With most card issuers in variable rate products, this translates to a rapidly expanding margin and improved bottom line. Good, right? Well, yes … but, it’s good for everyone, so that’s not a competitive advantage. How issuers use this newfound margin matters more, and the largest ones are using it to aggressively promote introductory rates and reward value promotions as well as fund incredibly aggressive cardholder-facing reward value.
This is why, for the largest issuers, all signs suggest their profitability is decreasing in the face of expanding margins: They are spending their newfound gains to gather as many accounts as possible.
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Credit Risk Increases
Second, and pushing back a little on No. 1, there are signs that credit risk is increasing.
It is true that current risk levels are still at historically attractive levels, but they are creeping up. The overall market, after an all-time low charge-off rate of 2.9% in 2015, ticked up to 3.6% in 2017. Credit unions have noted a comparable increase, from 2.2% to 2.6% over the same period.
These increases do not erode too much of the expanding margin; however, they are worth watching. Nothing threatens an unsecured, evergreen, consumer-controlled lending product like credit quality erosion.
Tomorrow’s successful issuers will be monitoring risk in their own programs, identifying if specific segments are becoming too risky — for example, specific origination channels or certain risk tiers — and constraining that risk to protect the credit union capital members have built over the years.
Third, the market has established that market-competitive reward propositions are provided only through a premium-category card product — Signature for Visa, World for MasterCard.
These product lines have become so ubiquitous that to call them “premium products” does not make sense any more. Not every member qualifies for one, but these products truly are mass market.
Issuers have moved to these products because of their advantaged interchange rates. These product categories generate 10 to 15 basis points in incremental revenue against transaction volume (the associations might have slightly different average numbers, but these numbers represent what TRK Advisors sees in its clients’ programs). If a credit union’s purchase volume is three times its balances, then it will earn an additional 30 to 45 basis points to its card portfolio’s ROA. Credit unions that don’t have that extra ROA have less in their arsenal to support and grow their program.
Credit union credit card issuers most understand many related details to put into place the necessary tactics to build a successful card program, but a broad view of market developments focuses those more granular elements.
Ultimately, everything must line up to ensure a credit union’s card program can compete as effectively as possible in a crowded and cutthroat market. Whether as an individual product, as part of a wholistic payments channel strategy, or as the backbone to a broader member loyalty program, a successful card program should be a critical component of many member relationships.
The credit card team alone cannot develop the underlying strategies to achieve this alignment. Senior management must be engaged in these discussions, otherwise the trade-offs among profitability, growth, and member satisfaction are difficult to manage. More than 75% of credit union credit card issuers grew at a below-average rate in 2017. Did yours? Will it again?
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