By Ray Birch
PETERBOROUGH, N.H.—The credit card war is getting even hotter, but this time the price to play is being driven higher by consumers rather than the big banks, says one analyst.
While the average cash back reward is staying the same—about 1.5% of spend—what is driving up costs for issuers are increasingly savvy consumers redeeming their rewards more and expecting more rewards programs to be easy to use, especially through mobile apps, said Tim Kolk, principal at TRK Advisors.
“It is more expensive for issuers today than it used to be,” said Kolk. “Consumer behavior is making the game more expensive, and that has implications for credit unions. Because if consumers are learning to redeem rewards more effectively, that’s going to increase costs to run rewards programs.”
A Warning
He warned issuers, especially credit unions that are not paying close attention to their offerings, that if they have a “lackluster” rewards deal they will be most hurt by the higher redemption levels.
“You are getting the increased expenses now without gaining any real benefits from your program if your program is unappealing to your cardholders,” said Kolk.
Kolk emphasized that rewards programs must be very attractive in today’s market to compete with the offerings from the big banks, and cannot simply be a program that once it’s up and running is placed on the shelf with little attention to dialing into the needs of the cardholder base.
But rewards programs aren’t the only cost driver. Kolk said a slick apps that make redemption simple, easy and fun is also critical.
“Many cardholders now expect to be able to easily redeem their rewards at so many different retail locations and do it easily and on the fly,” he said. “I can pull up my Citibank ThankYou points card and on my phone, in five minutes, have an airline ticket in hand, if I know where I want to travel and when. I don’t think a lot of credit unions’ rewards programs are at this point yet.”
Cashback Catch-Up
While the big banks have defined the baseline cash back as 1.5% of spend, credit unions, even the smaller ones, have been catching up on that feature, said Kolk.
“There still are probably 1,500-2,000 credit unions that are behind on their rewards values,” explained Kolk. “Some have looked at this and are strategically OK with it, but a whole lot of others have not found a way to effectively analyze the situation and move forward. These are the credit unions that tend to look at credit card rewards as an expense rather than an investment. And if they don’t know the profitability of their card program it’s impossible to talk about what they can afford here. This is a common situation I have seen.”
Kolk warned that if credit unions simply sit still with their rewards programs and “let the market move around them,” those CUs will begin to get all of the costs and very few of the benefits from their rewards offerings.
Steps to Take
Kolk suggested several steps credit unions should take to enhance the performance of their rewards programs.
“You need to find ways to get more new accounts and increase spend levels so you can work against the rising tide of increasing expenses,” he said.
Kolk emphasized that credit unions need to dig into their data to make sure their rewards programs match their members’ expectations.
Tim Kolk, TRK Advisors
“They can do things like surveys, or just determine if their card program is growing,” Kolk said. “The credit union market’s card receivables are growing at about 6%-8% a year. Transaction volume in the entire credit card market is growing at 10% annually. So if a credit union’s card balances are growing less than 6% and their transaction volume is growing at less than 10% a year, that’s a clear indication the program is at least not performing at an average rate. CUs need to make some realistic assessments of their programs, and whether they are really willing to be the rewards provider of choice for their members. Because if they are not, they have to accept that they are not going to grow much in cards moving forward.”
Another Step to Take
Another important step to meet member expectations is to play strongly in the Visa Signature card and Mastercard World card space, said Kolk.
“These used to be considered cards for the affluent, but not anymore,” he said. “They are really a mass market product today. And the reason these cards are important to issuers is they carry a higher interchange rate than platinum cards—which means for every dollar of spend the credit union gets more, and more money to fund their rewards. Now this takes some work and expense to upgrade. More CUs are doing this, but the majority still are not.”
Bottom line, Kolk said, credit unions need to get to 1.5% cash back, upgrade to Signature and World cards, match programs to members’ needs, and then do some basic “blocking and tackling.”
“Do related things like giving credit line increases, running activation and usage campaigns, and talk to members about the benefits of your rewards programs,” Kolk said.
A Word of Caution
But Kolk cautioned CUs not to chat up their rewards offers with members if the program is lackluster.
“That will have a negative effect,” he said. “I have seen credit unions waste a lot of money talking about their rewards programs when their deals are weak. You are then spending money and not getting any results, and what’s a bigger concern is that you are negatively affecting your membership’s opinion of the credit union—jading them—because you are not talking about anything that matters to them.”