(L-R) Barney Moore, Dawn Seward, Kathleen Krauss, Jeremy Faust
ORLANDO—The “credit card management hiatus”—which is what one panel of portfolio managers called the last seven years during which financial institutions have not had to regularly scrutinize their portfolios—is now over, thanks to the rising-rate environment.
Panelists at CSCU’s Solutions 2016 annual conference said it is time credit unions take a number of steps to manage credit cards to address the impact of rising rates—notably shrinking margins.
What it will take, certainly, is getting back to the practice of watching card markets closely as well as analyzing portfolios, member demographics, cardholder spending and their reaction to any of the CU’s pricing moves. It will also require staff education on card offerings and the rate environment, the panelists suggested.
“We are getting back to something that has largely just been on the horizon for a while in our space—an environment that we have not been in for quite some time,” said Barney Moore, portfolio consulting services manager at CSCU, who moderated the panel discussion. “Prime went to 3.25% in 2008 and did not change for seven years—unheard of.”
Moore suggested that the debate between CUs offering a fixed or variable rate product will likely escalate now, as variable rates can protect margins in a rising-rate scenario.
“But many credit unions consider offering a fixed rate is what makes them unique, as most banks don’t offer the product anymore,” said Moore. “For those people who want to carry a balance, a fixed rate gives them the comfort their rate won’t change, and this is often viewed as the more member-friendly option.”
Rewards Not Rate
Moore pointed out that the CARD Act has made it very difficult to change a fixed-rate card.
Moore, too, noted that a large segment of cardholders want rewards most and care little about rate, paying off the balance each month.
Dawn Seward, VP of lending from at the $550-million Zeal CU in Livonia, Mich., believes the CU’s fixed-rate offering can withstand two more increases from the Fed, but after that the card team will have to sit down and evaluate the program. “So this is concerning us.”
Kathleen Krauss, AVP of card services at the $330-millon Neighbors CU in St. Louis, said her CU is not concerned right now about its fixed-rate offering, saying the program can be maintained for a while through keeping costs down, which includes adding fraud strategies to limit losses.
For a variable product, which is all the $483-million People First FCU in Allentown, Penn., offers, Marketing Communications Specialist Jeremy Faust advised product line managers not to wait too long to raise the rate.
“If you wait for, say, three Fed rate hikes and increase your rate by .75%, is that received better or worse by the member than a series of small increases?” asked Jeremy. “I think the answer is that you have to understand your membership.”
No Noise From Members
Seward explained that her CU increased its variable rate earlier this year and has yet to hear any negative feedback from members.
“It was such a small increase, maybe we will hear from our members if we increase rates more significantly,” she said.
Krauss observed that hearing nothing from members now following a small rate hike does not mean they won’t react.
“Sometimes it takes people a while to get through their mail, and they may not realize for more than months that rate has increased,” Krauss said. “The sticker shock kicks in and they say to you, ‘Hey, I have had the same rate for years . . .’”
Panelists agreed that front-line staff must be ready to address those kinds of member reactions and be able to speak with account holders from an expert’s perspective. They reminded that it has been a long while since staff had to understand and explain prime rate in detail, as they did before the recession.
“Every week now we hold an hour of product training with our MSRs,” said Krauss. “Staff have to be educated and engaged to talk to members about their card options.”
That kind of skill, too, Krauss said, can help the credit union steer members to the card that fits their needs.
“Staff can get a feel if the member is rate driven or rewards driven and move them to where they need to be,” she said. “We hope this approach can increase card volume to help offset any margin decline.”
Lower Scores
Bill Lehman, VP of portfolio consulting services at CSCU, agrees that if margins shrink as rates rise that credit unions need to increase card portfolios. One way to do that, he said, is to risk price and offer more cards to more lower credit scores.
As far as whether it is time to move away from a fixed rate to variable, that is a decision that is based not only in the business plan of the credit union but on member demographics and the CU’s philosophy.
“So there is no right or wrong answer,” said Lehman. “Just keep a close eye on the portfolio and keep making the proper adjustments.”