Credit card profitability is under more pressure than ever, yet many credit unions don’t accurately report their program’s contribution to the bottom line. Although it is NOT the goal of the credit union to maximize profitability, it does need to ensure its programs are generating a fair return and its stronger members are not asked to subsidize a money-losing program.
Why are card programs under pressure? Three main forces are working together.
1) The average APR on products is in a long-term decline. Credit unions have long had the fairest rates available, and today their rates are hundreds of basis points lower than bank averages. Still, the industry must wonder when its rates are low enough (see below graph).
2) Credit losses have increased, more than doubling in three years. As credit unions continue to grow their programs they must ensure they properly understand (and price for) the risks they are taking on.
3) Programs are getting more expensive to manage. One-time and ongoing compliance burdens are being added to an already high service level product that often has reward points attached. None of these costs seem to be decreasing.
All of these factors contribute to a meaningful and ongoing erosion of average card program ROA.
Average credit card ROA has been declining for three years, any relief has been driven by historically low cost of funds. It does not appear funding costs can go much lower, and credit unions can expect fees to decline because of the CARD Act. Additionally, credit losses are likely to slightly increase in 2010; as current delinquency levels are already higher than at the beginning of the year.
For these reasons it is critical for all issuers to:
- Have a monthly credit card Profit & Loss Statement reviewed by management and incorporated into Board reporting.
- Develop reasonable forecasting methods for future period performance. The CARD Act and recent interest rate risk guidance from the NCUA make this more important than ever.
- Continually evaluate the relationship between program pricing (Interest and Fees) and credit risk levels. Without this evaluation, credit unions run the risk of having their strongest members carry the burden for the riskier ones.
With proper discipline and planning a credit union can capitalize on this unprecedented opportunity to become the credit card issuer of choice for more members. Doing so safely and profitably will create value for the credit union and its members for years to come. Growth is easy, smart growth takes effort.