By Ray Birch
GAINESVILLE, Fla.—A credit card war is just beginning among major issuers, say two experts, who caution that credit unions should not just be concerned over what the big guns are and will be offering—they need to reject long-held cultural restraints and target existing members and not new accounts.
“I do think there will be a credit card war and it will, of course, be centered around rewards,” said Bill Hardekopf of CardRates.com. “There is a huge increase in credit card rewards right now. I think what's happened is the credit market has opened back up and people are now spending. People, as the pandemic ends, are excited to spend because they've been locked up for a year and three months. They're excited to get out and travel and go to events and go out to dinner. I think consumers want to live again and the major credit card issuers are seeing that and thinking we need to capture as much market share right now as we can.”
Consumers’ credit scores and their credit card debt are contributing factors to the rewards battle that’s brewing, Hardekopf said.
“I think it shocked everybody when people paid down their credit card debt at record levels instead of building it during the pandemic,” said Hardekopf. “A lot of people are now free of card debt, many who weren't free of card debt before. I’m not saying they’re going back to their old habits, but I think people are more inclined to spend money now.”
And to attract those consumers looking to spend, the major issuers know they need to dangle attractive offers.
Bill Hardekopf
Hardekopf, who has been following credit cards and payments for many years, termed the rewards that some of the major issuers are now offering “incredible.”
“The Chase Sapphire card was offering a 60,000 point bonus. Now the card offers 100,000 points once you spend $4,000 in the first three months,” said Hardekopf. “The Venture Rewards card from Capital One is offering 100,000 points. And we're seeing a couple new cards offering cash back. Wells Fargo has come out with the Active Cash card, which takes direct aim at the Citi’s Double Cash card. It gives you 2% cash back on everything you spend.
“We’re also seeing Citi offering a card called the Citi Custom Cash card. You get a $200 bonus after you spend $750 in the first few months and then you get 5% cash back on the category that you spend the most amount of money in each month,” he continued. “That's pretty interesting; people have to keep tally of that. But you don't have to go in and register for increased rewards like you do on some cards. This card automatically gives you 5% back on the category and that you spend the most amount of money in.”
Hardekopf said there are rewards programs in the market now for just about any kind of credit card consumer.
“Again, they're trying to capture as much market share as possible right now while people are re-entering the spending mode,” he said.
Rinse & Repeat
Tim Kolk, principal at TRK Advisors, said the offers are focused on providing value in every transaction.
“Rewards lead that discussion, and we have seen a variety of 2% reward value cards hit the market in the last little while,” Kolk said. “Wells Fargo’s announcement is perhaps the most visible to the average consumer. But they will also be targeting extra value within specific merchant categories they think will resonate—perhaps domestic travel in the summer, for example. And this all gets supported by constant integration of the card transactions into their overall banking platform and messaging. It’s really a cycle of value, reinforcement, communication, recalibration….And then rinse and repeat over and over.”
Sound Balance Sheets
Tim Kolk, TRK Advisors
Not only are consumer’s balance sheets in surprisingly sound shape, but so, too, are the books of major issuers.
“The big issuers set a lot of money aside in reserves at the start of the pandemic,” said Hardekopf, noting no issuer has ever had to address risk in its card base during a pandemic. Plus, the big boys had the Great Recession in their rearview mirrors. They first thought, ‘Oh, my gosh, we are going to lose a lot of money,’ and set aside a lot of money in reserves. Now they have some extra money to use towards rewards offerings.”
How to Respond
What will credit unions have to do to compete?
“Given that about 80% of credit unions do not grow their programs at market average levels—at least on balances—that’s a challenging question,” said Kolk. “Those that compete well keep their programs calibrated to market expectations, and rewards value remains where we see the largest gap.”
Moreover, to compete credit unions must operate in the same “perpetual cycle” of fine-tuning offers within the baseline card program, targeting those to segments likely to value them, and then tracking and fine tuning the results, and doing it all over again, according to Kolk.
“And doing that all year, every year,” said Kolk. “CUs, overall, have not done too badly on balance gathering, insomuch as most are still below average, but they have done much less well at becoming the transactional card of choice. But doing what it takes when too many see any value provided to members as only an expense can be a real cultural challenge.”
‘Everyone Always Worries About This’
Kolk added it is not certain whether credit standards, which were tightened by most issuers as the pandemic stuck the U.S. in March of 2020, will loosen significantly.
“Everyone always worries about this…but I haven’t seen evidence of this,” said Kolk. “I don’t think anyone really believes the spending surge is likely to involve cardholders or prospects in the less-approvable credit tiers. It will be coming from those who weathered 2020 well and have pent-up demand. This is from the more comfortable cohorts of consumers. Loosening standards to gather more transactions seems unlikely to make much of a difference—specialty issuers aside.”
Kolk emphasized credit unions must improve their communications with cardholders.
“If I was a concerned credit union—which should be every credit union—I would spend my time making it clear why every transaction should be on my cards with existing and prospective cardholders alike, and not spend that time on finding 25 more accounts at low credit scores that we might be able to approve,” Kolk said.