It is not an understatement to say that the CARD Act has turned the credit card industry on its ear. But, credit unions, by maintaining their focus on offering the best card product available to members, can still be true to who they have always been. And in the light of the day, the CARD Act gives us the chance to shine.
While some of what was enacted proved to be more of an operational headache than meaningful change, the new pricing regulations will have the most significant, longest lasting impact on the credit card industry. These changes immediately required deliberate policy decisions surrounding the management of the credit card portfolio because the CARD Act changed the fundamental structure of pricing. Now issuers are compelled to reprice low-risk cardmembers but are prohibited from repricing those that are high risk. The inevitable result has been an increased cost of card-related credit to all consumers, because issuers now must price everyone who today appears to be of similar risk higher to account for those cardholders who may be charged off in the future.
When you add to the conversation the dilemma of fixed-versus variable-rate credit cards, the pricing model becomes more than a marketing strategy-it's the entire game. While many credit unions made their decision before February, there are still those who are undecided about what is the best vehicle for them. As long as the prime rate stays at its current historic lows, fixed-rate cards are a great offering, but what happens when prime starts to adjust upwards? Do you let a previously important income-producing asset become a loss leader? Because issuers no longer have the ability to reprice existing balances, and go-forward rate changes have a significant notification period, issuers will experience margin compression as yield remains constant and the cost of funds increases. In our analysis, it could take as long as five years to see the full impact of an increase in rates due to the new rules around how cardmember payments are applied to the account.
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With the CARD Act restricting certain rate and fee structures, we have seen a dramatic response from the large national bank issuers. They are devaluing reward programs, raising rates, introducing new fees and stripping away card features and benefits. Some issuers are even saying they will no longer offer credit to consumers they perceive to be moderate to high risk-the same people they aggressively targeted 12 short months ago.
But credit unions are fundamentally different. Our stakeholder return is figured a bit differently than our for-profit banking counterparts. We work to provide responsible products that serve our members-even if it takes a little more work or doesn't generate maximum profit. While we know what our competitive advantages are, sometimes we are not the best at communicating to the marketplace. Even though credit unions exist to serve the broader consumer market by continuing to offer fair products at good prices, we've let that message get lost among the smoke and mirrors of the largest issuers in the past. The CARD Act has given us an opportunity that we may not see again in our lifetime.
This opportunity is directly related to improved consumer awareness. New statement requirements now give cardholders information to assess the impact of their financial decisions. Disclosures and opt-outs also give cardholders the opportunity to make more informed decisions about the credit card products they choose. With the changes to how cardholders now see finance charges and fees, they are in a better position than ever before to really understand the cost of credit-another opportunity for credit unions to stand apart from the crowd.
Furthermore, new statement disclosures let consumers know how to reduce interest charged by helping them understand how long it will take to pay off their current balance. As consumers continue to be more conscious about their spending habits and look to reduce their overall debt and save more, the CARD Act has provided some necessary reform. Credit unions do not exist to create more debt for their members, but instead offer members the tools they need to manage their finances-more information and greater awareness can only improve that management.
At the end of the day, the CARD Act hasn't changed the philosophical approach to offering credit cards. Large bank issuers are already back in the market with a vengeance going after the most profitable cardholders hoping to rebuild their income with higher costs and fewer benefits. In the meantime, credit unions continue to balance earnings with the desire to serve all their members-and potential members-by offering them a good credit card product at a fair price.
What we have is an opportunity. While the CARD Act provides us with numerous challenges and some provisions that in the end have caused the cost of credit to rise and availability to shrink, it did open up an amazing opportunity to capture market share. Whether you take the opportunity is up to you.
Jeff Russell is the president/CEO of TMG Financial Services and executive vice president at The Members Group. He can be reached at515-457-5475 or ?jeffr@tmgfinancial services.com
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