Despite widespread recognition of their importance to an overall loan portfolio, credit cards remain far too mysterious to far too many credit unions, according to consultants that work with credit unions on credit card management.
Too few credit unions have a grasp on such basic concepts as being aware of what makes their card portfolio profitable, how to adequately but not excessively account for risk, how to manage and set credit lines and how to best understand and plan for fraud losses, the executives explained. They added that while none of these faults were sufficient to drive an otherwise healthy portfolio in the red, they were enough to keep them from performing as well as they could.
In order to make credit card portfolios more profitable, the executives agreed, more credit unions need be sure they understand how their card programs make 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 perform daily card management tasks, but that’s not the same thing as having someone regularly take a look the portfolio from the 30,000-foot level with an eye towards improving profitability.”
Consultant Ondine Irving made the same point, though she added that the fight to get credit unions to assign someone at the executive level to the card program is an ongoing effort.
“As I have said for over 10 years, a credit card program must be properly managed and measured,” Irving said in an email response. “A product champion is required to allow for accountability and ownership. 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 decisions about a portfolio without enough information.
“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,” he added.
That plays into the second broad credit card area that the consultants believe too few credit unions adequately understand, risk in their credit card portfolio and how best to manage it.
“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 Advisers Plus, a credit card consultancy that is an affiliate of PSCU. But with that said, he added, he believes too many credit unions remain unreasonably risk averse in their card programs.
Just as Scott noted that card fraud losses need to be seen in a 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 make. Or they keep credit lines so low that they leave cardholders vulnerable to offers from competing issuers that might offer a more generous line.
Irving said that credit lines have a direct impact on balances.
“The single most important factor is credit line,” she wrote. “The average credit union line is less than $5,000. With average credit lines 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.”
Barney Moore, senior portfolio consultant for Card Services for Credit Unions, advised credit unions to re-score their card portfolios at least annually. And, he added, credit unions should pay attention to credit score guidelines when pricing their card loans.
“We’re still seeing credit union 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 explained, but it will again leave the lower cardholder with too high a price that they could be stolen away by another issuer.
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,” Scott said. “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.”
Scott explained that an analysis of card behaviors such as reduced payment amounts and using the card to purchase basics like groceries and gas can signal a cardholder undergoing financial stress in time for the credit union to step in with an offer to help in time to prevent a bankruptcy.
He also said 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 loans.
Joy also cited rewards programs as potential pitfalls for profitability but laid the blame on credit unions neglecting to check how their card programs accrue 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 a large accrual liability that might become an unwelcome surprise later,” he added.