How To Track Profit And Loss

Growing a credit card program is easy in this environment; implementing a program scorecard allows for prudent and profitable growth.

 
 

Credit cards have long been a high profit product for credit unions, which historically have been able to count on average Return on Assets of 3-6% on their card programs. A recent combination of economic forces and regulatory changes, however, has seriously impaired profitability. With 1-in-8 card portfolios losing money, all issuers need to know how their programs are performing; no credit union has the capital or earnings to support a money-losing card program.

To ensure a healthy credit card program, credit unions must have an understanding of current profitability levels and long-term pressures. A profit and loss report provides the clearest single picture of program performance and health and allows the issuer to better understand the impact of program changes. Not only does tracking P&L allow credit unions to offer the fairest, broadest, most valuable products to members, but it also provides comfort to regulators and Boards, who want to see that a risk-management discipline is in place.

Step 1: Portfolio Behavior
Step 2: Earnings And Return Measures
Click the graphic to view full size.
Step 2: Earnings & Returns Measures
Step 2: Earnings And Return Measures
Click the graphic to view full size.

Reward Card Versus Non-Reward Card

Different products have different profitability. The clearest example is a reward versus a non-reward card. Each can be profitable, but each appeals to different consumer segments and have different drivers of profitability (which is why it is typically best to have both products). An example of how reward versus non-reward card profitability differs shows reward cards have lower interest income (because of lower revolve rates) but higher interchange income. Reward cards typically attract higher spending consumers who tend toward the lower-risk end of the credit spectrum, leading to lower credit losses, but extra expense is incurred by providing the reward program.

Step 3: Take It Further
Step 3: Take It Further

This example compares the profitability of reward cards versus non-reward cards. All issuers with more than one product would be well served to measure the profitability of each card product separately. The more you know about how each product performs the better you will manage the portfolio. Ultimately, a carefully managed portfolio brings comfort to the overall institution and the best possible value to your members.

Vintage Reporting

In concept, vintage reporting breaks a portfolio down into different segments based on the date the account was opened. This has become more important as credit unions find newer accounts behave quite differently from older, more established accounts. Although this has always been true, the differences have become more dramatic due to overall economic stresses and credit unions marketing to a broader community footprint than historic employer-based segments. What many find is newer vintages struggle (more than older vintages) to maintain a suitable bottom line.

Once the profitability of each vintage is understood it allows the issuer to more carefully analyze pricing plans, underwriting approaches risk-management tools, and other portfolio management elements. The large bank issuers are doing all of this and much more. If credit unions’ techniques fall too far behind they risk losing their best cardholders to banks while retaining only the riskier segments of their portfolios.

Vintage Reporting
Step 2: Earnings And Return Measures

Profitability Reporting Is Good For Your Members

It might be tempting to view profitability reporting as something that only the CFO and CEO need to care about, but reliable profitability measurement benefits the entire member base. It is the launching pad to fair product pricing decisions; it ensures that the institution knows where to best market its card products; and it provides critical information about what your members value in your credit card product. It’s more than an exercise in measurement, profitability reporting provides information central to the mission of each credit union.

 

 

 

Jan. 9, 2012


Comments

 
 
 
  • Good information!
    Jim Lawrence