Sometimes credit unions can assume the benefits of their products and services-including credit cards-are completely obvious to their members. After all, who doesn't want to save money on interest and fees? Or, conversely, avoid any surprise charges? But simply having a great product such as a credit card does not automatically mean all of your members will know about its benefits or understand them.
Banks were notorious throughout 2009 and 2010 for discovering loopholes in the CARD Act and pounding consumers with rates as high as 29.99% and increasing miscellaneous fees. During this time, a credit union credit card appeared to be the best card choice for consumers. We certainly did our best to let America know about our fair and ethical credit card programs.
Well, the banks are at it again, but this time with a twist. Bank credit card issuers are telling America they are actually lowering fees and eliminating penalty pricing.
Some argue this a public relations move to create good will among consumers, while others are more skeptical, claiming it is more of a logistical nightmare to manage the seesaw of rate reinstatement. But either way, credit unions need to know about it and compete against it.
I've always been a big believer of not assessing penalty rates because it is such a "bank thing" to do. If your card program has penalty pricing, it is time to pay attention. Your program is becoming less competitive.
Let's be real. How is increasing a members APR to 17.95% really helping them? I understand the need to manage risk, but I don't buy using penalty rates to reach that goal.
The CARD Act has made the penalty APR process more difficult and likely more costly for the issuer to manage overall. So what exactly does the penalty APR accomplish?
Bank of America is also eliminating late fees for customers with balances of $100 or less. I like this caveat and think credit unions should adopt a similar policy. Give the member a cushion. Let's continue to do what is right. Most credit unions still have a minimum five-day grace period for payments and banks still have none. Get that word out!
Chase, Citibank and American Express are making moves to drop foreign transaction fees on select card programs for select cardholders. Forget the fact that most banks almost always marked up this pass through fee to 2% to 3% anyway. They are telling America they are eliminating the fee for some programs and cardholders. Before credit unions jump on this bandwagon, determine what your foreign transaction fee income was in 2010. It is not likely a great source of revenue, but you still need to recover this expense passed through from Visa and MasterCard. Determine if this bit of revenue can be recouped by reducing other credit card program expenses.
Fee income revenue for bank credit cards averages 48% of total card program revenue, which is up from 31% ten years ago. Credit union credit card fee income averages 15% of total card program revenue. Are these bank fee reductions permanent? Not likely. The fact remains credit card issuers still have the ability to change late fees, foreign transaction fees and reinstate penalty APRs with 45 days notice. It is all part of the credit card game. So don't be misled into thinking banks are completely reducing fee income revenue stream. It just may be shifting slightly to finance charge income.
There will be increasing competition for credit card balances in 2011 as the banks are once again targeting subprime borrowers at very high rates while reintroducing 0% balance transfer promotions to premium cardholders (with a 4% to 5% balance transfer fee).
Prior to this public relations effort by the banks, their credit card programs averaged 3% and $10 minimum in balance transfer fees with a $50 cap. Banks are now averaging 4% to 5% for balance transfers with no cap on the fee. Credit unions should never be assessing balance transfer fees. Why would you charge a member to bring a balance to the credit union? A balance that will earn an average of 12%. Boggles my mind sometimes.
The final catch? The sky remains the limit with bank APRs. With most credit card rates being variable and based on prime (currently at 3.25%) and the average bank credit card APR at 14.6%, the gap is over 11%, which exceeds most credit unions' average card rate. CU members need to know this.
If properly managed and structured, credit union credit card programs have always been profitable. Manage your income and manage your expenses. Don't make the member pay the price and be proud that the banks are taking a few clues from the credit union card program industry. Get the word out and start telling your members the reality.