Economic Shock and Awe or Opportunity?
This is not the time to leave your card program on autopilot. It is a time to seize the opportunity. By giving your card program the attention it deserves, it will likely continue to be your highest earning asset.
Offering a well-designed card with member-focused benefits is just the first, vital step to card program success. For prosperity, card programs also require active management and year-round promotion. If your card program is on autopilot, you may not be doing all you can to mitigate risks and avoid losses.
As a first step, credit unions should reduce their exposure to risk, starting with a portfolio review. It is essential to use solid underwriting policies and collection practices to avoid charge-offs. In this regard, credit unions have traditionally outperformed banks, resulting in lower charge-offs. Industry data indicates banks average charge-off rates were 5.4% in 2008-or double the average credit union issuer's rate of 2.7%-as of year-end according to Callahan and Associates.
In these tough economic times, effective fraud management and marketing can also be the keys to a profitable card program. You should work closely with your processor to implement strategies that will mitigate fraud risk and periodically analyze your portfolio's performance to identify improvement opportunities.
Though credit card sales volumes have recently declined, particularly in the fourth quarter, there were other positive trends last year. When looking at CSCU credit unions' averages, active account percentages were at an all-time high, well in excess of 60%, and average outstanding balances increased a solid 7%. This translates into increased finance charge income, which accounts for more than 70% of credit card revenue. Credit card usage also stayed strong, at nearly six transactions per account per month. Total revenue per active account showed continuous positive growth.
As these trends illustrate, even in a challenging economy, a well-managed card program can be a credit union's strongest asset. One of the biggest opportunities to grow revenue is upgrading credit cards to platinum and increasing credit lines. Data show platinum cards outperform classic in every metric.
Since more than 60% of credit cards in the U.S. are already platinum, I would suggest all credit unions consider upgrading all of their cards to platinum, which can be done as part of the reissue process to avoid incremental expenses. Credit unions may also want to consider credit line increases for their creditworthy members to provide adequate spending power without excessive risk. We recommend credit unions run automated credit line increases at least annually with an accompanying creditworthiness screening to ensure only solvent cardholders are targeted.
When it comes to increasing usage, features like rewards are very effective in making your card top-of-wallet. Industry data demonstrate rewards-based cards enjoy twice the usage and volume of nonrewards cards, thereby generating double the interchange revenue to the credit union, which more than pays for the cost of rewards. If you are not currently offering rewards on your cards, now is a good time to start.
Today's consumers want to have a full range of electronic payments options at their fingertips. Industry research predicts credit and debit cards, along with other electronic methods, will account for nearly two-thirds of consumer payment volume this year. By 2013, U.S. consumers are expected to use cash for only 20% of their transactions. They'll use credit or debit in 56% of transactions, up from 42% in 2008. Savvy credit unions see this trend and are changing their payment strategies to offer a full array of payment options.
Today's economy presents an unprecedented opportunity to do just that. As banks are weakening their cardholder relationships-raising interest rates and cutting credit limits-consumers are looking to credit unions for a safer harbor. By providing better service, credit unions can potentially gain market share from these banks and grow their portfolios. It is important to remember that managing your credit card program effectively will provide a return when you need it most.