Credit, Debit, Prepaid Relationships in 2012- Are You Prepared?
Credit card portfolios have had a rough go at things the past couple of years.
Even with all the media attention on credit union credit cards in 2010, they grew just 2% that year. The previous five-year trend was an annual average growth rate of 10% to 12%.
Several elements came together to slow credit union card growth. First, the impact of the CARD Act, followed by the economic issues, high unemployment and housing crisis, left many credit unions in ultra conservative positions with their lending if not hounded by regulations and auditors, especially in the area of unsecured credit card lending.
And, let’s not forget the ramifications of the Durbin Amendment regulation in 2011, of which the impact is beginning to rear its ugly head, but in an odd way, will be shifting more usage and focus back to credit cards.
If credit unions continue to neglect their credit card program, they may find themselves in a situation that may be difficult to turn around. This is not the year to place your program on auto pilot. This is the year to place your credit card at the forefront of your product offerings. Here are a few things to consider.
First, 2012 will see credit cards rise. The debit cards and credit cards are the seesaw of the banking payment playground. Sometimes one is up and the other is down and vice versa. This year, credit cards will be on the up and credit unions should be prepared for this.
From my perspective, credit cards are the preferred product because of three sources of income: finance charge, interchange and fee income. Finance charges represent an average of 70% of total credit card program revenue. Sure, the debit card gets usage and interchange, but the finance charge income is what really contributes to the credit unions bottom line.
Consumers have also become more aware of improved financial management in the past few years as evidenced by increasing credit scores. Experts are predicting that 2012 will see a huge shift from debit card to credit card usage. Granted, consumers have learned and will be using credit cards more responsibly. When used correctly, credit cards can remain free and offer rewards or cash back.
Credit unions should heed this message as banks are offering increasingly valuable reward programs, 0% balance transfer offers and direct mail is back to pre-recession levels. Balance transfer promotions should be an ongoing staple at your credit union, stressing no balance transfer fees. First quarter is typically the ideal time for optimal results, but in this day and age, the promotion should be ongoing.
Second, rewards programs are likely to become even more important. Those offered by credit union need polishing and updating. Processors need to step up and offer credit unions reward programs that can compete with the ever enticing bank card reward programs.
A recent visit to the United Continental Terminal at O’Hare International Airport found humongous Chase Bank banners hanging from the ceilings and virtually everywhere you looked. Credit card reward programs touting no security line waiting, airline lounge access, companion passes and free checked bags – all being marketed to a captive audience standing in the slow moving security line.
It is way overdue that processors need to step up and revamp the canned reward programs offered to credit unions. Those programs created 15-plus years ago are losing their competitive advantage. Sure, they were great when they came out, with airline reward tickets on any airline, no blackout dates, the ability to earn miles on free tickets and an expansive selection of trinkets, gadgets, electronics and for those who dare, the gift cards. But now, we are contending with airline bank card reward programs – and, they are enticing. Credit card processors need to get to work on this for credit unions.
Third, 2012 will see the increasing rise of prepaid card programs. Popping up all over the place are mono-line prepaid issuers, including January 2012 debut of Suze Orman’s brand new “approved card.” These products are effective with a limited market, typically the unbanked or under-banked. No need to be concerned about direct competition with credit cards, but a plan should be in place to foster what credit unions do best: the complete member financial relationship and education.
One prepaid card does not make a banking relationship. Sure, members may like a prepaid card on occasion as a gift or for travel, but your members will not likely shift to a prepaid product as a mainstream banking product. These prepaid cards are a stop gap and do benefit the consumer with establishing and improving credit. The same lessons a prepaid product offers is right there with your checking and debit card programs and in most cases, are fee free.
There is likely a small segment of under-banked consumers within your membership and it is your job to prepare this segment for the real world of finance including building credit, managing a checking account, attaining their first loan and building a life-long relationship. A prepaid product will not help accomplish any of this and your members should be educated.
Therefore, I suggest utilizing a combination of a credit and debit card strategy specific to your under-banked members focusing on the entire member relationship – one to help build credit and one to help learn transactional banking.
After all, relationship building and fostering a sense of financial education and knowledge for their members are what the credit union industry does best.
Ondine Irving is president of Card Analysis Solutions.
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