'Competing On Card Rates Key To Attracting Loser Relationships'

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Credit unions looking to compete with some of the 0% credit card offers proliferating in the marketplace should turn to enhancements like reward packages rather than falling into the trap of lowering rates, according to one credit card expert.

"You just can't make money at 0%, and if you're only attracting the confirmed rate-hoppers out there, that means all you're doing is acquiring a losing relationship," said Brian Crawford of PSCU Financial Services, formerly Payment Systems for Credit Unions. "So, you're losing money and you're acquiring a dead-end relationship."

But that doesn't mean credit unions can ignore the fact that they face significant competition in the credit card marketplace, and that some of those competitors are dangling attractive initial APRs.

"Generally speaking, the 0% offers are still in the marketplace, and they are definitely affecting our credit union clients," Crawford observed. "Consumers are on the receiving end of these offers from competitors much more so than from the credit union. Credit unions aren't as aggressive, so they are losing some ground."

At the same time, however, there are indications that the heavy volume of direct response credit card offers is getting old in the consumer's mind. "We're seeing a drop in response rates to direct mail and a drop in the number of cards being used by consumers," he explained. "People are really zeroing in on one or two cards. There is some indication that consumers are getting tired of the whole balance shopping rate wars. We see a trend that consumers are not carrying any less balance in aggregate, but they are accepting fewer card offers, and they are concentrating their balance on one or two primary cards. This is becoming a one- or two-card game, winner take all."

And that's where the credit union opportunity lies, he suggested, but only if CUs recognize that interest rates simply aren't what motivates a cardholder to pull a particular card out of the wallet.

"A lot of what's driving usage is not rate any more, it's the rewards package," Crawford stated. "The rate determines the decision to accept a card, but it is the rewards package that drives the decision about which card to use."

When rewards packages were first introduced, the premium was typically "miles" on a given airline. That was an offer that primarily drew upscale consumers who travel more frequently. Rewards packages have since broadened to reach more types of consumers.

"There's still a lot of travel rewards, but also general merchandise," he noted. "Rewards packages are now about offering a better everyday value."

Even when a special rate is used, it should be as much about retaining existing cardholders as it should be about acquiring new ones.

"Some credit unions are answering 0% deals by dropping rates, but not all the way to 0%," Crawford commented. "Let's say they usually have a competitive rate of 9.9%, so they offer balance transfers at 4.9%-it's an intertia-breaking rate. That's a real, rational, smart way to go. And you couch it as a reward to your good cardholders, a relationship reward-because you don't want to strand your loyal members.

"We've seen some credit unions get pretty aggressive about it, but credit unions should pick their position carefully to reward the mainstream borrower, and that's why I counsel credit unions to look pretty hard at a rewards option," he continued. "Give your members a reason to consolidate their usage around your card instead of the other guys."

The good news is the average credit card penetration rate for credit unions is in the mid-20% range, Crawford noted. The bad news, however, is that only 7% of credit union members with credit union credit cards say the CU's card is their primary card. That doesn't mean, however, that there isn't a real opportunity for credit unions to drive their "primary card position" way up, he added.

Another element in today's marketplace that is having an affect on card balances: home equity loans and other loan consolidation programs. "All you can do is suffer through the refinancing cycle, and then enjoy it when members get back to the balance-building cycle, because it is cyclical," Crawford advised. "One thing CUs can look at is offering a platinum card associated with a home equity line of credit. That really only appeals to a small segment of the market, typically an upscale consumer product. Maybe on 4%, 5%, 65 of members are interested, but you typically see lines of credit in the $30,000, $40,000, $50,000 range."

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