Specialty Credit Cards

Specialty credit card programs such as affinity card partnerships, business cards and secured cards can play a vital role in enhancing your credit union’s branding, growing its market share and deepening loyalty among new member segments. 

Yet all too often, we have seen even the best-intentioned programs drain credit union resources, create culture clashes and generate ongoing compliance headaches — with little or no revenue or membership growth generated along the way.

How can your credit union decide when implementing a specialty card program makes strategic sense — and even more important — when it doesn’t?

Insights and Lessons Learned

We have spent our careers crafting specialty card solutions to help credit unions achieve their membership and balance growth objectives.

Here we share our insights and lessons learned about three types of specialty cards, highlighting the potential opportunities, risks and resource demands that accompany each: 

Affinity Cards

Affinity card programs are partnerships between a credit union and a charity, club, faith-based or community organization. Affinity partnerships operate under contracts that typically last a minimum of four years and often much longer. Although credit unions can and do approach affinity partners directly, most partnership discussions are initiated by affinity groups through the RFP process.

• Opportunities: Finding a good synergistic fit with an affinity group can give a credit union ready-made access to a highly qualified and receptive new membership pool. Depending upon factors such as a credit union’s geography and mission, an affinity partnership can represent a one-off opportunity or the beginning of an ongoing member relationship that leads to cross-sales of debit, checking and even auto loans and mortgages.
• Risks: Credit unions face a number of risks to their revenues, resources — and possibly their reputations — from a poorly chosen affinity partnership. Values and goals may not align, expectations for success may not be shared, employee morale may suffer and demographics that initially seemed promising may not convert to engagement.
• Resource Demands: Affinity partnerships bring with them a number of legal, regulatory and compliance demands such as cardholder communications, affinity group compensation, dues collection and financial projections, in addition to increased marketing and member services workloads.
• Bottom Line: Don’t think you can put an affinity group’s name on your plastic and create an instant relationship. An enormous commitment to due diligence is required. Above all, credit union managers should trust their guts. Sometimes the best affinity card deal for a credit union is the one it decides not to do until the right one comes along. With the right communication, partner expectations and financial projections, a successful partnership can be created.

Small Business Cards

Small business cards are similar to personal cards but often come with sign-up bonuses, as well as ongoing rewards that are tailored to business purchases. Although business owners qualify for credit as individuals, business cards are not protected by the provisions of the CARD Act. Because of that, interest rates can vary dramatically and annual fees can sometimes be very high.

• Opportunities: Business cards can help create access to a lucrative member segment that is professional, oriented toward asset creation and community-oriented. Business owners in turn appreciate cards with substantial lines of credit at advantageous rates, as well as advice on merchant processing, e-commerce and payroll solutions.

Small and medium-sized businesses typically align well with the credit union mission of providing high-value, low-cost financial services and community outreach. Particularly when banks try to take advantage of business card fees, credit unions can build strong loyalty that can lead to the creation of additional individual and/or employee accounts.

• Risks:  Often credit unions issue credit limits that are lower than those of their banking peers and this can become even more pronounced in the small business arena. That makes it critical that small business card credit limits be sufficient to support business needs. Additionally, a credit union’s unsecured lending cap must be high enough to allow for both consumer and business credit card products.
• Resource Demands: Business members can be demanding because they are busy, price-sensitive and searching for maximum flexibility when it comes to branch hours, online banking and solutions like online bill pay. Slap them with fees or create problems for their cash management and they’ll start shopping around in a heartbeat.
• Bottom Line: Business card members are some of the highest quality members a credit union can have, not only in terms of asset investment potential but in terms of loyalty as well. We believe the key lies in building on the card relationship by providing outstanding value, one-on-one communication and a willingness to go the extra mile. And who’s better at those things than credit unions?

Secured Cards

Secured credit cards allow credit unions to be member centric offering higher-risk consumers looking to build or rebuild credit a payment vehicle option to gain loyalty and potential revenue through a longer member spending lifecycle.  Although collateral is provided to fund approved credit lines in the event of default, the secured card product has many risks to a portfolio’s profitability and sustainability if not strategically positioned well and managed properly.  The intention of this card is not a short term growth or profit generator, but rather a long term investment in cultivating members in financial literacy, with the goal of member loyalty and potential migration along the member lending lifecycle. 

• Opportunities: When tailored to the unique demographics and economic circumstances of a credit union’s membership, pairing a secured card offering with financial education sends a powerful philosophical message about the importance of establishing and maintaining good credit. Providing liquidity and financial stability to members who are new to credit or seeking to get their credit ratings back on track can be an excellent way to earn their long-term loyalty.
• Risks: Although secured card programs don’t carry credit default risks per se, the ROI of secured card offerings is often minimal to none from a short-term and potentially long-term financial standpoint. After factoring in costs that the collateral balance doesn’t cover such as creating and sending the card, maintaining the account and providing services such as credit education, secured programs can easily become loss-leaders.  Understanding a multi-year break-even point and implementing a graduation strategy is critical to a successful secured card product. 
• Resource Demands: Providing secured cardholders with the member education necessary to monitor card payments and create individualized “graduation strategies” for migration to unsecured cards requires a significant commitment on the part of the participating credit union. What’s more, the monitoring and collection of necessary add-on services such as free credit bureau pulls can be time-consuming and expensive.

It’s imperative that a credit union must identify and understand their acceptable risk tolerance, loss odds and breakpoint to formulate optimal graduation strategies, pricing and fee structure, collateral process, rewards or service offerings, sub-prime portfolio mix allowance and segmentation strategy. 

• Bottom Line: Done right, a secured card program can be a game changer for members in need, but the resources required to train credit counselors, monitor accounts and create a financial path forward should not be underestimated. Focus on potential, not profitability to set reasonable goals for future success and avoid disappointment.

The Road Not Taken

No specialty credit card program will be one-size-fits-all when it comes to meeting the needs of every credit union. By knowing what alternatives are available, investing the time necessary to customize the right program and being willing to pass up partnerships that don’t turn out to be a good fit, credit unions can develop specialty credit card programs that powerfully differentiate their brands and grow membership.

Bradley J. Wylie and Katie Kean are directors of credit consulting for Advisors Plus. CUES Supplier member Advisors Plus, serves as the consulting arm of CUES Supplier member PSCU, St Petersburg, Fla., helping credit unions to meet their financial and business challenges and grow. The team provides practical, data-driven expertise in the areas of business strategy, credit cards, debit and checking, marketing growth campaigns, digital and branch channel engagement, and contact center and operations optimization.