Over the past decade, new regulations have modernized and transformed the credit card industry. Specifically, the Credit CARD Act addressed the way issuers are allowed to market credit cards to consumers.
When the Credit CARD Act went into effect, the industry lacked transparency. Today, issuers have to be much more transparent about their pricing, terms and conditions, fees, and other credit card features.
This has been a positive development for issuers, as it has leveled the playing field and forced a lot of bad actors out of the industry.
These changes also have been positive for credit union members, who are now more informed and empowered to make good decisions about their use of credit cards.
For credit unions, offering a competitive portfolio of credit card products that are smartly marketed to members can lead to two key benefits:
1. Financial. Charge-off rates are at historic lows, balances are starting to grow, and the return on credit card assets can be up to five times higher than other lending products.
2. The opportunity to better understand and engage members while building stronger and deeper relationships.
Credit cards are in-hand
For many years now, credit cards have been a must-have for millions of people. Research from Raddon Financial Group shows 84% of consumers have a credit card, a number unchanged since 2006.
We rely on them for everyday items, big-ticket retail purchases, vacations, emergency situations, or simply when our checking account balances are lower than usual.
Most credit cards offer incentives for use, such as cash back and other rewards programs, and promotional interest rates.
Others offer value-driven features, such as no annual fee. Rewards programs can entice members to continuously use their credit cards whether they prefer to pay off the balance each month or carry it over.
Activation is key
Activation is a critical first step in what can become a fruitful, long-term relationship with your cardholder, and it helps ensure your portfolio is composed of active, highly engaged consumers.
Where to start? By making the best use of the data you already have to identify, target, and make personalized offers to spur cardholders to activate and use your card.
A good analytics tool can help credit unions extract useful information from the data they already have. How many cardholders use mobile payments? How many are conducting EMV transactions?
A good tool will help you better understand your portfolio, such as total use per cardholder and which channels they use most.
Once it is known who cardholders are and how they are using a card, a strategy can be built to encourage them to reach for your card first. A knowledgeable consultant can help navigate trends and benchmark performance against peers as well as the industry in general.
In addition, by leveraging behavioral data, credit unions can identify opportunities to offer members value-added services that are tailored to their families’ spending habits.
For example, members with children at college often request additional credit cards—tied to their master credit lines—to help with regular expenses or in the event of an emergency.
Sophisticated mobile apps are available to limit spending to certain merchant categories and locations, as well as on/off controls and notifications. For example, $20 for lunch and a movie? Accepted! $200 for a shopping spree? Denied!
With growing credit card portfolios, one potential concern is managing the risk that comes with it.
Increased levels of unsecured debt can raise red flags with internal lending committees and regulators. However, there are ways to adequately manage this risk and ensure financially sound practices on behalf of the credit union.
Prudent underwriting policies and procedures should transparently define when the credit union will approve or decline requests for credit. Members with the highest creditworthiness and ability to service their debt should get larger credit lines than those who are riskier.
In addition, terms and conditions should be structured to align with the appropriate interest rates and fees you offer members.
Your credit card portfolio should also have risk-based pricing, which enables you to compensate yourself for the appropriate level of risk based on each line of credit. This can help minimize potential losses to the credit union in cases of financial hardship.
While mobile payments are growing in popularity, credit cards remain popular across all generations: 81% of millennials have a credit card, compared to 84% of Gen X and 85% of baby boomers, according to Raddon.
Members may still be testing the waters on using mobile devices for point-of-sale transactions, but this doesn’t threaten the future of credit cards.
Newer services like Apple Pay, Samsung Pay, and mobile wallets are typically linked to a member’s credit card, and they serve as a channel of convenience for faster purchases.
This technology also enables credit unions to gain an enhanced understanding of member behavior, which can help drive further engagement.
As technology continues to evolve over time, credit cards may not be as prevalent. But the underlying product—the line of credit—will still exist and offer credit unions many benefits.
CHAD PECK is vice president, credit product strategy, card services, for Fiserv.