DES MOINES, Iowa—Another expert is recommending that CUs consider plans for adjusting credit card programs, possibly moving from a fixed to variable rate and adopting risk-based pricing.
Cindy Williams, vice president of regulatory compliance at PolicyWorks, noted that with credit card competition significantly increasing, rising rates on their way, and the fact that card portfolio pricing does not turn on a dime due largely to compliance concerns, credit cards demand attention now.
Williams said that PolicyWorks has been receiving calls from credit union compliance officers to investigate their card portfolio options.
“One of the areas we’re seeing quite a few credit unions look at more closely is the credit card portfolio,” Williams said. “More specifically, the credit union partners we work with are exploring the conversion of their cards from fixed to variable rates.”
Big Banks
Addressing rising rates is just part of the reason why credit unions are investigating their card options. Analysts have stated that the big banks have stepped up promotion and pricing of their credit card offerings, particularly around rewards. CUToday.info recently reported that a credit card “rewards war” may be taking place.
Tim Kolk, principal at TRK Advisors in Peterborough, N.H., told CUToday.info that the major card issuers are escalating rewards value to win new accounts.
“This is on both new account bonuses and ongoing reward value,” he said. “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.”
Kolk noted that only a few credit unions have kept up, and that it’s time for them to decide if they are “up for this challenge or not.”
Also, a new report from Bloomberg indicates that issuers have sweetened rewards. Recently three of the biggest lenders—Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp.—said combined income from card operations dropped 15% to $3.1 billion in the third quarter from a year earlier. At the same time, expenses in their consumer-bank units rose 1% to $15.3 billion, a sign that these banks are dumping profits back into richer rewards programs.
Williams said that more credit unions are considering risk-based pricing, a strategy of moving from one rate for the entire portfolio to different rates for different cardholders.
“Fair lending concerns abound, so the credit unions PolicyWorks partners with make a concerted—and documented—effort to set pricing consistently across similar cardholder profiles,” she said.
Pricing decisions have a trickle-down impact and often affect card benefits, such as rewards, noted Williams.
“As competition for consumer loyalty and engagement heat up among issuers, credit unions have to consider how changes to pricing will impact the overall value proposition of the credit card as compared to those issued by the competition,” she said.
Many Factors To Consider
Williams said there are numerous factors to consider, as well as regulatory requirements that need to be applied to each decision.
“For example, cards teams have to consider how they plan to market their credit cards, being mindful of potential UDAAP concerns,” she said.
What does all this mean for credit unions? Long-range planning and some big decisions are needed, Williams suggested.
“Strategic planning is an incredibly important part of the credit card program evaluation. How much change is too much before members bail on the card? What may pricing changes do to the credit union’s bottom line? When should the changes go into effect and what are the compliance considerations? Just some of the many things to consider now,” said Williams.