4 Ways To Build A Better Credit Card Program

A razor-sharp focus on four areas of credit card lending helps credit unions operate a program that supports critical priorities, provides income, and deepens member relationships.

 
 

Top-Level Takeaways

  • To operate a successful credit card program, issuers must stay focused on clearly established priorities. Those priorities guide reporting, design, and investments.
  • The payoff for some priorities are years down the road.

This year’s planning season presented an increasing sense of urgency as compared to prior years. Urgency to deepen relationships. Urgency to attract new members, particularly younger ones. Urgency to find loan balances with a good yield. Urgency to increase fee income. Urgency to become more important in the payment ecosystem.

Urgency! About everything!

This is a symptom of an unavoidable truth: Competition for financial services relationships with American consumers is among the most competitive marketplaces in the nation.

With more than 10,000 banks and credit unions — as well as a variety of alternate product providers and a growing set of alternative payment mechanisms — in the United States, operating with a sense of urgency is a prerequisite for survival.

 

 

As someone who specializes in establishing, designing, building, and managing credit card programs, I could not be happier about it. You see, a well-managed credit card program can support critical priorities, provide income, serve a variety of member expectations, and function as a lynchpin product that deepens member relationships.

But to realize this potential, every credit union needs to match these benefits with the commitments it takes to be a successful issuer.

So, what does it take to be successful? For starters, a razor-sharp focus on four key areas.

No. 1: Set A Priority

First, what is the credit union’s priority for the card program? Is it growth? If so, is it growth in balances, transactional volumes, or both? Is it profitability? If so, is there a near-term need for earnings, or does the credit union have a longer-term view?

Competition for financial services relationships with American consumers is among the most competitive marketplaces in the nation.

Tim Kolk, Principal, TRK Advisors

Accelerating growth often requires investment and a sacrifice of near-term earnings; increasing profitability in the short term likely means sacrificing investments and constraining future performance.

Increasing transactional volumes — often described as a desire to increase interchange — typically means providing a reward program that is competitive and gives members a reason, such as promotional elements, for uptake.

If everyone involved at a credit union cannot clearly state the institution’s priorities, the program will end up muddled with, at best, middling results.

No. 2: Measure And Report

Second, is the credit union measuring and reporting on what it has prioritized? Too often, planning exercises end without a clear way to measure against priorities. The credit union should measure, and report on, its monthly performance against the priorities it has set.

This is scorekeeping, and not everyone likes to have their scores kept, but it is much more, too.

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Moving a credit card program forward requires work months in advance of the desired outcome. Does the credit union want a bunch of new direct mail accounts in June? Then it better start the project in February. Does the credit union want strong growth in transaction volumes in the fourth quarter? Then it better start designing promotional incentive campaigns in the summer. 

Scorecards not only identify variances, which is important, they also ensure senior management is supporting the resource needs of the staff being held accountable. Too often staff hears “we want” from senior management rather than “what do you need so we can reach our priorities?” Good scorekeeping arms staff to challenge senior management to provide that support.

No. 3: Meet Market Expectations

Third, make sure the cooperative’s credit card products meet market expectations.

Credit unions excel in providing fair treatment. Loan rates, particularly for credit cards, are often well below what large banks deliver, and fee levels are generally much more attractive than bank equivalents. These value propositions mean most credit union issuers have a set of loyal, seasoned, revolving cardholders.

Where gaps between credit union products and market expectations more typically occur is in up-front promotional terms and reward programs value, which is what the next set of cardholders want.

Many credit union credit card programs outperform the overall market in any number of ways, but none do that by accident.

Tim Kolk, Principal, TRK Advisors

A rational consumer can see that a long promotional rate coupled with up-front fees and high go-to rates is less valuable than a low-rate product, many consumers are not that rational. A credit union that does not accept the fact consumers are not always rational is, itself, irrational. Some credit unions are willing to bring their reward programs to market levels; others have consciously decided not to and do not prioritize this member segment. But too many shuffle along with a mediocre reward proposition delivered poorly, and in this marketplace mediocre is, well, awful.

No. 4: Make The Investment

Fourth, understand that many priorities require investment above current levels. For example, when a reward proposition is below market value — e.g., only 1% cash back) — new account generation suffers, transactional volumes suffer, attrition ticks up, and member loyalty is made vulnerable to poaching.

If growth and loyalty are priorities, then the credit union must consider an investment in a stronger value proposition. This will likely push down portfolio returns. In planning season this can be a non-starter UNLESS the credit union has established clear priorities, and everyone understands the trade-offs.

The same is true, but in different ways, for increasing new account volumes to spur portfolio growth. This market requires meaningful promotional value — i.e., rates and rewards — and any new account will require up-front expense and a promotional period with minimal interest income. The payoff will be in years two through, well, maybe decades, but not in year one. Make sure everyone understands this, or some CFO-type (like me!) will get an investment request and ask “How much more interchange will we get next year? How much more interest income?” If the credit union has properly defined its priorities, then answer is “That’s the wrong question. This serves our priority by …”.

Managing a card program is anything but easy. Economic conditions change — for example, credit risk is ticking up for the first time since the Great Recession — consumer servicing expectations are evolving — everyone knows millennials don’t branch — and competition is progressing — large banks are sacrificing near-term profits to generate growth, are credit unions willing to do that?  

But using a simple framework to set priorities and monitor the above areas throughout the year will keep everyone on the same page, combat the tendency to revise priorities after the fact, and help identify and fix gaps early.

Many credit union credit card programs outperform the overall market in any number of ways, but none do it by accident.

 

Nov. 13, 2017


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