By Jeff Russell
How the marketplace will look following the full integration of the Credit CARD Act of 2009 is one of the many unknowns plaguing today’s card issuers. Swept along with the rapid changes already impacting the credit card landscape, credit unions in particular are wondering how the new environment will impact the viability of their credit card programs.
With such a small share of the card market, credit unions take the position of follower as the major issuers drive the market overall. This is not to say that credit unions can’t be inventive or compete in their communities. In fact, the opportunity to do just that is stronger now than ever and will likely persevere as the industry continues to feel tremors from the intense impact of the CARD Act.
Several likely scenarios will challenge credit unions to be creative, strategic and balanced when planning changes to their credit card programs. These include, but are not limited to, the departure of any major issuer from the market, the reintroduction of annual fees, the trimming of rewards programs and the rising of interest rates.
The CARD Act dramatically impacted the business model of many issuers, largely due to the fact that these companies can no longer re-price cards based on the assessment of a cardholder’s risk. If one of the major credit card issuers decides to leave the business altogether, the ramifications will likely be far-reaching, as abandoned cardholders scramble to reinstate credit. If this occurs, credit unions will need to position themselves not only as attractive replacements but as smart alternatives to the remaining issuers.
At the same time, credit unions must be careful about who they are attracting, exercising caution when targeting abandoned or dropped cardholders. Clearly, not every consumer without plastic will be worthy of a credit union’s risk.
Annual fees are already becoming more popular. One of the nation’s largest credit card issuers, Citigroup, recently added annual fees to existing credit card accounts, surprising cardholders and commanding news headlines. While it remains to be seen if others will follow suit, credit unions should be starting discussions of how they will respond, should the market become saturated with annual-fee products. Will CUs determine a fee is necessary to maintain a sustainable portfolio or will they choose to stand apart by offering a no-fee option?
The same goes for rewards programs. Since the beginning of the year, U.S. cardholders have watched as their credit card perks have been trimmed or even removed entirely. Credit unions need to weigh the cost of such programs with their card base's collective redemption behavior. If cardholders are redeeming earned points for rewards and the credit union has seen an increase in interchange since the introduction of the perks, it may be smart to maintain the program. But credit unions must also pay attention to trends, such as the increased reliance on rewards for financing of necessitities vs. luxuries, before they determine whether their current rewards program is relevant and attractive in the changing marketplace.
Major issuers have not been shy about raising interest rates in the face of the potential for lost revenue. If credit unions have not already begun to analyze and model cardholder behavior, they must start today. Working with their processors, credit unions can use existing data to predict the likely outcomes of different changes to interest rates. This will help guide the decision whether to jump on the rate-increase bandwagon.
How a credit union determines it will respond to the above scenarios–-and others that are sure to arise–-will have much to do with the overall positioning of their credit card programs. Does the credit union serve a low-credit membership requiring non-traditional programs, such as pre-paid cards, or can the cardholder base support a more costly set of products? Does it make more sense for the credit union to become known for its low-cost options or for its conservative underwriting? Credit unions can become known for either if they leverage it in their marketing.
Yet at the end of the day, credit unions must remember to balance positioning and member value with true profitability. The general desire to provide convenient, attractive and affordable products to members is, of course, admirable. But it can not alone sustain a healthy credit card program.
Taking the time to strategize for these “what if” scenarios now gives a credit union time to weigh the pros and cons of its decisions, as well as to prepare members for what could be dramatic changes ahead.
Jeff Russell is VP/strategic development for CUES Supplier member TMG (The Members Group), a credit, debit, ATM and prepaid card processor serving the credit union industry.
Also by Jeff, "On Compliance: CARD Act Deadlines" published today on cues.org.
