Please be patient with your typically friendly credit card program manager — they might have lost all sense of perspective and could be exhibiting some pretty abnormal behavior these days.
If they are twitching a little, stammering more than normal, or staring into space like a teenager with a broken phone, it’s perfectly understandable. Your card manager wakes up every day trying to breathe in a world where the air smells weird, where horses are led to water to find out it’s egg nog, where sharks walk the land, and where even self-professed industry veterans who believe they have “seen it all” realize they have been lying to themselves, get punchy, and write nonsense sentences in esteemed publications.
“Why are they so discombobulated?” you ask.
I’m glad you asked, and I appreciate your word choice. The reason is straightforward, even if the path to de-discombobulation isn’t. Successful card management requires maintaining perspective, having confidence that one understands how the credit card market works, and executing a well-articulated plan for the business. Last year threw expectations into chaos for all of us, but for card managers, the business moved in ways they have never had to deal with before.
“What ways are those?” you ask. Another excellent question. Let me tell you.
First, market trends have gone all wonky. Consumers pulled back their credit card use in 2020 — overall balances were down approximately 11% on the year. Balances were down approximately 17% over the two-year period during the Great Recession; however, charge-off rates of more than 9% per year largely drove that decline. In 2020, charge-off rates moved down. Yes, you read that correctly. We were in a brief recession with record job losses and unemployment rates, yet credit risk declined. That’s wonky — there’s no other (publishable) word for it.
Second, cardholders have behaved unexpectedly. As mentioned, cardholders in aggregate paid down credit card debt and lowered their risk levels. No one saw that coming. As late as last summer, some of the largest ratings agencies were predicting 10% charge-off rates into early 2021. We are now past early 2021, and industry charge-off rates are at about 3.5%. Charge-off levels in 2020 actually ended up lower than in 2019. And unlike during the Great Recession, when credit union card balances continued to grow while banks got clobbered, this time credit unions got clobbered, too. Twitch. Stammer. Stare.
Third, credit card interest rates keep going up, and no one seems to care. The 150 basis point drop of the prime rate in March 2020, on the heels of an early 50 basis point drop in 2019, meaningfully lowered the effective interest rate on virtually all credit cards — by 200 basis points, one might think. However, according to the Fed, credit card interest rates declined only 70 basis points on average from 2019 to 2020.
There are two ways this could happen. First, cardholders could be moving into higher risk pricing tiers, bringing the average up. Second, the largest issuers that drive everything could be raising their APRs across the board. I expect it is a combination of the two.
In regard to the first, whereas we can believe more cardholders are being priced into more expensive tiers than previously, we can’t know this for certain. In regard to the second, we can say definitively that some issuers [**cough** CapOne **cough**] are disclosing higher interest rates than they were a couple of years ago. Why? Probably because they feared increasing credit losses — as did everyone — plus, they saw an opportunity.
As the prime rate declined, they could raise their margin over prime — from prime + 10.9% to prime + 12.9%, for example — and cardholders would not actually experience an increased effective rate or higher payments. There is little evidence that rate competition increases growth rates for credit card issuers — at least for “go to” rates — so maybe they are onto something.
Fourth, profitability is taking a hit from all angles. Credit card profitability is always under pressure. There are thousands of credit card issuers, and most consumers, especially younger ones, feel no particular loyalty to favor a credit card from their primary financial institution. But this year brings a singular combination of additional pressures.
Balances are down, so fixed costs are a bigger burden than in the past and interest revenues will be based on smaller balances. The prime rate is down, so yield will be lower than 2020 against those lower balances (double whammy!). Credit risk levels have been reassuring, but it seems unlikely they can hold at 2020 levels. Purchase volumes seem to be rebounding decently enough, but many will struggle to grow and generate interchange to the desired degree. Reward costs will keep escalating as the market has set a 1.5% baseline value. Technology investments — think contactless, omnichannel servicing, real time rewards, etc. — increased in 2020 and will continue into 2021. Twitch. Stammer. Stare.
With this many pieces moving, and in directions and combinations we haven’t seen before, it can be tempting to sit and watch and wait. But history suggests that’s exactly the wrong approach.
The last time the card market experienced significant turbulence was during the Great Recession, and many credit union card programs performed very well in every way, including profitability and growth, at that time. Although today’s turbulence is even more incoherent than then, there is every reason to believe the opportunity to gain ground remains as strong.
Someone will win, and if your card manager has previously proven to be the right leader for a critical product, then they almost certainly remain capable now. Bring them a muffin, give them some space, listen to their ideas, console when you must, and invest in their plans. They need you to have their back. They’ll be back to normal soon enough, but in the meantime, they might be your secret weapon while others are watching, waiting, and falling further behind.
Timothy Kolk is the owner of TRK Advisors. Kolk has almost three decades of credit card experience and has helped credit unions across the United States improve their card programs, better serve their members, and create long-lasting, high-performing card programs. Reach him at email@example.com or (603) 924-4438.
TRK Advisors brings unmatched expertise to any card issuer. Areas of expertise include program performance analysis and opportunity identification, market and member segmentation, product design, processor RFPs, marketing program development, affinity/cobrand programs, de novo (startup) programs, card portfolio acquisitions and sales, and just about anything else involving the credit card product.