Credit Card Market 'Mature' or 'In Infancy?' Opinions Vary at TNB Card Services Payment Conference
FRISCO, Texas -- Town North Bank has acquired the credit card portfolios of about 100 credit unions to date, a role the bank says it is happy to fulfill, but the nation's only credit union-owned bank says it is equally committed to helping credit unions maximize the potential of their credit card portfolios if they choose to hang onto them.
To this end, the TNB Card Services Payments Conference Oct. 12-13 focused on where the payments industry is headed and how credit unions can operate a successful card program.
Renee Mauborgne, co-author of Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant, opened the conference explaining the research behind her best-selling book.
A study of 150 strategic business moves spanning 30 industries led Mauborgne to conclude that tomorrow's leading companies will succeed not by battling competitors, but by creating "blue oceans" of uncontested market space that are ripe for growth. Such strategic moves--termed "value innovation"--create powerful leaps in value for both the business and its customers, according to Mauborgne, rendering rivals obsolete and unleashing new demand.
"Competing with rivals," Mauborgne said, "results in nothing but a bloody 'red ocean' where rivals fight over a shrinking profit pool. While most companies compete in this way, the strategy is increasingly unlikely to create profitable growth in the future." With Mauborgne's approach, credit unions should strive to find new ways of providing value to their members through card services, rather than benchmarking their activities against leading financial institutions.
Dennis Moroney, senior research analyst with the TowerGroup, told the credit union audience that the nation's credit card market has matured, but it is still profitable. "The U.S. remains a credit-centric culture, but with 'changing dynamics.' Margins will continue to shrink because of competition, fraud issues, and uncertainty about the economy.
"Receivables growth the past five years has averaged about 2%, compared with double-digit growth experienced from the 1970s through the 1990s. Institutions are making more solicitation mailings and issuing more cards, but are getting lower response rates and decreasing usage."
But, Moroney said, credit cards will continue to contribute major returns to financial institutions. "It is still the most profitable lending opportunity that exists."
Jeff Rankin, senior vice president of client services at Visa USA, disagreed with Moroney's comments about a mature credit card market, saying the market is "still in its infancy," as evidenced by the fact that not one of Visa's card products has declined below high single-digit growth in recent years.
"Consumer credit growth this year was almost 10%," Rankin said. "Why the resurgence in use of credit? The life of a credit card is 10-15 years for the majority of people, because relationships are solidified with multiple accounts. Recurring payments keep them as members. No one wants to change to a new institution. Your job is to sign them up for bill pay!"
With half of the $7 trillion in 2005 personal consumption expenditures made by check and cash payments, Rankin said the credit card market still offers ample opportunity.
Visa is actively pursuing new technologies (contactless, mobile), modifying existing products (ZSR, small ticket purchases, utilities), and promoting existing products, such as bill pay. Contactless payments, in which the card never leaves the consumer's hand, are receiving a lot of attention, according to Rankin. "The big players in the industry are committed to this." On day two, Lynn Daniel, TNB Card Services vice president/account executive, explained the six disciplines of effective card programs: managing the portfolio, choosing the right products, setting appropriate pricing, promoting the program, establishing loyalty programs, and achieving profitability. Daniel recommended that credit unions with card programs look at issuing Platinum cards if they are not already doing so. "That's where all the growth is. Many TNB clients have gone to only one product--the Platinum card, which they may offer at 18% for the high-risk cardholders and 4.9% for low-risk cardholders."
Callahan & Associates President Chip Filson concluded the conference by asking to consider whether credit unions are in a new financial era and whether they will need to reinvent their business models to survive. "Bank success results from maximizing value from the customer. Credit union success comes from maximizing the value delivered to the member. How can credit unions re-imagine, recreate, and reinterpret their roles in members' lives in the 21st century?"
For credit unions to succeed in transforming their institutions, they have got to change their views about how to realize opportunities, Filson said. Success today is coming to institutions with "entrepreneurial drive," such as start-up credit unions with a well-defined mission.
Other successful credit unions have delivered member value through product and service innovations. One example is BECU's newly launched Member Advantage account that pays 7.5% on the first $500 in a savings or checking account linked to bill pay, direct deposit and e-statements. "The credit union is focused on encouraging savings and building relationships," said Filson. "Their approach is, 'We know you don't have a lot of money, but we want a relationship for life!'"
And finally, Filson said credit unions must consider business model evolutions that spawn new revenue opportunities, such as multi-owned credit union service organizations. --firstname.lastname@example.org