If credit card issuing were a game of street stickball, mid-size institutions a decade ago yelled “CAR!”, got out of the road, then never gave the cry for “GAME ON!” Today, the credit card industry is ripe and the market is warm for community and regional issuers to get back into the game.
Taking a look at the overall credit card industry, credit cards in circulation hit a peak in 2007 at 710 million cards, according to a 2013 Nilson Report. Then the crash of 2008 hit, the Card Act went into play in 2009, and consumer spending changed. From the low point in 2010, the number of cards increased by roughly 50 million in 2011 and continues to climb today, when we have 520 million cards in circulation.
From a financial perspective, credit card pretax ROA is roughly 3% and on an upward trend. ROA on credit card programs has traditionally ranged between 2% and 4% (Source: RK Hammer/Card Knowledge Factory). Credit card interchange has not been Durbin-damaged as of yet, and interchange is still high. In the United States, 10 issuers own 85.4% of the cards on the market (Source: The Nilson Report, February 2013).
Prior to 2008, Americans averaged 5.5 credit cards (Source: Consolidated Credit Counseling Services). After the shock to the system in 2008, we saw a change in consumer spending and more stringent approval requirements. Now the average consumer has an average of 3.5 credit cards, and in March 2013 credit card delinquencies of 60 days or more were at an all-time low of 1.6%, according to bankcreditnews.com.
Consumers today are looking for personalized service and greater simplicity in managing their finances. And while the market tells us there is opportunity to create a credit card program or even revamp a stale one, a credit card program is certainly not an autopilot venture. Certain key activities call for serious consideration before taking on the endeavor.
Keep it simple. The value proposition and different card types should be kept to a minimum and no more than a handful. The goal should not be to have a card for every type of cardholder out there but should instead be focused on what is important to the cardholders in the targeted market. Simple to explain and easy to understand cards are also an important element of a multi-channel sales strategy.
Fully integrate. Full integration of the card product has several key elements to get it right. In order to stand out in the crowd, all cardholder products have to be on one screen with a single, streamlined interface. Credit card information must be integrated with Internet banking; balance information and transaction history integration needs to have the look and feel that it belongs and flows perfectly. A single sign-on pass-through to a popup on a vendor site branded with the issuer institution’s logo is no longer going to cut it.
Market to existing customers. Target existing customers who live near branches, know the brand and want a credit card that comes with a built-in relationship. A differentiator for mid-size institutions is that customers can have a conversation with a real live human if they have questions about their card.
Create loyalty. Turning a standard “ho hum” rewards program into a conversation about the relationship is a great first step in a true loyalty program. Today, rewards programs based on usage habits of credit cards is the standard expectation. Instead of having to debate with customers over the value of a point, why not turn the conversation around and offer a loyalty rewards program? For example, offer a double and triple play – 100 points will be auto-deposited per month when the customer has credit and debit, and 300 points when the customer has credit, debit and savings. KeyBank and FORUM Credit Union are examples of true loyalty programs in action.
Innovate. Bringing some uniqueness to the table can do wonders to set an institution apart in the market. For example, provide customers with a credit card to use for everyday purchases and then do a nightly sweep of the whole balance, a percentage or a fixed amount, letting the cardholder decide. Move individual transaction history from the credit card over to the checking account while making the process as transparent as possible. With this type of strategy a plethora of benefits start to emerge. Flexibility is the name of the game here with regards to late fees, debt counseling, fraud protection and increased rewards.
Get serious about underwriting. Credit bureau data alone may not be enough to drive aggressive growth goals. In this post-recession environment, bureau data can produce lower than necessary approval volumes. Leveraging DDA cash flow information can make a real difference in the mid- to low-prime segments.
It is easy to be drawn in by the lure of a shiny new credit card offering. As with most new ventures, there can be pitfalls. A few words of caution regarding the following:
Don’t try to outsmart the mega issuers at their own game. It is extremely difficult to break into the established partnerships with the airlines, big box stores, and national clothing chains. Equally tough is to compete in the marketplace based purely on price (interest rate, rewards value, etc.). Instead, market to existing customers who can relate to the value of personal service.
Just because you built it doesn’t mean they’ll come. The credit card industry enjoys a healthy dose of competition between issuers. Putting the card on a Web site, a flyer at the branch, and direct mail is simply not going to cut it. Mid-size institutions have to build it, create a killer story around it, and hit the streets hard making sure everyone knows about it.
The credit card program is not meant to be a standalone offering. Going to market as a standalone offering means competing directly on price. It is very difficult to quantify a value proposition when you are being compared on a feature matrix. Mid-size institutions simply do not have the volumes necessary to compete with the likes of the top 10 issuers. Winning value propositions will be about relationships and convincing customers that institutions will be there for them when they are most needed.
While not everything paints a completely rosy picture; a significant opportunity exists today to make great strides in adding value to our customers and gain precious wallet share. With the right amount of strategy, integration, creativity and panache, customers will benefit and bottom lines will be strengthened.
To this I say – “Game ON!”
-Rackley
Whether you’re looking to launch a new Credit Card Program, choose a Card Vendor, Negotiate a Contract or Optimize your Payments Strategy, Cornerstone Advisors has the expertise to assist with your cards and payments initiatives.
Contact us today to learn more about the many ways we can help with your competitive strategies.
On a side note:
Total US debt in this country is also at a five year high exceeding 2.7 Trillion dollars, not counting real estate and mortgage debt.
Credit card debt would be much higher if the Credit Card Act was never passed.
Getting back to my point:
Keeping it simple for card holders is very important. With the statements now disclosing important information and making it VISIBLE for cardholders to see, is a step in the right direction.
This is an excellent post. I wish we could get Ryan Rackley to do a post like this on one of our sites.