Can Credit Unions Capitalize on Card Advantages?
If considered only in a glance, credit union card programs seem extremely well-
positioned for 2011.
Trying to cut their credit card losses, large bank credit card programs have dropped a record number of consumers and cut many of the remaining cardholders' credit lines to a point where the cards are of little use. At the same time, trying to recoup lost income from overdraft and debit interchange regulation, large banks have begun to charge fees or require balance minimums to justify issuing debit cards. Both moves suggest that large banks will remain alienated from a significant portion of their customer base and that the trend to move from large, national banks to smaller community banks and credit unions will likely continue.
But does that mean that credit unions will necessarily capitalize on the opportunity? That is not so clear, according to CU card experts and consultants. But first, the credit union strengths.
Even after the current round of federal regulations effectively made many large bank credit cards look a lot more like CU-issued credit cards, credit unions still offer consumers a better deal on cards, the consultants say.
Further, when it comes to debit cards, it seems possible that credit unions with some community banks may be the only source of debit cards free or almost free of fees and other onerous rules like minimum checking balances. Finally, in contrast to large banks, credit unions are riding the wave of praise from national experts in consumer protection and consumer finance. Further, along with community banks, credit unions have gained the praise of national media outlets and campaigns that have sought to bring money back to local communities. All of that would appear to position credit union card programs for strong growth in 2011.
But CU card consultants and executives stressed that credit unions will need to take steps to make sure that their members and the broader public know and understand the key credit union differences-and not just when it comes to cards.
That difference is going to involve the whole credit union, according to Jeff Russell, executive vice president with The Members Group, a payments CUSO affiliated with the Iowa Credit Union League.
"Let's take fees," Russell said, "a bank-issued card might charge $25 for a late payment where a credit union card might charge only $15. That's not as clear a difference as it might have been when a credit union might have charged only $10 or $15, and the bank card charged $49."
In place of such stark differences, Russell suggested that the CUSO's research showed that it was going to be the relationship with the credit union and the local, community aspect that CUs were going to have to deploy for their card programs.
"It's going to be the knowledge that they can walk into a credit union branch with their [credit card] statement and say 'can you walk me through this' or 'can you help me understand something' that is going to make the difference," he said. Russell also suggested that many credit unions may need to review their card programs and portfolios to make sure they still match their members' needs in this changed environment.
For example, a member who might have had one credit profile in 2009 might have a much different credit profile after they canceled some of their bank cards or, more likely, had some of those bank card credit lines either cut back or even cut entirely. Even though those folks might have had their credit score slip, they are likely still pretty good credit risks who need a helping hand from their credit union now more than ever, Russell declared.
Ondine Irving, a card consultant and founder of Card Analysis Solutions, a Chicago-based credit union card consultancy, agreed with Russell but only somewhat.
"I still see credit union credit cards as something which can compete as a standalone product," Irving said. "On their merits alone."
Irving conceded that regulation has closed some of the previously yawning gaps between credit cards issued by banks and those issued by credit unions, but maintained her conviction that no regulation could improve the behavior of bank card issuers or their assumptions when issuing the cards.
Irving played off Russell's example of the relative late charges. While it was true that the gap between a bank and credit union late charge might have narrowed, she explained, the two issuers remain far apart on when they will make that charge and their willingness to charge.
"Sure, the bank might only charge a $25 late charge, but when are they going to make that charge?" she asked. "Most credit unions still offer a grace period of up to five days to make payments and most banks are going to charge you the late charge if you are even an hour late. It makes a difference."
Irving said the relationship that credit unions have with their members will resonate with consumers if the core of that relationship is respect for the member and a willingness to help them. Some credit union clients, she allowed, had forgotten some of that lately and acted a little bit too much like bank card issuers and their credit card programs had begun to suffer.
"Fundamentally you have to see members as members," she said, "not primarily as opportunities to bring in more revenue."
Chuck Fagan, an executive vice president with PSCU Financial Services, said his CUSO takes an optimistic view of the CU card outlook.
"We think 2011 will be the year for the breakout of credit union credit cards," Fagan said, adding that while the new card regulations had served to narrow the differences between bank and CU credit cards, it had also alerted consumers to that difference.
"That law and the debate over that law did a lot to open up a lot of consumers' eyes about the cards in their wallet," Fagan said. "And that's good for credit unions."
Fagan agreed with Russell, however, that credit unions needed to review some of their card programs to meet their members' changed card needs. He said PSCU was working with client credit unions on two particular card products, one a card that carried rewards and the other a card that carried a lower annual percentage rate. Each one should help CUs meet the needs of two broad groups of members, he said.
He also noted that quite a few credit unions need to update their online and mobile banking presence, not just to have the new technology for its own sake but to help insinuate the credit union more deeply into the members' lives. "A tightly integrated online or mobile presence will help members streamline their contact with the credit union and help them bring the credit union into more parts of their busy lives," he added.
Bill Lehman, card consultant for Card Services for Credit Unions, stressed that properly understanding and segmenting their membership will be even more necessary for credit unions to take advantage of the card opportunities. He suggested that credit unions both study card use data of their existing cardholders and survey their membership about card needs to determine if they are serving them properly.
"Too many credit unions listen to voices in the marketplace about trends and needs without remembering that the broader marketplace is not their membership," Lehman said, adding that even as many credit unions have broadened their fields of membership to serve whole communities, they usually still have strong relationships with large groups of members from the old SEGs. Those relationships and history can provide a good source of data about member needs.
Russell, Fagan and Lehman said the situation had gotten more complicated when it came to debit card programs and they agreed that the relationship between the CU and its members is going to become more important when it comes to debit cards.
"Too many credit unions are looking at this question solely in terms of 'should we or shouldn't we keep free checking,'" Russell said, "when in reality the question is more complex."
Russell recounted reports TMG has gathered of credit union members who held a checking account with their credit union and another with a usually larger bank. When the larger bank announced that its checking account was going to require a minimum balance in order to qualify for a fee-free debit card, those members did not close their bank accounts and move to the credit union. Instead, they closed their credit union accounts so they could put all their money in their bank accounts and make sure they met the account minimum, Russell explained, adding that they could have acted for any number of reasons.
"Maybe they have their mortgage with the bank and paying it is easier if they have their account there. Maybe the bank has more ATMs. Maybe they have other loans there," Russell said. "The point is that what credit unions need to aim for is not to get every member to have a checking account but for every member to have a checking account, a couple of loans and to bring their kids to the CU when they are old enough," he said.
"It's all about how many products do you have per household," he added. "A checking account, that's one product, a credit card, that's another. A car loan, another, a mortgage, another sort of personal loan. They all add up to a relationship between the credit union and its member," he added.
Fagan agreed, and said he expected membership rewards programs-which reward credit union members for using other credit union products-to become more important in 2011 as a way of helping credit unions foster and deepen their relationships with their members.
Lehman agreed and said that credit unions may need to build free checking into a broader relationship rewards and pricing structure and may need to look at the use of prepaid debit cards for those members who will not be able to participate in the pricing package right away by taking out other loans or using other products. Such cards are inexpensive to offer, provide the members with the convenience of cards and are not subject to any interchange limits, he noted.