DES MOINES, Iowa — Shrinking refi business, falling debit swipe fees and banks ramping up card marketing have credit unions increasing their emphasis on their cards' portfolio.
Several cards analysts and credit union executives agree that CUs have increased their focus on a product that offers a great deal of upside revenue potential but faces increasing bank competition.
Credit unions are taking a number of approaches, playing up cards prominently on their websites, increasing limits and running balance transfer deals, cutting rates, leveraging analytics and simply increasing marketing dollars.
The Members Group reported that CUs have more than tripled their requests for credit card marketing promotions in the 2013 holiday season compared with the previous year.
"Rather than being passive in their marketing, more credit unions are actively engaging consumers," said Georgann Smith, VP of marketing. "They are doing more with their marketing, and their offers, because if their card is not top of mind with members, someone else's certainly will be."
With credit risk at almost a 20-year low and bank card profits rising, analysts see the big guys dumping extra profits into credit card advertising and attractive offers, like Capital One's 1.5% cash back.
"The banks have definitely come out of their hangover from the downturn," said Jennifer Kerry, VP of credit card services at CO-OP Financial Services, Rancho Cucamonga, Calif.
Not only is the threat of competition stealing away business leading to action, but a great deal of room exists for credit unions to grow their credit card portfolios.
Dave Colby, chief economist at CUNA Mutual Group, Madison, Wis., said there is significant market share to be recovered from what was lost during the recession.
Colby noted that in 2008, the credit card market for all financial institutions peaked at $1.005 trillion in balances, and now stands $181.8 billion short of that total through October 2013. "That is a lot of lending that can be made up," said Colby.
Numbers show credit unions have stepped up their efforts this year to regain some of what has been lost since 2008, growing their credit card portfolios year over year (through October) by 6.1% while all other FIs grew credit cards by eight tenths of a percent.
A Big Opportunity
The opportunity is big, emphasizes Sam Kilmer, senior director at Cornerstone Advisors, Scottsdale, Ariz. "There is huge untapped potential. According to the Federal Reserve Board's Survey of Consumer Finances, 65% of Americans have a bank- or CU-issued credit card." But the CU credit-card penetration rate—while growing—is only at 15% of members, according to Callahan & Associates
Kilmer said some CUs doing well with credit cards have penetration rates between 55% to 65%. "So, depending upon the CU's current card penetration, doubling or tripling the portfolio is conceivable. Of course, that doesn't happen overnight."
In Lake Mary, Fla., executives at CFE FCU understand it takes time to build the portfolio. The $1.4 billion-asset institution has beefed up its portfolio through marketing, analytics, credit line increases, balance transfer promos, a low card rate (8.75% for the best credit) and instilling a sales culture within the front-line team. "In our assessment, today it takes a multifaceted approach to build your card base and your balances," said Suzanne Dusch, VP of marketing.
While much of CFE's increased activity over the last year is aimed at helping the credit union increase lending by a whopping 15% in 2013, the moves are also a response to major card issuer offers.
"The competition is coming from everywhere. It's not just the local market anymore," said Dusch. "You have the big issuers and then you now have the virtual banks. We need to respond to these threats to our cardholder base."
CFE offered a free 1.9% 12-month balance transfer offer this year that played a large role in the CU increasing balances from $39 million at the start of 2013 to $54 million through November. Last year the credit union averaged 200 new credit cards per month and has now raised the 30-day average to 633.
Dusch attributed the CU's strong results, again, to more than just the balance transfer program. "You have to give cardholders choices. A balance transfer might work for one member and then a low rate for another. For some, a credit line increase is attractive, or maybe rewards. It's not one-size-fits-all anymore."
Avoid The 'Auto Pilot'
Bob Roth, managing director of contract negotiations practice at Cornerstone Advisors and leader of the company's payment solutions group, cautions that credit unions that leave their credit card programs on "auto pilot" will pay the price.
"I think this has happened at many credit unions, and as a result they just get consistent, but low organic growth. Marketing has usually been of the statement insert and branch posters variety, with little effort in segmentation or targeted offerings," said Roth. "Meanwhile, the card brands have introduced new products and rewards programs that can give the credit union programs a dated image, resulting in less than average card use."
Heritage Valley FCU in York, Pa., found out what can happen if the card is left to stand on its own without a lot of new attention. The $72 million CU had been enjoying 30% year-over-year growth in the portfolio from 2009 through 2011. However, just at the time banks and major card issuers began increasing their marketing and improving their offers, HVFCU saw a flattening of that growth in 2012 and for much of this year.
The credit union responded in the fourth quarter by making credit cards prominent on its homepage. Instead of burying the product inside a lending page, credit cards now has its own dropdown menu at the top of the screen. Mike Gutshall, VP of lending and collections, said results have been big. "The impact was almost instantaneous. We have increased new accounts, credit lines, penetration and outstanding balances," said Gutshall. "Card applications, as well, have increased by 100%."
Not only were credit cards given a top spot on the homepage, new options were added to the dropdown menu, including a form to apply online for a credit line increase. That has boosted monthly credit line increase requests by 350%, said Gutshall, who believes automating the request keeps the offer in front of members and lets them choose when the time is right to increase their line.
Overall, with the emphasis now on credit cards, CFE is making up to $30,000 a month in credit card net income after charge-offs. "That number used to be $8,000 to $10,000," said Gutshall.
Getting Comfortable With The Card Act
What has led to some of the CU resurgence in card offers, observed several analysts, is credit unions becoming more comfortable with the CARD Act, which has led to greater confidence in extending credit line increases.
Barney Moore, senior portfolio consultant at CSCU, Tampa, Fla., said many CUs have not moved ahead with line increases due to the CARD Act requiring financial institutions to re-verify a cardholder's ability to pay before boosting the line. Moore explained that many CUs lacked confidence in their documentation for this process.
"As a result, I think there has been hesitancy here," said Moore. "Now that is going away. This is important, as promotions are constrained when members don't have enough credit line available. Now we are seeing more credit unions doing credit line increases and then a bonus point offer, or maybe a lower rate or balance transfer."
The $355 million Heritage Family CU, in Rutland, Vt., this year increased credit limits and offered 2.99% for six months. Matt Levandowski, SVP of retail, said balances rolled in and utilization is up.
"About 49% of cards participating in the offer are still seeing balances rolling over. So many are utilizing their cards, not just transferring a balance and leaving it. We signed a lot of new members from this promotion, as well."
TMG's Smith is another who sees CUs becoming more comfortable with the CARD Act. "I think credit unions wanted to wait and see, give the Act some time to settle in, and see what the outcomes would be."
She said the results are reflected in holiday card spending among client CUs. From Thanksgiving through Cyber Monday, TMG saw an 8% increase in sales transactions and an 8% increase in overall volume. "The average transaction went up 5%, as well. Credit unions this year paid more attention to credit cards."
