Answering Whether Card Portfolio Is Viable-And How To Get There
Is your credit card portfolio viable?
That question, said one expert, is the only question worth discussing. The answer, he said, lies in the effort the credit union is willing to make to making that portfolio work.
"One of the things every credit union has to decide is your level of commitment," said Glen Lee of TNB Card Services. "You must become more and more committed if you are to be successful. It's more than just products and services. It requires the time on the credit union's part to make this successful."
In remarks before the Texas Credit Union League's annual meeting here, Lee said there's no dispute over the soaring popularity of plastic payments. In-store usage of plastic cards by itself is up 430% since 1995, and Americans' carry more than one-billion pieces of plastic (both debit and credit).
For credit unions, the dispute lies in can the card portfolio be viable and profitable. More than 80 credit unions sold their portfolios during 2003 to various buyers, including credit union-owned TNB Card Services.
"The real question is why are credit cards important to you?," he asked rhetorically, before answering, "Because they're consumer products and the consumer says 'I want this product.' Credit cards are a key consumer loan product today."
But many credit unions apparently aren't holding the key. According to Lee, during 2003 total loans at credit unions increased $11 billion (2.3%), but credit card outstandings decreased $1 billion (5%). He added that 63% of credit union portfolios shrank through the third quarter of 2003, and noted that of the 80 portfolios that were sold in 2003, 90% shrank.
"From that you can ascertain that if your portfolio is not growing, someday you may decide to sell yours," he offered. "This is an extremely competitive market. It's saturated. There are 5.25 credit cards per households."
In credit card loans, banks hold $559 billion in outstandings (96% of market), while credit unions hold $22 billion (4%).
The top 10 issuers have reached the point where they now dominate the market, thanks in large part to acquisitions of other portfolios and large acquisition campaigns among consumers, Lee observed.
He noted the big issuers do broad-based cardholder profiling, have expansive affinity/lifestyle programs, and aggressively price their products. Moreover, they have a greater risk tolerance than most credit unions, he said.
Those top 10 issuers have seen credit card profits soar, with Citibank seeing an increase of 22% during 2003, and MBNA seeing a 30% boost.
"Competition and market maturity will increasingly impact growth and profits," said Lee, noting that response rates to direct mail has dropped by half over the past four years to 0.6%. He added that TNB has seen significantly better response rates among credit union card pitches.
Where The Credit Union Advantage Lies
If all that sounds like reason enough to sell the card portfolio, Lee said there are reasons not to, and that credit unions do have some competitive strengths to leverage.
For instance, according to Lee, research done by the Raddon Group shows that while just 18% of consumers say they would consider a lower-rate mortgage, 40% of consumers say they would consider a low-rate credit card-an area where credit unions have an advantage.
During 2003, 56% of consumers applied for and received an average of 1.5 cards, he said, and of those 85% are active users. Sixty-six percent of consumers who did change cards cited price and/or fiscal responsibility as the reason, he pointed out.
"But there's been a shift in attitude," said Lee. "Thirty-six percent of consumers prefer the standard card, down from 57% in 1999. Thirty-three percent prefer a co-branded card, up from 25% in 1999. And 25% prefer loyalty cards, up from 10% in 1999. That means that 58% now say there is a reason other than price for accepting a card, and those are reasons you can use."
Credit Unions Have Credit Cards? Who Knew!
One alarming statistic to which Lee pointed is research showing that 24% of current members at card-issuing credit unions do not know cards are available.
"The primary method to drive new credit cards is not direct mail," said Lee, whose company does offer such solicitation programs. Rather, he said the most effective means is in-branch cross-sales. "That constant drumbeat of in-branch activity is where the real growth is going to come from."
So what is a credit union to do if it wants to compete? Stress the fundamentals, emphasized Lee: Pricing, product and promotion.
"For about five years at TNB we have made a central strategy, 'How do we help you to grow your program?' For five years we have watched the month-over-month run-off of accounts occur at approximately the same rate as new accounts were coming in. Where are these accounts running off to? In any portfolio, if there's not any activity to bring on quality, new cardholders there is a deterioration of the portfolio. People who are leaving are your best members, and they are leaving to get something they're not getting now. The people who aren't getting solicitations and who don't have a better product to go to are the ones who are staying."
Lee said that most credit unions have not altered their pricing philosophy: they either believe that one size fits all ("We don't see that as much as we used to") or the credit union prices by product.
"What we recommend instead is that you price from a risk-based standpoint. You can have consistent pricing across all products by pricing according to risk. You could have someone in your platinum card who is paying more than someone in your standard card. This allows you to offer credit to people whom you can't afford to otherwise offer credit."
Lee also advocated reward/penalty pricing to influence cardholder behavior and to react to changes in cardholder risk. As an example, he presented an eight-tier table of "risk pools" according to FICO score (see chart).
Lee pointed to one credit union's 9,000 account portfolio in which TNB recommended those eight levels of pricing, ranging from 7.5% APR to 18%. When the CU repriced its accounts, 37.5% of the accounts received a better APR on purchases; 53.1% of the accounts received a higher purchase APR that he said enabled the higher yields that portfolios strive to achieve.
The Value Of Increasing Credit Lines
Another area where credit unions can make changes and boost portfolio viability is in credit lines, according to Lee.
He said that credit union cards have credit lines that are $2,500 below industry averages, even though card charge-offs are 35% of the industry average. "This is a key, key area to make your current portfolio perform better," he emphasized.
Using the same credit union portfolio used in the example above, Lee said that when members were placed into "risk pools" according to FICO scores, 42% of cardholding members were found eligible for a credit line increase.
Total lines increased by 9.26%, he said, even though risk did not increase, as members in the four lowest categories were not given increases.
Lee said that 95% of card applications are for Platinum cards, and that 85% of accounts issued are Platinum. Platinum cards have nearly triple the average balance of the Classic card. "By doing a combination of three things, managing from a risk-based standpoint, managing from risk-based credit lines, and offering a better product, we were able to significantly change the way members look at their credit card," he said.
Lee said the difference between portfolios that are promoted and those that are not is "dramatic." Those credit unions that did promote their cards grew their portfolios by 6% in 2003, while those that did not shrunk by 4%."
"Portfolio marketing drives all vital statistics: new account acquisition, activation and usage, balance growth, and risk review and management," said Lee.
A key to marketing, he said, is that Reward Cards drive loyalty and usage. He noted that six in 10 cardholders have chosen a Rewards Card as their preferred card; that one out-of-three say usage is driven by rewards, and that 90% would not reduce usage of that card.
But he cautioned that an effective rewards program must have manageable costs for redemption and administration.
"Today I don't think your rewards program should be limited to the credit card program," suggested Lee.
As for credit unions unsure if they can make their portfolios viable, he observed, "Through focused efforts directed at the fundamentals of portfolio management-pricing, product and promotion-profitability improvements can be achieved."