Good ideas never go out of fashion – but they sometimes fall out of favor.
That's what's happened with credit card programs. As the economic downturn that began in 2008 deepened, credit tightened, consumers switched to other payment methods, credit losses reached historically high levels, and financial institutions saw a reduction in credit portfolio profitability.
Now, credit unions are in position to help reverse this trend, assisted by two converging forces: a stabilizing economy and regulatory reforms affecting payments.
The timing is right. The significant economic challenges of the past few years required many credit union members to broadly reduce and control expenses. Given the economic thaw that's underway, many consumers now seem ready to ramp up their spending, and re-integrate credit into their overall payments strategy. Even those who gave up credit altogether may be seeking out credit solutions to enhance their payments choices.
Evidence of an improving credit climate can be seen in purchase volume data from numerous industry sources that shows solid growth. And recent Federal Reserve data suggests revolving balances are inching up while charge-off rates are hovering around 3% the lowest level since 1995.
Cards provide a way to replenish lost income. Supplementing the economic uptick is the role of governmental regulation. Although credit cards are now more tightly regulated thanks to changes resulting from the Credit Card Accountability, Responsibility and Disclosure Act, they still present an enticing opportunity for credit unions to improve their revenue streams and replenish their balance sheets. That's because credit programs still generate fee and interest income – as well as interchange that has not been affected by the changes brought by the Durbin amendment.
Despite the debit legislation that exempts institutions under $10 billion from an interchange cap, debit issuer studies confirm that all financial institutions regardless of size have taken an interchange revenue hit. As a result, growth-oriented credit unions should seize the opportunity to encourage credit product adoption and use within their memberships.
Move ahead. It's easy to see how offering a credit program can positively impact a credit union: a credit card payments option positions the credit union as the one-stop source for card payments choices, encourages greater member loyalty and greater adoption of services, and results in longer and more beneficial relationships. In hard-dollar terms, a credit program has the highest level of interest yield of any loan product while also earning critical, additional fee and interchange income. For most issuers, credit card lending is the single highest return loan product they have.
To optimize credit programs, credit unions need to select flexible and comprehensive solutions that will meet member needs. Whether credit unions choose to do everything in-house or work with a payments partner, they'll need to ensure the implementation of a credit program is seamless. It is important to prevent offering a program that is too narrowly focused and operationally challenged.
But success isn't pre-ordained. Credit unions will need to spend significant energy to introduce and sustain a program.
Read more: Assessing opportunities …
Assessing credit program opportunities begins with understanding member demographics and habits. Credit unions need to mine and analyze data, and then develop clear program performance goals. Once credit unions know their markets and targets, they can create marketing strategies designed to reach identified demographic and behavioral segments
For optimal results, credit unions should connect with members in unique ways that will differentiate themselves from the many competing issuers. Here are ways credit unions can differentiate their credit offerings:
- Offer a winning product value proposition that serves members' long-term needs. But remember: growing accounts, making sure they are active, and managing them through the many years they will be on the books is an ongoing process requiring a clear organizational commitment.
- Embrace a multichannel member acquisition strategy. Online acquisitions can be 60% cheaper than direct mail, and costs are even lower for branch acquisitions. It's interesting to note that direct mail volumes have seen a decline of almost 35% from pre-crisis levels.
- Thoroughly analyze both your risk and rewards strategies. The proper risk tools will protect both your members and your financial institution.
- Adopt digital channels for customer servicing. They not only enhance your members' experience, they will also lower the costs of your program.
Properly designed, credit programs will enhance loyalty, increase card usage and revolving balances, and attract new members.
Credit unions should take credit and do themselves and their members a favor. Providing the services members want is always in fashion.
Vikas Bansal is vice president and credit product leader for Fiserv Inc. of Brookfield, Wis. CONTACT: (407) 513-5559 or vikas.bansal@fiserv.com.
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