Many credit unions have underperforming credit card programs, which often lead to discussions about selling their portfolio. In many cases credit unions can increase the value of their portfolio without having to sell.
Before you discount the viability of your credit card program, I encourage you to ask yourself five important questions about your portfolio, then explore changes you can make to improve its profitability.
1. What is our credit line utilization rate?
Effective credit line utilization management enhances revenue without significantly increasing risk. Utilization of 28% to 30% is optimal. Above 33%, a credit line increase is probably needed. Below 28%, cardholders are likely using competitors' cards. Your objective: increase the share of income from low-risk cardholders while managing higher-risk users.
By aligning credit lines with members' FICO scores, we've seen clients experience tremendous gains in their portfolios. One in particular raised credit lines about 33%, resulting in a 60% increase in average outstanding balances, better credit line utilization, and 460 new cardholder accounts, while reducing overall portfolio risk.
2. Do we use risk-based pricing?
Risk-based pricing is imperative for portfolio growth. It gives credit unions greater management flexibility and helps them compete for new cardholders with major issuers.
Risk-based pricing assigns different APRs to members based on their credit rating or FICO score. Tiered pricing and aggressive rates can attract members with better FICO scores, giving lower-scoring members a higher rate, reflecting the risk they represent.
oMakes cards available to a broader member base.
oDelivers increased profitability and transaction volume. oEnables better portfolio and risk management. oRetains the best cardholders and improves your competitive position. 3. Do we use neural network fraud technology?
Fighting fraud by tracking cardholder behavior through neural networks is highly recommended for all card programs (credit, as well as debit PIN and signature).
Neural networks learn how the cardholder makes purchases, recognizing and evaluating patterns and deviations. This enables them to gauge future purchases against the cardholder's real-time profile. Neural networks such as FalconTM and FRIS work around the clock to ensure fraud controls are enforced.
Unfortunately, many credit unions don't leverage neural network technology, which puts their institution and members at a greater risk of becoming fraud victims.
4. What is our card program growth plan?
Some credit unions don't have a specific business plan that outlines how they will grow their credit card portfolio. A good business plan analyzes your portfolio, card products, and membership penetration goals. It establishes measurable, realistic goals (such as card growth, activation, usage, and outstanding balances), with specific action plans and measurement tools for managing execution. For the goal of increasing Platinum cardholders, for instance, the action plan may call for cross-selling Platinum cards to 50% of members obtaining a home loan.
On average, 18% of members are cardholders. If your credit union falls below that average, you need to increase card penetration. Once you understand your targets, you can design programs to reach them through in- branch efforts, direct mail, online promotion, or by fine-tuning the product.
In-branch promotions are a low-cost way to boost card accounts and awareness. Offering incentives to the staff for opening card accounts can be very effective, as can cross-selling. One client cross-sells by offering a quarter-percent discount on auto loans to current cardholding members or card applicants. In six months, the credit union generated 530 new credit card accounts, a 5% increase.
Direct mail can drive usage and attract new cardholders. Pre-screened offers can target new cardholders with a low rate or Platinum upgrade. For existing cardholders, direct mail can increase usage and grow outstanding balances.
Online promotion is another option. How visible is the card on your Web site? Can your members apply for it online, or at least easily find a phone number to call for more information? The card product itself is key. Is it appealing to your members? Competitive rates and fees? National issuers bombard your members with offers, so you must offer a competitive card product. 5. Is our credit card portfolio earning an appropriate return? Net income reflects how well your card program's performance has been managed. Managing net income requires accurate measurement of a variety of related expenses, assessed against the program's revenue.
Performance should be judged by looking at return on assets, as well as account activity, outstanding balances, credit line utilization, and risk statistics. Evaluating your performance over time and benchmarking your program to industry averages reveals strengths and weaknesses and aids in development of tactical improvement plans. A credit card portfolio can be your highest-yielding asset. This is especially true if you analyze your answers to these key questions. If you aren't sure where to start, give your card processing partner a call. Your card partner should have the skills, technical expertise, and perspective to help you develop a successful plan.