servicing tools they now expect as a baseline, and continually marketing in a targeted and effective manner.
But today? Today that looks like an enviably manageable set of concerns. With the seizing up of the consumer economy, job losses unprecedented in scale and velocity, and an unpredictable duration for all of it, the difficulty in managing a card program can be much more easily felt than really understood. As we saw in the Great Recession, though, a level-headed and data-driven approach to what is happening can serve the credit card program, a credit union’s members, and the health of the credit union as a whole.
Register now to join Tim Kolk for this special webinar event, Credit Card Market Overview: Current Trends & COVID-19 Impact. He'll discuss trends driving the credit card industry as well as action one can take in the current economic environment. This session is free for the credit union industry.
In support of that effort, we encourage every credit union to:
Understand the impact of today’s interest rate environment as compared to 2019. In 2019 the Prime rate already dropped by 75 basis points. March changes have brought it down another 150 basis points. How much this will reduce variably-priced card program yield is a function of revolve rates, promotional balances, and similar factors. It can be tricky, but every credit union should determine these impacts to even begin a realistic assessment of 2020 revenue prospects.
Stress test the program’s profitability under a variety of purchase volume reductions. In the last recession purchase volumes came down about 10% from their highs. Will this one be worse? It seems so, and understanding the range of possible reductions and impacts on interchange revenues (offset potentially by reduced reward costs) is almost as important as understanding yield impacts.
Also stress test what happens in an escalating credit loss environment. In the Great Recession overall credit union charge-off rates more than doubled. What happens to your program if that happens again? Are you watching roll rates? Are you tracking member behavior changes which signal escalating risk?
Prepare Collections areas for increased volumes. One of the lessons learned in the Great Recession was that an overwhelmed Collections area becomes a less effective Collections area. We even saw some credit unions all but abandon credit card collections to focus limited resources on larger ticket loans. The data suggests this may have been a mistake at that time. We’ll really never know if it was, but it certainly hurt those credit card programs.
Be ready to be nimble around the areas of marketing, underwriting approval and line assignment policies (not typically an area where ‘nimble’ comes to mind), and member servicing and accommodations. Ensuring one stays as the most trusted and valued financial institution relationship can matter a great deal when consumers have to decide who gets paid, and how much.
Having been through several economic cycles we can say that this one looks, feels, smells and sounds different. We are concerned. Unsettled, even. But one thing we know for certain from those past cycles: those credit unions which prepare as best possible, keep a view at least a little forward from today, have developed reporting and resources which are trusted and capable, and which are led with purpose will fare the best. Over time, through cycle after cycle, these are the credit unions which bring the highest value to their members, preserve the credit union’s capital when that is the best one can do, and emerge to a happier day when the sun shines again.
Now Is The Time To Lead With Purpose
Members are looking for their financial cooperatives to help them navigate these uncharted financial waters and credit union leaders need a purpose-driven lens to help make unprecedented decisions.
Leading with Purpose is a 100% virtual learning experience which brings together best in class content from Harvard Business School Online, Callahan’s 35+ years of industry perspective and knowledge with unparalleled collaboration with other credit union professionals – to deliver this timely and imperative knowledge.
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