How to Succeed in the Credit Card Business (A Playbook for Credit Unions)

How to Succeed in the Credit Card Business (A Playbook for Credit Unions)

How to Succeed in the Credit Card Business (A Playbook for Credit Unions)

How to Succeed in the Credit Card Business

Following nearly a decade of ups and downs, the credit card industry is growing again – at more than 5 percent in 2015, according to Federal Reserve data. In fact, the industry is steadily working its way back to where it peaked in 2007, with nearly $1 trillion in total U.S. card assets today.

While credit unions have since increased their market share across this enormous industry, big banks still dominate the landscape. According to, the top 10 issuers generate 90 percent of the nation’s credit cards.

“Credit unions collectively hold approximately 5 percent of the U.S. credit card market, and they are swimming in this ocean with some very big fish,” said Tim Kolk, credit card industry expert and owner of TRK Advisors. “It’s true that credit unions have gained momentum with their card programs since the great recession hit, but big banks today are managing this business more effectively than ever, and now appear to be growing their card programs at a faster clip than credit unions for the first time since 2004”

How can credit unions reverse this trend and ensure the long-term success of their card programs? According to Kolk, a close look at how the nation’s top issuers operate holds insights.

Why the Major Players Are Winning

Kolk counts Chase, American Express, Capital One, Discover, Bank of America and Wells Fargo as industry leaders whose practices every credit union should analyze.

For example: Although American Express leans more toward the high end of the market and Discover toward middle income consumers, Kolk asserts that the product portfolios of these market leaders largely overlap. “Instead of focusing on capturing one consumer segment or another, the most successful issuers work every angle to capture all available segments – at all times,” said Kolk. “What makes these companies so successful is their ability to develop clear value propositions, craft highly targeted marketing messages and segment their customers according to individual cardholder behaviors.”

Kolk says Chase is the nation’s strongest issuer today, though he emphasizes that the company’s success is some extent due to its cobranded programs, offerings that credit unions can’t match. He points to Capital One as a more direct competitor for credit unions to watch.

“Capital One is very successful with its Quicksilver cash-back and Venture rewards cards,” he said. “These products have become household names because of Capital’s very aggressive, analytic, segmented and memorable marketing campaigns.”

What’s in Your Card Program?

To compete with the likes of Capital One, Kolk advises credit unions to think beyond the low rate cards that have traditionally anchored their programs, and to invest in top-notch loyalty products as well.

“This can be a sticking point for credit unions that view ‘cash back’ or points-based rewards as more of an expense than an investment in that member relationship,” he said.

“Consumers are bombarded with card offers today, and they are well aware that virtually any major bank will give them 1.5 percent cash back – and Citi now offers 2 percent. Travel cards today come with generous offerings of bonus points as well that consumers turn into valuable free perks. So even if you are offering the lowest rate in the industry, that value proposition is simply not enough to attract your enough of your members. Many simply to not care about rate at all,” he said.

Kolk cites Visa Signature and World MasterCard products as the new “Platinum” cards, especially for rewards, adding that the higher interchange they yield helps fund their loyalty offerings.

A Data-Driven Business

According to Kolk, a critical measure every credit union should take is conducting a focused analysis of member data, utilizing internal information in combination with externally obtained data to really understand how their members use credit cards in their daily lives.

“You need to clearly identify which members have your cards and which don’t (that’s easy), which are revolvers, which use your cards for everyday purchases, and which are heavy spenders,” he said. “Competitors such as Capital One likely have hundreds of segments they are addressing – or more. For the average credit union, we recommend honing in on five or six segments and building product, promotion and marketing initiatives around them. This can be done with only a few individual products.”

He emphasizes the importance of assessing your performance on an ongoing basis. “Card programs cannot be reviewed every few years, updated and then put back in the drawer,” he said. “Success requires both a watchful eye on your competitors, and continuous investments in tracking and improving your own program to meet evolving member needs.”

This depth of understanding also helps C-suite executives confidently invest in your card brands.

“The most common mistake credit unions make is having very poor performance reporting for their credit card programs,” said Kolk. “They may have top line trends and a sense of yield, but they don’t have a comprehensive picture of the program. So when they ask management for $10,000 to market a new card or marketing campaign, no one understands whether that is a sound investment.”

Kolk adds that the credit union’s card program – and its marketing budget – should be evaluated as an individual products for the purposes of investment decisions, with investments tied to specific targeted returns.

“Remember that the credit card marketing budgets of the biggest banks benchmark to 1 percent of their balances,” he said. “For a credit union with a $10 billion portfolio, that would translate into a $100,000 marketing budget just for credit cards each year. That may be more than an entire credit union’s marketing budget for the year. This is why the quality of your analytics, segmenting and messaging is so important. You don’t need to match a bank level of spending, but you need to spend something – and you need to make every dollar count.”

Where Credit Unions Shine

While big banks have much deeper funding and support resources for their card programs, Kolk reminds credit unions of one very powerful market advantage they enjoy: trustworthiness.

“This attribute is central to your brand, and should set the tone for all of your messaging,” he said. “For a credit union, the idea that your cards are always fair to the member resonates well – and is a strong point of differentiation.”

He adds that part of that trust stems from the close member relationships that credit unions are able to forge. “This dynamic gives you easier, more effective access to members, and inspires them to be more receptive to your product sets and promotional activities,” he said.

Credit unions benefit from significant advantages in their financial structure as well. “This includes lower funding costs, lower charge-off rates and lower return requirements,” said Kolk. “We estimate that these savings give credit unions up to a 300 basis point advantage over large banks, funds they can apply toward enhancing their card programs.”

He notes that the Durbin Amendment gives credit unions under $10 billion a sizeable interchange advantage on debit as well. “To leverage this revenue advantage over larger institutions, we recommend combining relationship rewards across debit, credit and other products,” he said. “This is an offer that large banks simply can’t match due to the legislation, and is one that serves your members well. Once you have a member in a relationship reward package they are much harder to pry away.”

He continued, “Over and over, we find that credit cards generate the highest ROA of any product at nearly every credit union – about 5 percent on average, versus less than 1 percent across all credit union products combined. So a strong card program is absolutely essential to your financial performance. But more importantly, it is one of the most valuable services you provide to members, and can greatly impact their overall satisfaction with your organization.”

For expert insights on the profound changes impacting card issuers, view the premium content recorded webinar presented by Mercator Advisory Group: “Issuer Investment to Help Navigate Industry Headwinds,” available exclusively from CO-OP Financial Services.

Issuer Investment to Help Navigate Industry Headwinds