If the current economic situation makes you want to forego marketing your credit card portfolio-think again. 2009 offers an unprecedented opportunity for credit unions to gain market share, reach out to worthy consumers who need credit, and build a more loyal membership base.
It's no secret that most banks have restricted credit and suffer from low liquidity and weakening financials. The nation's banking industry is expected to pull back about $2 trillion in credit lines over the coming year. Most credit unions, however, are in a much better situation, having avoided sub-prime loans and other risky lending practices. Credit unions have a solid overall capital-to-asset ratio of 11.1%-which is at least two to three times that of banks.
As a result, credit unions can use the current economic situation to their advantage.
"Credit unions have the opportunity of a lifetime to serve their members and potential members. Banks are seeking capital to survive; U.S. credit unions are well capitalized-averaging 10.9% net capital to assets in August 2008," a NACUSO report released last fall said.
What can your credit union do to optimize the advantages offered by this credit crunch?
It's time to examine your portfolio. Most lending portfolios are focused on real estate and auto loans. While there may be some business in refinancing home loans, it's time to focus on credit card loans. This high-performing asset can help credit unions reverse declining asset growth and flat membership rates-while simultaneously attracting younger members.
Visa reports that its issuers achieve a pre-tax net income return on assets of about 4%. Credit cards clearly represent a product with optimal gains from a modest investment. To achieve these gains, however, credit unions need to invest in their credit platform by offering rewards and attractive interest rates, along with promotional incentives to encourage activation and usage.
Here are steps to build a profitable, low-risk credit program while appropriately managing risk:
1) Launch targeted acquisition and activation campaigns.
Credit unions must reach out to consumers to describe the advantages of their credit program. Members are bombarded with bad news about the financial markets and the lack of credit. They will not be aware that they can achieve lower interest rates by consolidating balances from other cards and that they have access to convenience checks-unless you tell them.
Special rewards incentives or cash-back offers can also drive acquisition and activation rates. Many CUs have access to tools to track promotional balances. The ability to launch frequent targeted promotions can stimulate card usage, attract new cardholders, and grow outstanding balances.
2) Recruit Gen Y with promotions targeted at college students and young adults. These campaigns should drive prospects to a page on your website with educational content on how to build a good credit score and how this score is used to determine pricing on financial services. Consider using stylish card designs or user-selected graphics to appeal to this audience.
3) Offer higher credit limits and a rewards program.
One of the best ways to drive higher usage is to offer higher limits to credit-worthy members. All these gains can be retained if your credit union updates FICO scores quarterly to both reward high scoring members and to limit credit lines for those whose scores are declining. In this volatile economy, annual updates are not enough-quarterly updates are essential. Credit card offerings also must match customer expectations, which include a flexible rewards program or cash back. This reward incentive is essential, so make sure that your credit union has a generous rewards program that will both drive usage and build loyalty.
4) Use account level pricing to set interest rates and fees.
Automatic price adjustments can be made based on each cardholder's account characteristics and behavior. This eliminates manual reviews and account changes. Pricing strategies can be based on the cardholder's credit score, credit bureau score and delinquency and over limit history. Accounts can be automatically evaluated and re-priced periodically.
5) Institute automatic management of credit lines, over-limits and other factors to appropriately manage risk. Efficient portfolio management requires the use of technology that tracks behavior scores along with delinquency history, credit bureau scores and other account attributes. These tools equip staff members to take appropriate action for accountholders that show increased risk, while rewarding accountholders whose credit-worthiness is improving. Better management of credit line, reissue and collections strategies improves profitability while enhancing member service.
The current economy is the perfect storm for credit unions. Meeting consumer's credit needs will attract new members, and presents a unique opportunity to target younger adults who have little credit history or experience. Appropriately managing risk will ensure that credit unions achieve the highest possible return on their investment.
The only downside is CUs that do not seize the opportunity to "capitalize" on the current need for credit will continue to lose members and market share to their more progressive peers.
John Pembroke, is Chief Marketing Officer with PSCU Financial Services.
