By Ray Birch
PETERBOROUGH, N.H.–Are CUs at an inflection point with their credit card programs? Will some CUs again look to sell their portfolios rather than compete with aggressive cash-back programs from other issuers?
One payments analyst thinks so. Tim Kolk, principal at TRK Advisors, believes credit unions must decide if they are going to beef up their rewards programs—meaning spending more on offers and making a smaller profit—or fall behind banks in this market space.
Kolk said those credit unions that decide they will ante up will need to do so now, as other issuers are already making significant investments in their rewards programs in 2016. He added that if CUs don’t meet banks’ reward programs head-on, they could not only lose lucrative card accounts, but high-net-worth members, as well.
“This is the main credit card story of 2015-2016,” said Kolk. “With card programs at very high, possibly record levels of profitability, the large issuers are escalating reward value to win new accounts. This is on both new account bonuses and ongoing reward value. They do this instead of offering lower rates because the consumer market has demonstrated, over and over, that it cares more about rewards than rate. Only a few credit unions have kept up, and it is a key moment for them to decide if they are up for this challenge or not.”
Relevant With Transactors
Kolk said it is a simple decision: does the credit union, which serves its rate-conscious cardholders well, want to remain relevant with the high transactors, generally upper-end members?
“This is not just a credit card matter,” advised Kolk. “Because if the CU can’t meet these members’ credit card needs, these profitable members may question if the credit union can meet their overall financial needs.”
Kolk described what is taking place ow in the credit card space is “almost like back to the future,” noting that in the early 2000s CUs were getting whipped by banks on rewards programs before began stepping up their rewards offerings around 2004. That eventually led to overall CU credit card annual balance growth outpacing that of banks from 2005-2015. Kolk said in each of those years, on an annual basis, CU credit card balance growth exceed that of banks.
But the signs are not good this year, said Kolk. Not only are banks markedly improving their rewards programs—many offering 2% cash back—but the data shows bank card balance growth is now outpacing credit union balance growth.
“Now this is data at the six-month point of the year, and we will have to wait to see how 2016 plays out. But this is not good news for credit unions,” said Kolk.
What’s occurring is just another turn of the competitive wheel, said Kolk, as the credit card market is at historically high levels of profitability—for both banks and credit unions.
“And banks have decided they are going to spend some of that profit to make their credit card programs even more attractive to get more accounts,” noted Kolk. “They are accepting that they have to spend more on rewards to get more accounts and to keep their rewards programs growing.”
Recent WalletHub data underscores what is happening. The value of initial rewards bonuses hit a record high in the third quarter of 2016, at an average of $101.48 in cash or more than 15,000 points or miles available to new applicants. That’s more than a 300% increase in sign-up bonus cash and about a 120% increase in points and miles since 2010.
“The real question to credit unions is. ‘Are they willing to make less money on their card programs to keep meeting market competition and growing consumer expectations?’” said Kolk.
Kolk again noted he remains unsure how many CUs are keeping up with the challenge right now.
“I have seen some that are up to the task, and some that are really struggling with this,” said Kolk. “A good example of a credit union leading the charge is Baxter CU, which offers 2% cash back. Their portfolio is growing. Now I know other credit unions that don’t even want to offer 1% cash back. Their portfolios are not growing. There is only so much you can ask your members to do for you based on loyalty to the credit union. And if you are not meeting the offers they are getting in their mailbox every two days, well …”
Kolk acknowledged that it will be harder for small credit unions to remain competitive in the rewards space, as they face mounting human resource, compliance and capital pressures. Kolk said the smaller shops must rely more on their payment processors for assistance here. And it may also lead to a tough decision.
“I am starting to see renewed interest in credit unions selling off their credit card portfolios and letting someone else manage it,” said Kolk “They feel as if the burden is too much.”
More Selling Portfolios?
Kolk does not see a return to large numbers of CUs selling off their card portfolios, which occurred in the early 2000s. “I am simply seeing more credit unions discussing selling their portfolios now.”
But decisions on what to do must be made quickly, restated Kolk.
“Does the credit union want to compete in rewards or not,” he said, “because the price is getting higher. And if they want to compete, it is time to move. It can take two to three years to get a credit card program truly updated and changed, and lot of ground can be lost in that time.”