Let’s state the obvious. Every credit union would love to find more loans. The U.S. economy is not generating enough loan demand to fill supply. And, therefore, competition for new loans is intense in all ways, including marketing, pricing, and up-front incentives.
This is why more credit unions are looking to credit cards as a source of loan growth. Granted, credit cards are often a small portion of the balance sheet — typically about 5% — and new accounts can be expensive (often with a three-year-or-more payback period). But with credit risk stabilizing and consumer spending inching back up, credit cards can contribute meaningfully to growth goals. Moreover, credit cards are often the highest ROA asset on a balance sheet, so growing $1 in credit card balances can often generate the same earnings as $3-$5 in auto lending, for example. And, to put it bluntly, credit cards can earn the institution money indefinitely, whereas almost any other loan product pays down and then has to be replaced.
Here are three critical areas of focus needed by a credit union to realize their opportunity in this environment. Success in these areas will go a long way in ensuring growth is both profitable and does not create undo credit risk. The key areas where there is a need for improvement at most credit unions include underwriting approaches, marketing, and product development.
Update Underwriting Approaches
The Credit Card Act requires specific changes to underwriting procedures, most materially the inclusion of ability-to-pay calculations when granting a credit line, and requiring greater care in aligning new account pricing with potential future credit risk. But in today’s environment, an issuer needs to go deeper than what is required. Fortunately credit unions with a focus on known relationships are well positioned to do that. The advantages of the relationship became impressively apparent during the recession: credit union charge-off rates for credit cards were less than ½ of those experienced by banks despite having comparable credit risk profiles by FICO score.
That’s the good news. The bad news is that the largest banks (which control more than 80% of the market) have put substantial energy into this area. Their underwriting now goes much deeper than it used to and extends well beyond credit score, and credit unions can expect ever more targeted poaching of your most desired relationships. To complete smaller institutions also need to look beyond credit score and include such elements as relationship length and strength, employment history, employment type, performance on other loans, and other data elements. This means resourcing a stronger combination of data analytics and manual work when facing-off with an applicant. Without updating these approaches, credit unions risk making worse decisions than their competition. And with credit cards, it only takes a few bad decisions to overwhelm the good ones.
Market Carefully And Regularly
Effective marketing of credit card products requires more segmentation and behavioral analysis than ever before. Know how a prospect is likely to use a card. For example, will they revolve a balance? Or do they tend to pay off every month? Do they travel abroad? Do they have a lot of credit on other issuer cards? drives the product one should offer. We all say ‘credit card’ as if it means one thing. It doesn’t. ‘Credit card’ means different things to different prospects and misaligning your marketing with prospect viewpoints wastes time and money and, once results are underwhelming, can lead an issuer to mistakenly conclude that card marketing should not be a focus. Ineffective marketing is worse than no marketing in this product.
Develop A Reliable Product Profitability System
Difficult times cull the herd, and this past recession was no different. And the market does not care if one is merely unlucky with being in a tough geography, or if they are truly mismanaged when it drives an institution into dire straits. One of the lessons of this past recession was that to remain healthy and forward-looking, an institution needs an accurate and evergreen product profitability system. Once the recession hit, too many credit unions knew that their overall bottom lines were in trouble, but too few credit unions knew which products were their main culprits. This led to broad stroke cost-cutting, such as eliminating marketing, for even positively contributing products and marketing products that actually harmed the bottom lin. It was several years of confusion about appropriate priorities.
Relatively few institutions were better prepared than the overall market, and they were those with in-place and well constructed product profitability systems. Credit card profitability should be measured within an overall system, where all revenues and costs are assigned to specific products and the entire system strikes to the entire credit union’s bottom line. Once that is in place, it is often demonstrated that credit cards are generating above average returns and should continue to get resourced and marketed to help the credit union overcome difficulties in other areas. But if profitability measurement is ad hoc and not comprehensive, the institution can make mistakes in all such decisions.
By focusing on just these three items, we are confident that almost any credit union will improve their card program performance. As a result, growth will be improved, returns will be protected, and the organization can commit resources with confidence to the program’s future.