With credit card usage on the rise — and the need for loan growth and additional revenue intensifying — more and more credit unions are considering (or reconsidering) the value of issuing their own credit cards. Is credit in the cards for your organization?
In many ways, the timing couldn't be better. Although consumer confidence remains a little tenuous, credit card spending is picking up. MasterCard reported $629 billion in worldwide purchases during the first quarter of 2012, up 17% over a year ago. Transactions rose 29% to 7.7 billion-the fastest rate of growth since MasterCard went public in 2006. Meanwhile, Visa posted a whopping 47% increase in profits during the same period.
But there's more to this opportunity than increased activity. Consumers are skeptical about big banks and their card programs. Not only are rates and fees high, but bad news about big banks continues to roll in. Consumers are ready for new, trustworthy alternatives.
Credit unions, meanwhile, need alternatives too. Revenue is hard to come by these days and a well-run credit card program can bring in $75 in net income per account and 4% net yield program-wide. That's significant, and it's only part of the picture. Credit cards are also relationship builders-critical at a time when winning members' loyalty and wallet share is a key challenge for credit unions. Credit cards enable you to:
• Offer members a "sticky" product they already need and want.
• Meet the expectation that every financial institution offer its own credit card.
• Demonstrate the difference between your credit union's rates, fees and rules and those they might find at a big bank.
• Reinforce the relationship between you and your members each time the card is used.
• Build loyalty with rewards programs.
• Communicate with members monthly via statements.
There Are Risks
Issuing your own credit cards brings a host of benefits, but it's not without risk. Even as the economy recovers and consumers adjust to their new economic realities, lending money carries risk. If your program is new, taking on credit card accounts means acquiring new lending relationships. Credit card debt is unsecured, and when times are tough, it's the debt that's often first to be thrown under the bus by strapped consumers.
What's riskiest is jumping into credit card issuance without a solid plan. Offering your own card program isn't fast or easy. Card expert Tim Kolk of TRK Advisors estimates that a typical credit union card program will capture about 2% of membership in its first year of operation-with another 2% per year to follow. If you're making an appropriate investment in startup marketing and operations, you may take three or four years to earn that investment back.
If you've been out of the credit card issuance arena for several years, you may find that the rules have changed. One-size-fits-all products and monthly monitoring of accounts aren't going to bring you the business-or the returns-you're looking for. Using data-driven methods to evaluate creditworthiness, track accounts and tailor products to a segmented membership is the key to a growing and profitable program.
There's another risk to consider: Failing to differentiate yourself. While the average consumer may not specifically be looking for a credit card with credit union values (at least not consciously), creating a card program that embodies and promotes your values as a credit union might be the smartest thing you can do.
Why? Actions speak louder than words. What better way is there to illustrate the credit union difference than to show members a different kind of credit card?
Things To Think About
Though options abound, here are a few attributes to think about:
Money-saving. Offer better rates. Because you're a credit union, you can.
• Simple. Fees don't have to be complicated.
• Loyalty-building. Competitive rewards programs are available to credit union card issuers: Use one. Also consider tiered "relationship" pricing for members with multiple accounts.
• Personalized. Can you promote incentivized programs for Select Employee Group (SEG) members? Rewards that reflect your members' interests? Ultra-low rates for your best members? (Hint: Yes, you can).
• Humane. Credit unions exist to help people. Reach out to members who don't have credit yet-or who have suffered setbacks in the recent recession-with accounts that help them build their credit.
• Visible. Don't ask your credit card programs to speak for themselves. Be explicit about the value of what you're offering. Promote accounts to all appropriate members. Give employees incentives for cross-selling.
Starting and running a successful credit card program isn't a small task. But it offers credit unions a unique opportunity to meet important member needs, strengthen relationships, boost profits, diversify loan portfolios and communicate value. That's credit where credit is due.
Eric Porter is EVP-business development and marketing with CO-OP Financial Services, Rancho Cucamonga, Calif.