ST. PETERSBURG, Fla.—The Fed’s move to increase the Fed funds rate by 25 basis points, only the second time the FOMC has raised rates this decade, could negatively impact margins and profitability for many credit union credit card portfolios, according to Chris Joy, principal with PSCU’s Advisors Plus credit card consulting team.
In a statement, Joy noted many credit unions have grown accustomed to notably high interest rate margins — often as high as double digits — as a by-product of the Fed’s policy of holding its target fed funds rate to steady, record lows over the past eight years.
As analysts look for an additional three to four rate increases to follow during 2017, Joy advises that the rising rate environment should rekindle questions surrounding credit card portfolios that carry non-variable or fixed APRs.
“As eight years of declining or stable funding costs shift toward a rising rate environment, credit union regulators, boards of directors and senior management alike will be seeking information regarding the impacts of rising funding costs on margins and profitability,” Joy cautioned.
According to Joy, credit unions cannot do as much as they once could to mitigate the impact of these declining margins given the restrictions of the CARD Act in 2009. Because issuers no longer have the regulatory latitude to change APRs at any time and for any reason, credit card portfolio managers must be particularly attuned to events in the marketplace and trends within their portfolios.
Joy said that he and his fellow PSCU credit card experts are recommending that credit unions begin by stress testing their 2017 budgets to address possible reductions in interest margins and profitability over a likely range of scenarios. Once credit unions have quantified those possible impacts, they will have the information they need to communicate to key stakeholders proactively to avoid surprises and develop plans to minimize risks, according to Joy.
For more info, PSCU has published a white paper, “Rekindling Questions on Non-Variable/Fixed Credit Card APRs in a Rising Rate Environment.” The white paper can be downloaded at www.AdvisorsPlus.com and www.pscu.com together with numerous other credit card consulting and marketing insights from Advisors Plus.