Community banks and credit unions with sluggish profits in their credit card portfolios may need to freshen up their strategies and let go of recession-era thinking.
Recent changes in consumer credit health and the gradually improving economy are making certain subprime borrowers more attractive again, after issuers ran away from them during the recession (
As a result, certain smaller card issuers should take a closer look at their underwriting strategies and card-marketing tactics, Brian Scott, vice president of sales at The Members Group, advises in a new white paper. The Des Moines, Iowa-based organization provides payments-technology expertise for credit unions and consultation on industry trends.
In his industry white paper, "Credit Card Portfolio Best Practices for the Modern Payments World," Scott says consumer credit card spending gradually is picking up again, but many issuers still are leaning heavily on recession-based underwriting strategies.
The ideal mix of credit card loans should be about 10% of an institution's overall loans, but many community banks and credit unions average between 5% and 7%.
And some institutions may be taking an approach to card loans that is too conservative.
To glean profits, loan officers may need to use specialize strategies to go after certain customers with "less-than-perfect" credit histories, Scott says.
That does not mean issuing credit cards to everyone. But "by making actual conversation with an applicant," smaller card issuers more easily can justify approving borrowers that fall outside of traditional lending guidelines, he says.
Issuers also may consider using careful judgment in approaching the risk-management question by increasing the total credit card portfolio's average credit limit.
Credit cardholders typically stop using their cards once their balance reaches between 30% and 40% of their credit limit.
An example of a card portfolio with a good balance between outstanding balances and credit limits is one with an average credit line of $7,500 and an average balance of $2,600, Scott says.
"If the right set of business-intelligence tools exist, raise credit limits for only those cardholders who show potential for making the most of the benefit," he advises.
Smaller institutions have their own type of prospects in credit card issuance, Scott says. Unlike the general marketplace, which aims for deriving about 70% of card-portfolio profits from finance charges, community banks should try to derive about 75% of credit card portfolio income from finance charges, or interest. Some 20% of profits should come from interchange and 5% from fees, Scott advises.
A good benchmark for card profitability is ensuring that at least two-thirds of a portfolio's accountholders are using their card at least once per month, Scott says. Anything short of that suggests an issuer ought to revisit card-marketing strategies.
Instant card issuance is one way to boost card activation and use, to help strike when the iron is hot and consumers are aware of, or interested in, a new line of credit. Clients the group advises that support instant card-issuance see 50% more transactions during the first 45 days after a new credit card account is opened, Scott notes.
Customized cards, including those with personal photos, often can spur consumers to activate and use a new card. Institutions that enable cardholders to update and change their customized card images see even better results, according to the white paper.
Inactive cards are a more serious problem than issuers realize. An inactive card can "silently drain the profitability from even the most robust portfolio," Scott says.
Card data-analysis tools can help issuers monitor card use and alert managers when a cardholder stops transacting.
Issuers should take action on any card account that has been inactive for at least six months, the firm advises. Examples of tactics to restart card use include offering promotions to cardholders, such as double rewards points for a designated period of time or upgrading to a new type of card.
To weed out deadbeat accountholders that do not respond to incentives, issuers should conduct a purge every six months and close those accounts, Scott says.
Issuers should beware of certain marketing tactics that may only drive short-term results, such as balance-transfer promotions, he says.
Dangling a short-term 0% interest rate to new cardholders that transfer a balance often leads to getting caught in a cycle of attracting "balance-hoppers" that have no loyalty to the institution, Scott says.
Promoting a low rate, instead of a 0% rate, is a better strategy for attracting customers that will stick around, according to the paper. "Not only does this avoid doing business with consumers unlikely to be loyal to one issuer, it also earns enough income to sustain the program long enough to build a relationship with the new cardholder," Scott says.
For issuers that have strategic reasons for promoting balance-transfer offers, the group recommends smoothing the process by making the transfer possible with a single step, such as a phone call or visiting a bank online website.
Merchant-funded rewards are another tactic issuers might explore to rejuvenate consumer interest, Scott says.
A valuable strategy is to ask consumers what they value about their cards and rewards "because increasingly, consumers no longer view rewards as a perk," and more of a routine benefit, he says.
Refining promotions and rewards around specific customers' preferences is far more successful than using a blanket strategy, Scott says.
Issuers must segment their portfolio and determine which customers are revolvers who carry a balance; which are transactors, or convenience users who pay off their balance monthly; and which are actively paying down a large outstanding balance. Each group may be receptive to different types of promotions and rewards offers, Scott says.
The key to succeeding is to look deeply at existing policies and be honest about gaps, he says.
"Before you can properly steel your credit card program for battle in what is poised to again become a jam-packed marketplace, you have to identify your weaknesses," he says.
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