The trip from Anchorage, AK, to the next closest American business center in Seattle, WA, covers a little more than 2,260 miles, roughly the distance between Washington D.C. and Los Angeles. Driving nonstop from Anchorage to Seattle would take approximately 45 hours. Realistically, the only way to the Lower 48 for Alaskans is by plane, allowing them to rack up air miles in the process. Not surprisingly, Bank of America offers one of Alaska’s most popular credit cards by market share in part because customers can earn miles redeemable on Alaska Airlines. For credit unions in the state, including Credit Union 1 ($862M; Anchorage, AK), capturing a piece of this market has been a process—one that started with a simple question.
“What we recognized is that there are three basic products that most adults have: a checking account, an auto loan of some sort, and a credit card. And so our question is if they have those products, why don’t they have them with us?” asks Tom Newins, chief operating officer at Credit Union 1.
The credit union’s success in auto lending especially offered a path for boosting credit card market share. According to 3Q 2013 Search & Analyze data on CreditUnions.com, new and used auto loans account for 63% of Alaskan credit unions’ loan portfolios, on average, compared to 30% nationally. Credit Union 1’s portfolio consists of 40% auto loans, higher than the 31% average for peers with $500 million to $1 billion in assets.
Many people were already familiar with Credit Union 1 thanks to the greater visibility and consumer awareness that Alaskan credit unions enjoy compared to other states, Newins says. What Credit Union 1 wanted was to take existing auto loan relationships several steps further: first into credit cards, and then into checking and savings accounts. The institution’s vice president of consumer loans first pitched the idea nearly two years ago.
“If we do all these car loans and we are looking for greater credit card penetration,” Newins says, “let’s bundle them together and offer them to the members and then come up with explanations as to why our cards are a better deal than the cards that are generally in their pocket.”
A Tale Of Credit Card Success
Members who qualify for an auto loan from Credit Union 1 automatically qualify for the institution’s credit card. Based on their FICO score, the institution determines the minimum amount they are pre-qualified for, with $500 as the baseline for C-rate-or-lower borrowers and $1,000 for A-B borrowers. The credit union presumes that because each individual qualified for its auto loan, the same person would also qualify for a credit card.
Make no mistake; this is a true credit card, not a pre-paid card, and members can decline the offer. But that pre-qualification does invite a dialogue between the credit union and member.
“They have the option to say ‘No, I don’t want it,’ or, ‘I have too many cards,’” Newins says. “But then you get into the discussion of ‘Well, you may have too many cards, but do you have the right card for you?'”
The goal is not just simply to push another credit card on members either. Instead, Credit Union 1 wants to educate members about its credit card product and allow them to compare what they have currently to what Credit Union 1 offers. That way, if switching credit cards makes sense, the member will see that. And Newins believes his card stacks up well against the competition thanks to numerous benefits such as lower rates, better terms, easier access, overdraft protection, and no additional fees. Already, there are signs that members are more likely to switch to the credit union’s card or at least add it to the ones they already have in their wallets.
The credit union does not track how many of these auto loans generate new credit card holders, but from 3Q 2011, before the program was introduced, to 3Q 2013, according to Search & Analyze data, the total value of auto loans went from slightly more than $150 million to $250 million, a nearly 66% increase. At a minimum, these statistics imply more members are learning about Credit Union 1’s credit card, but the actual numbers for credit card penetration rates show an even better result.
Before the program was introduced, Credit Union 1 maintained a 14%-15% credit card penetration rate. Currently, according to Callahan & Associates’ First Look Peer-to-Peer data, penetration has risen to 23.47%, which is still under Newins' ultimate goal of 35%. Nevertheless, that penetration rate ranks significantly higher than the 15.32% rate for asset-based peers. As the credit union continues to use the card to solidify and expand the member relationship, share draft penetration rates also indicate the institution’s growing role as a primary financial institution. In 3Q 2010, share draft penetration was 60.94%, well ahead of the credit union’s peers in the same state or asset class, but in 3Q 2013 that number rose to 67.56%, considerably higher than the 56.02% and 52.84% rates of asset- and state-based peers, respectively.
Employees As Financial Experts
Newins stresses the credit union is promoting education, rather than a credit card, using its employees to guide members into making smarter financial decisions. Although the credit union benefits from those efforts with higher credit card penetration and usage rates over the short term, any product that doesn’t help members also risks damaging the credit union in the long term.
“We might have that one account, but if they recognize that they didn’t get that good of a deal, they aren’t going to come back, for one, and they will probably tell their friends that, ‘Hey, I feel like I got ripped off at Credit Union 1,’” Newins says. “Our goal is to get people to talk positively about us, and that is only going to happen if we reach out and help them.”
Newins views his employees as financial experts, whose job it is to provide everything the member needs to make an informed decision. But, as with anything, employees can and must continually educate themselves on the credit card product.
For example, according to First Look Peer-to-Peer data delinquency rates on credit cards grew from .53% in 3Q 2012 to 1.09% in 3Q 2013. Those figures, Newins says, underscore the need for further employee education so that his staff can advise members better.
“The word of caution is to make sure that employees do an effective job communicating the responsibilities of the auto loans we offer,” he says. “We have to make sure that the members recognize this is not just a free card; this is part of their financial package and portfolio.”