PETERBOROUGH, N.H. — Bank credit card growth last year outpaced credit union card growth for the first time since 2007, a figure cards experts say indicates much tougher competition is ahead for CUs, especially around rewards.

While CU executives and analysts have recognized that banks have been coming back with stronger credit card marketing for more than a year, growth in bank outstandings now clearly shows that banks are back, said Tim Kolk, owner of cards consulting firm TRK Advisors.

"Collectively, bank credit card balances showed negative growth from 2008 through 2010," said Kolk, referring to February 2014 Federal Reserve data and CU call report information through 2013. "Their outstandings declined by .04% in 2008, 10% in 2009 and another 9% in 2010."

But in 2013 bank balances grew by $8.1 billion, shared Kolk, who noted CUs grew by $3.1 billion last year. "In 2013, banks did as well as they have in the last five to six years."

Kolk said that is reason for credit unions to worry because banks are sinking more dollars into their credit card programs, specifically richer cash-back rewards.

"There is a shift [toward greater rewards] happening here, and credit unions, while they typically have a very favorable rate and compete well there, they don't want to fall behind and have to play catch-up," advised Kolk.

That is a concern for Pioneer West Virginia FCU in Charleston, W.Va., which has enjoyed a strong credit card program since new management came aboard in 2010. The CU has tripled balances, sharply reduced delinquencies and improved credit quality within the $9.36 million portfolio.

Yet even with those results, and one of the lowest rates going — as low as 4.95% for the best credit — EVP & CFO Dan McGowan said the $180 million credit union recognizes the market is getting tougher. "We have to actively sell our card for it to gain traction."

Rewards Over Rates
McGowan explained that while Pioneer's card is attractive to those who carry a balance, a growing segment of consumers don't care about rates.

"They want rewards," said McGowan, whose CU plans to introduce a points-based rewards program in June. "We don't want to play catch-up. We already believe we are at a competitive disadvantage because we have yet to go to market with our rewards program. But when we do we think we will be able to play with the big players."

Rewards offers are also heating up as the economy improves and banks have more confidence to sink money into their cards programs.

"Credit cards are very profitable now," said Kolk. "Banks seem to be putting more money into their cards' value propositions than they have in the past. There is enough money being made now that they can give more back to their cardholders."

Jennifer Kerry, VP of credit card services at CO-OP Financial Services in Rancho Cucamonga, Calif., said that credit unions will have to battle growing bank pocketbooks.

"Banks have settled in and are on steady ground. Their charge-offs are straight, they have their new lending policies in place and are starting to spend more money," Kerry said. "They know they have to put more valuable rewards and loyalty options into the mix to get more consumers to take their cards."

Kolk pointed out that more card money is flowing now as the overall credit card market expands. Outstandings among banks and credit unions collectively grew by $11.2 billion in 2013, up from $3.3 billion the previous year and $1.8 billion in 2011.

As banks experienced negative card growth during 2008 through 2010, credit unions fared well in those years, accounting for all of the market growth, seeing balances grow by $2.3 billion in 2008, $2.1 billion in 2009 and $1.1 billion the following year. Before posting their $3.1 billion outstandings growth in 2013, CU credit card balances increased by $1.4 billion in 2011 and $2.1 billion in 2012.

"Since 2007, banks are down a combined 10% while credit unions have increased their card balances by a cumulative 47%," said Kolk.

That performance is causing banks some angst, and leading to some of the new, richer cards deals, industry insiders observed.

"Banks are being more aggressive now because they have to," said Brian Scott, VP of sales at The Members Group in Des Moines, Iowa.

But Scott pointed out that banks' current credit card activity is well short of their efforts before the bottom dropped out of the economy. "Back in the mid '90s bank card portfolios were growing much faster, and people were getting an average of 180 different credit card marketing pieces a year," he said.

Industry analysts say banks' efforts today to grow share is more focused on affluent cardholders than prior to 2008. "Banks know what happened to them the last time they focused on the subprime space. They also know that to win over the affluent market it takes richer rewards and the premium cards," said Scott.

Opening For CUs
That leaves the door open for credit unions to focus on the subprime space, according to Scott, who pointed out that a portion of today's subprime borrowers are not as risky as their credit score indicates. Scott contends banks ignore this space due to credit score, but sees opportunity for credit unions.

"There are a lot of people who filed bankruptcy who are back on their feet but carry a subprime credit score and are not a bad financial risk now," he said.

According to Kolk, the answer to growing bank pressure is CUs should re-evaluate their credit card product set and pricing.

"This is a fast-moving market," Kolk said. "Credit unions have always been in a position to compete on rate. But it's the other features and value propositions members care about that CUs could fall behind on if they just assume the products they have had the last four years are still OK."

He fears some credit unions may balk at adding rewards, or beefing them up, because they will simply see the moves as a higher expense. "You may save money today but you will have a far less healthy program in the next two to three years."

McGowan reiterated that PWVA sees the need for rewards for its card program to continue its strong growth. He said the credit union will offset the cost of its Pioneer Perks program with a higher rate for the rewards card — 11.99% for the best credit.

"And that rate will be very favorable with the Citibanks and Chases," he said.

PWVA is offering Fiserv's UChoose rewards program, giving members points for purchases that can be redeemed for airline travel, gift cards, online purchases and more.

"A well-administered rewards program should cover its costs with a little bit of profit margin on top of that," said McGowan.

CO-OP's Kerry agrees it's time CUs spend more money on credit card rewards programs and marketing, but insists that they do it by segmenting members through strong analytics.

"Credit unions have to spend members' money wisely," she said. "And the best way to make to make a bigger impact with the cards program is to know the membership. Make the right offer to the right member."

Greg Smith, CEO of the $4.2 billion Pennsylvania State Employees CU in Harrisburg, offers a different perspective. PSECU, with one of the largest CU credit card portfolios in the nation, does not offer credit card rewards and has no plans to change.

"People always say that PSECU needs to add a rewards program to our cards offering. Why would we want to do that when the programs with rewards have lower growth rates?" said Smith, who pointed out PSECU credit card growth stood at 9% while the top five issuing banks, through June 30, 2013, all had negative growth.

"PSECU has used a very simple formula for the past 20 years and it has helped us grow our portfolio to the fifth-largest CU credit card portfolio in the U.S.," he noted. "We offer one rate on the card (9.9%) for purchases and cash advances. No fees except for a $20 late fee. No cash advance fees, no balance transfer fees. We offer a very low balance transfer rate of 2.9% for up to two years. We don't risk-base our VISA rate — every member who meets our credit criteria gets the same low rate."

Regarding rewards, what PSECU does do, according to Smith, is "tell members to use their rewards cards for their purchases. But if they need to carry a balance, use our balance transfer to pay off the balance. They get their points for whatever reward system they choose and we get the balance — and PSECU grows the portfolio nearly 10% year in and year out."

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