Despite COVID’s continued, stubborn grip on the economy, 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 June 2021 NCUA data, average credit lines across credit union issued card portfolios had increased just 1% year over year. Moreover, per NCUA data, average balances for credit union-issued cards with card balances fell by 5.9% year over year to just $1,677—well below the estimated $3,000 average balance for all credit card accounts.
So, what gives?
For one, banks are responding more quickly to the change in cardholder behavior and declining balances, by easing their underwriting criteria for new credit lines. 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 and 26.3 million in 2019. 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 sitting back and being very cautious with increasing credit lines and acquiring new accounts. Although on its face, this conservative approach may seem like a prudent risk mitigation strategy, it may have longer-term, unanticipated consequences. Specifically, credit unions’ reluctance to provide members with easy access to credit is driving some to adjust their payment behaviors by moving their bank-issued cards to the top of their wallets, while allowing their credit union-issued cards to sit unused.
Credit unions must adopt a two-pronged strategy to address this concerning trend if they wish to attain competitive credit portfolio growth while also boosting member engagement.
Strategy #1: Build Credit Balances – Carefully
According to CO-OP credit union portfolio data, credit spending saw a resurgence in late 2021 as consumer confidence improved. However, the story of credit card balances is not quite as positive. As of June 2021, credit balances remained down by 5.9% from year-end 2020. Balances have been improving slightly, but if mid-year patterns hold, then credit union balances will have grown at a slower rate than the bank segment for the first year since 2004.
For 2022, the low-hanging opportunities for credit unions lie within building balances – slowly. Credit unions should focus on rebuilding their existing member credit balances with consistent balance growth initiatives, paired with at least one credit line increase effort.
Strategy #2: Capture More Member Transaction Volume
However, 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 2020, the turn rate of the top 10 Visa and Mastercard issuers has increased from 2.1x to 4.0x and is predicted to rise to 4.5x by the end of 2021. Transactional success is a leading indicator of member engagement. If transaction volumes are not growing at the current market rate of 20%+ compared to 2020, 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 activate and optimize your loyalty 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 in 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.