Despite widespread recognition of their importance to an overall loan portfolio, credit card portfolios remain far too mysterious to far too many credit unions, say consultants who work with credit unions on credit card management.
Too few credit unions have a grasp on such basic concepts as what makes their card portfolio profitable, how to adequately but not excessively account for risk, how to plan for and set credit lines, and how to best understand and plan for fraud losses, these cards experts say.
Here they identify three areas in which credit unions most need to improve their understanding of card management.
Awareness and Ownership
First, more credit unions need to make themselves aware of how their card program makes them money and to make sure that someone at the executive level has responsibility for overseeing and growing the portfolio.
“I think many credit unions, most credit unions, have a staff member who is assigned to the credit card program for the day to day,” explained Brian Scott, vice president with The Members Group, a payments CUSO affiliated with the Iowa Credit Union League. “They can answer member questions about the cards and similar concerns, but that's not the same thing as having someone regularly take a look at the portfolio from the 30,000-foot level with an eye towards improving profitability.”
Card consultant Ondine Irving made the same point, and said getting credit unions to assign someone at the executive level to the card program has been an ongoing effort.
“As I have said for over 10 years, a credit card program must be properly managed and measured,” Irving said.
“A product champion is required to allow for accountability and ownership,” she said. “It is not enough for the card program to be 'part' of someone’s responsibility. The highest profit making product deserves its own owner.”
Scott largely agreed, adding that he was often surprised at how few credit unions really understand how much money their credit card programs make for them.
This is a key gap in knowledge because, without that perspective, credit union executives can wind up making mistakes, such as making broad decisions about a portfolio based on risk alone, the TMG executive said.
“Sometimes executives will tell me they have pulled back on a portfolio because they took fraud losses of $10,000,” Scott said by way of example. “But I will point out that the same program, even with those losses, made them $190,000. Executives have to have the complete picture to make decisions.”
Next: Risk is Real and Manageable
Risk is Real and Manageable
The second mistake that credit unions often make in managing their credit card programs is to misunderstand and inadequately measure risk, the consultants said.
“Understanding risk is key, because not adequately controlling or pricing for risk in the origination of a card account can lead to ongoing problems that can take a long time to work out,” said Chris Joy, director of Advisors Plus, a credit card consultancy that is an affiliate of PSCU, a leading payments CUSO. But, he said, he believes too many credit unions nonetheless remain unreasonably risk averse in their credit card programs.
Just as Scott noted the need to place card fraud losses against the perspective of total card income, Joy observed that misunderstanding card profitability leads many credit unions to be too risk averse, declining applications for credit card loans that they probably should open or keeping credit lines so low that they left the cardholders vulnerable to offers from competing issuers who might offer a more generous line.
Irving agreed, noting that credit lines have a direct impact on balances.
“The single most important factor is credit line,” she wrote. “Average credit union line is less than $5,000. With average credit lines being so low, average balances will follow suit. And balances are key to profitability of a card program.
“The majority of card program revenue, up to 70%, should be derived from finance charge income. Credit unions with average credit lines in the $10,000 range have more profitable programs. No amount of marketing or dollars spent on activation or acquisition campaigns will work if the credit lines do not support the efforts.”
Meanwhile, Barney Moore, senior portfolio consultant for Card Services for Credit Unions, advised credit unions to re-score their card portfolios at least annually and pay attention to credit score guidelines when pricing their credit card loans.
“We're still seeing credit unions that only charge one price for their credit card loans and we really believe all credit card loans need to be priced on risk,” Moore said.
Not only will this leave riskier credit lines priced too low, he said, but it will again leave the lower cardholder with too high a price that may make them vulnerable to being stolen away by another issuer.
Lastly: Know Thy Cardholders
Know Thy Cardholders
The last too-often-overlooked area in credit card management has to do with understanding and using card data and marketing.
“Too many credit unions don't understand how much they can learn from a cardholder's transactions and card behavior,” said Scott at TMG. “Not only can they get clues about other products and services their members might need, but I could point to cardholder behavior to predict cardholder bankruptcy.”
He said an analysis of card behaviors such as reduced payment amounts and using the card to purchase basics like groceries and gas can signal a card holder is undergoing financial stress and that it’s time for the credit union to step in with an offer to help possibly prevent a default or bankruptcy.
He also said too many credit unions have too limited a view of credit card rewards, seeing them only in terms of merchandise or airline miles and less in terms of, for example, allowing cardholders to use their rewards to lower rates on other, fixed, loans such as for cars and home equity.
Joy also cited rewards programs as potential pitfalls for profitability, but laid the blame on credits union neglecting to check how their card program accrues reward point liability and managing that sufficiently.
“Credit unions should track their reward point accrual and redemption rates to remain confident that they are not building up an inadequate accrual liability that might become an unwelcome surprise later,” he said.