Despite some economic issues lingering from the global pandemic, rising inflation and threats of a recession banks are pursuing and capturing new credit cardholders with aggressive marketing strategies, more lenient underwriting criteria and rich rewards, while credit unions have largely remained on the sidelines. And credit union members are noticing.
According to Q1 2022 NCUA data, average balances for credit union-issued cards rose 9.8% year over year to just under $2,000, well below the estimated $3,000 average balance for all credit card accounts. While the growth in balances for credit unions is positive, it is still less robust than the industry average of 11.6% trailing bank segment increases.
Per NCUA data, for the first time in nearly 20 years, balances in the bank segment outgrew credit unions in 2021, with trends continuing into 2022. To further exploit their success, banks posted historically low annualized charge-off rates at 1.8%, .4% under credit unions annualized charge-off rates (Federal Reserve Board of Governors). As a result, for the first time ever, credit unions will post a higher calendar year credit card charge-off rate than the banking segment. This shift brings into focus the stark reality that historical credit union advantages are disappearing, highlighting a transformational shift in payments.
So, what gives?
For one, banks are showing flexibility in their lending practices and responding more quickly to the change in cardholder behavior and declining balances, by easing their underwriting criteria for new card accounts and opening up available credit. According to TransUnion, in 2021, banks issued over 29 million credit cards to consumers with credit scores of 660 and below, a marked increase from 20.4 million such accounts in 2020. Moreover, according to the latest Federal Reserve senior loan officer survey, roughly one-third of banks reported relaxing their credit card approval standards over a three-month period ending in early October 2021, a big jump from 2020.
Meanwhile, credit unions are hesitant to increase credit lines and acquire new accounts. Although on its face, this conservative approach may seem like a prudent risk mitigation strategy, longer-term, unanticipated consequences are emerging. Specifically, credit unions’ reluctance to provide members with easy access to credit is driving members to look elsewhere or to adjust their payment behaviors by moving their bank-issued cards to the top of their wallets. In addition, lack of credit union acquisition efforts to members and non-members alike to generate new accounts and grow the credit union movement is hurting growth and revenue opportunities.
Why does this matter?
Credit unions must remember – even in past downturns most card programs remained profitable. Staying on the sidelines due to uncertainty is no longer an option. The lack of action coupled with formidable competition in the payment space is affecting member affinity. It is time to refocus, and possibly readjust, critical program management factors, including underwriting, and implement growth strategies to recapture credit card spend.
A multi-pronged strategy to address this concerning trend to attain competitive credit portfolio growth while also boosting member engagement, includes:
Strategy #1: Assess member needs and lending opportunities
The credit union movement was built upon the principle of members helping members. From their inception, credit unions made lending affordable in communities when banks did not. Credit unions built their membership through superior service, low rates and fees, and reinvesting profit in its members versus a for-profit bank that distributes profit amongst investors. Despite obvious benefits, credit union membership rates are stagnant, and a more recent trend is emerging. Credit unions have pulled back on their lending and become more conservative in their approval process while banks are capitalizing by filling those needs.
It is time for credit unions to take action. Per the NCUA Quarterly Data Summary, the net income of federally insured credit unions rose a remarkable 127% from Q2 2021 over Q2 2020 and 8.2% in Q1 2022 over Q1 2021. Revenue increased in March 2022 to $21.2 billion, indicating the fiscal strength of credit unions, despite unprecedented times and more competition. Yet, even with healthy revenue metrics, credit union member growth has been stagnant, despite a 13% increase, a 20-year high, in new card accounts from Q2 2022 to Q2 2021 (Washington Post). More recently, Banks outperformed credit unions where they have, historically, had long-term advantages: balance growth and charge-off rates. This critical shift in favor of banks cannot be overlooked. Credit unions must act and become more aggressive in their account acquisition, underwriting and account management strategies to acquire or recapture members and reinstate the long-standing credit union mission: to be the trusted provider of financial services to every eligible member and to enhance the value of their lives and financial well-being while maintaining their fiscal strength.
Strategy #2: Build Credit Balances
As of July 2022, Co-op’s credit balances have grown by 13% from the prior year with positive balance growth 9 out of the last 10 months (January 2022 the only month to see a slight decline).
It is critical for credit unions to focus on acquiring new accounts to spur balance growth, while continuing to build existing member credit balances with competitive balance growth initiatives, paired with at least one credit line increase effort.
Strategy #3: Capture More Member Transaction Volume
Credit unions must stop considering balance growth in isolation and begin thinking about card program success in terms of capturing more purchase volume. The “turn rate” refers to the ratio of purchase volume to balances within a credit portfolio. For example, a portfolio that has $100 million in spend and $25 million in balances has a turn rate of 4x.
Between 2015 and 2021, the turn rate of the top 10 Visa and Mastercard issuers increased from 2.1x to 4.5x. Transactional success is a leading indicator of member engagement. If transaction volumes do not grow at the current market rate of 20%+ compared to Q1 2021, the credit union is losing ground.
Putting it All Together by Focusing on the Relationship
For credit unions, the secret to growing transaction volumes and increasing member engagement lies in compelling product sets, rich rewards and ongoing marketing strategies to incentivize member loyalty.
First, it’s time to get off the sidelines, begin acquisition, and recapture strategies to regain member affinity through competitive offers. It may also be time to review lending practices and overall program pricing to ensure you can support all members’ needs – from those who are just starting to establish credit to savvy card users.
Next, it is critical for credit unions to review their portfolios by balance and transaction mix. Understand where the strengths currently lie and capitalize on these strengths in go-to market initiatives. If the portfolio indicates a 2:1 turn rate, highlight low rates and service, and implement short-term incentives to spur additional transaction volume.
Analyze your rewards offering against the market. If your program is falling behind, it’s time to invest in or optimize your rewards program. Consumers are moving back to using credit after embracing debit cards as a budgeting tool during the early days of the pandemic. They are being selective about which credit cards they use, leveraging those that offer the most compelling, flexible rewards programs. Make sure you are providing your members with the right incentives to use your card for their everyday spending, as well as for larger, one-time purchases like appliances, renovations, vacations, and home furnishings. And ensure they have the flexibility to redeem their accumulated points for rewards that resonate with their earning goals and how they choose to live their lives, today.
It’s also imperative to analyze the portfolio data you have at your fingertips to determine which accounts are due (or overdue) for credit line increases. Pay particular attention to how your members use their accounts – by looking at metrics like utilization rates, time since last credit line adjustment, average monthly spend, repayment history, whether they carry a balance, debt burden, and how those trends have changed over time. FICO scores should not be the only criteria considered when making a credit line adjustment decision.
Lastly, make sure your marketing campaigns are targeting the right audiences, whether they are current member-cardholders or future members. Analyze your current members’ spending behaviors and customize your campaigns with a goal of acquiring new members with similar profiles. Understand that marketing is evolutionary and requires consistent testing and small modifications, one campaign at a time, to increase overall program success. This is a formula for success that will lead to strong portfolio growth and long-term, healthy Primary Financial Relationships.
Credit union leaders can learn how to unlock the potential of their credit portfolios through customized portfolio analysis, targeted campaigns and creative strategies that engage their members. To learn more, contact Co-op SmartGrowth Advisors. https://www.co-opfs.org/Solutions/Consult/SmartGrowth-Consultation