For the past 29 years, the number one earning asset in the credit union industry has been the credit card portfolio. During the best and worst of times, by FAR the most consistent generator of revenue has been the credit card. Despite all the breaches and compromises, despite the economy tanking in 2008, and despite the many mergers in the credit union world, credit cards continue to outpace auto loans and mortgages by a 3:1 or 4:1 ratio. As of June 2018, the return on balances for credit cards was 3.97% while auto loans were 0.63% (according to Raddon). Real estate loans sat at 1.05%.
That statistic probably comes as a surprise to many CEOs (not to mention CFOs) who spend many resources on other loans, products and services in the credit union. I’ve met with many CUs for the past 15 years around the U.S. and it seems like the only topic CFOs want to discuss is either charge-offs or breaches when it comes to credit cards. It isn’t until they dive deeper and compare the credit card ROA with the overall ROA of the credit union that they realize how profitable it truly can be. When you also factor in that members that carry your credit card also have a more likely chance of getting a car loan or mortgage, it’s imperative to get that plastic into as many wallets as possible.
So, what does a successful credit card portfolio look like?
One BIN can be good enough
There are certain fundamentals that can help achieve this goal. Back in the “olden days” credit unions typically offered three different cards—Classic, Gold, Platinum—and needed 3 separate BINs. That proved to be very costly to the CU. Fortunately, those days are long gone. You can now offer just one card and utilize risk-based pricing under one BIN. Additionally, you can have varying credit limits from $500 to $50,000 all under 1 BIN as well. By reducing to 1 BIN, you have also just reduced your processing expenses. (Note: this is not to say that having more than one is bad, but if you’re not doing credit cards because you fear the expense of multiple BINs, don’t let that deter you!)
Use balance transfer incentives to bring in cardholders
Second, the fastest way to bring in a new cardholder is with a balance transfer. The most effective time of year to go after these is right after the holidays. By offering a 1.9% – 3.9% BT rate, you would be amazed how many new cardholders will jump at that offer. Ideally, according to the Card Act of 2008, the BT will run for 6 months from January 1 to June 30.
Members want rewards for using their cards
And then we get to rewards. In 2018, 92% of all spend was with a rewards card. Whether it’s points or cash back, 92% of people in the U.S. utilized a credit card that offered some sort of perk. The concept of spending $1 and accumulating 1 point has been successful for decades. From the CU standpoint, it works because many CUs will receive 11 more basis points on the interchange when they offer a rewards credit card. That additional 11 basis points will help offset the redemption for rewards. And keep in mind that the average redemption in the CU is usually 35%, which means 65% of those points never get redeemed.
By “playing” with rewards the CU can also cross-sell and cross-promote their other products. For instance, if a member has 60,000 points and does not want to redeem those points for an airline ticket, the CU should allow the member to redeem half of those points for a better car loan rate. The basic formula of 10,000 points for 10 basis points has worked for years. The member is happy because they can redeem 30,000 points while seeing their new car loan get reduced from 3.9% to 3.6%. Or, you can do the exact opposite and offer a member 1000 points for opening a new loan with the CU.
Play around with the points
Many of the CUs that I’ve worked with since 2004 offer 1000 points when a member activates their card and then another 1000 points after first usage. It’s amazing how those two steps have been so beneficial into increasing penetration, activation and usage (PAU). You have just given that member 2000 points for activating and first usage—are they going to redeem those 2000 points immediately? No, they are trying to build/save their point total to 30,000+ to get better gifts or a free airline ticket.
Offering 10,000 points every month to one lucky member is another way to increase PAU. Those members who use their credit card 5 times/month are eligible. You’d be shocked at how many cardholders will go from using their card 3 times a month to 5 times a month just for a chance at those 10,000 bonus points. Other CUs will require a cardholder to spend $500/month to qualify for that 10,000 points.
Some CUs will offer their staff 1000 points for every application by a potential new cardholder. This accomplishes two things: the employee becomes more familiar with the product while also providing some great motivation. Other CUs offer cash to their staff. We had one CU in the upper peninsula of Michigan that saw a teller hand out over 100 applications, which put an additional $500 in her paycheck.
Give credit cards space… on your website
Lastly, take a look at your website. Let’s face it, fewer members are coming into the lobby. Make sure that credit cards have their own tab; NOT listed under loans. Also, adding a credit limit increase button to your website can generate revenue very quickly. Many of our CUs recently have added this feature so a member can see if they qualify for a credit line increase. The math is simple: if a member gets a $1000 increase (and trust me, many members haven’t had an increase in years) they will utilize about 40% of that limit per month, which means around $400. If the avg. ticket is around $80/transaction for credit cards, that means you have just given your valued member a chance to use their credit card an additional 5 times per month. The key is they have to qualify for this increase, it’s just not granted automatically.
By adopting a few simple theories, a CU will see growth consistently with their portfolio. The worst thing a credit union can do is nothing. There is so much competition out there that if you don’t make your card attractive your member will find another offer that is more attractive and appeals to their spending habits.