CLEARWATER, Fla.-Having had time to digest some of the language in the just-enacted Credit Cardholders' Bill of Rights Act of 2009, analysts see opportunities, but also issues related to effectively pricing for risk and having operations in order.
That was the message from several plastic card industry insiders contacted by Credit Union Journal in the wake of the new law, which makes it harder for credit card issuers to raise interest rates and increases notice requirements when the issuer makes changes to accounts.
Robert Hackney, president of Card Services For Credit Unions, headquartered here, was one of several to point out the Act cracks down on predatory policies that most CUs avoided. But, he added, "This is a situation like in grade school where the whole class gets punished for the actions of one or two."
Jeff Russell, VP of strategic development for Des Moines, Iowa-based The Members Group, and president and CEO of TMG Financial Services, said it is important to know the Credit Card Act of 2009 is a "big deal" for CUs.
"While most of the things in the new law don't impact credit unions significantly from a financial perspective, they do from an operations perspective," he said. "Every credit union will have to put in time and effort working with their processor for the next 15 months to make sure they are compliant. Card portfolios will remain profitable, if it is a strategic product for the credit union. I don't think this legislation changes that."
Every credit card issuer will have to get used to appropriately pricing for risk, said Scott Wagner, EVP of TNB Card Services, Dallas.
"In the last five years, a lot of credit unions have moved into a risk-based approach to their card portfolios. Three, or even four times a year they would assess risk and make adjustments as needed."
The changes needed are not necessarily difficult, they simply require a different business model, Wagner continued. "Credit cards will continue to be profitable for credit unions, but people will be scrambling to find out what changes need to be made."
CSCU's Hackney noted 15% of total revenue for the credit card industry comes from fees, but for credit unions that figure is just five. "I don't think credit unions are going to get hit as hard as the big issuers, who rely on fees much more," he said. "There will be an adjustment period to see what the new revenue models are going to be like, but I don't think it will be as drastic for credit unions."
If the new law is successful in eliminating some of the nefarious fees associated with bank-issued credit cards, how will CUs differentiate their cards? TNB's Wagner believes the premise of the question has its flaws.
"There are some folks that feel it will level the playing field because this legislation will prevent or stop questionable pricing tactics, but it is naïve to think it will stop all of those practices," he said. "Issuers are going to find a way to be profitable, and large issuers will find new loopholes to make them profitable.
"I still believe credit unions will not adopt those tactics, because their business model is based on service, not maximizing profitability," he added. "It is too early to know what the differences will be, but there will continue to be a difference between credit union credit cards and bank-issued credit cards."
Defining 'Differentiation'
To CSCU's Hackney, differentiation means "continue to treat members well."
"And as big issuers increase fees to make up for lost revenue, that's where the differentiation is going to come in," he said. "Credit unions will not have to respond to this legislation by increasing fees. Public companies are driven by Wall Street, and they must find new ways to generate profit. This has a potential to isolate them even further."
The Members Group's Russell said the new law represents an opportunity to gain market share by showing more respect for individual members.
"Because of that, and the backlash that is happening against the large bank issuers, many people are moving to credit union credit card issuers for the personalized feel as opposed to the one-size-fits-all feel of the bank issuers," he said. "The opportunity is for the credit union card sitting in the member's wallet to move from the No. 2 or No. 3 card to No. 1. But credit unions need to be actively talking with their members about the advantages of their credit card program."
PSCU's Schechter said the overall effect of the new law will allow credit unions to say, "We've been telling you for years we are a better deal, now you can see it with your pocketbook. We have a better product."
"Credit unions don't need a different level of differentiation, they just need to become more aggressive marketers," Schechter added.
TMG's Russell concurred. "One thing we know is there will be change in the next 18 months. Credit unions will need to adapt to changes in the marketplace, and they will need to pay attention to those changes so they can capture market share. We really believe that opportunity is there. Credit unions have 3.5% of the credit card market today, but they can get more members to carry and use their credit cards."
TNB's Wagner said he is "very optimistic" about the future of CU card portfolios. "We think credit cards are a great product for credit unions to offer and be excited about."
