As the economic downturn that began in 2008 deepened, credit tightened, consumers switched to other payment methods and credit losses reached historically high levels. That landscape has changed dramatically. Today, a recovering economy and new payments-related regulatory reforms are converging to bring credit back in favor among both U.S. banks and consumers. Banks are increasingly well positioned to expand credit programs to enhance consumer loyalty, drive revenue growth and keep non-financial players from disintermediating account relationships.
Consumers, meanwhile, are better able to extend themselves financially, ramp up their spending and bring credit back into their overall payments strategy. Revolving balances are growing again and purchase volumes are also expected to grow by double-digits during the next few years, further evidence of an improving credit climate. Recent data from the Federal Reserve suggests that revolving balances are increasing while charge-off rates hover around 3%, their lowest level since 1995.
While the Credit Card Accountability, Responsibility and Disclosure Act (CARD Act) tightly regulates credit cards, credit programs still generate fee and interest income – as well as interchange that is not affected by the changes brought by the Durbin Amendment. Debit issuer studies confirm that all financial institutions have taken an interchange revenue hit, so growth-oriented banks should seize the opportunity to sell credit products to their customer base in an effort to improve their revenue streams and replenish their balance sheets.
It’s easy to see how offering a credit program can benefit banks. By positioning themselves as the one-stop source for card payments choices, banks that offer credit programs will encourage greater consumer loyalty and greater adoption of services, resulting in longer and more beneficial relationships. In hard-dollar terms, you’ll be building a business with the highest level of interest yield of any loan product while also earning critical additional fee and interchange income. For most issuers, credit card lending is the single highest return loan product they have.
Select a flexible and comprehensive solution that will meet your customer’s needs. Mine and analyze spend data, develop a clear understanding of performance goals and implement a marketing strategy to optimize the various aspects of your portfolio against the demographic and behavioral segments your research uncovers. Addressing credit payments opportunities begins with understanding customer demographics and financial habits.
Successful credit programs will provide clear differentiation from the many competing issuers trying to get consumers’ attention. Here are four critical steps to designing and implementing a unique credit program.
Offer a product value proposition that serves customers’ long-term needs. Growing and managing credit accounts is an ongoing process requiring a clear organizational commitment. For most financial institutions, that commitment increasingly includes offering a credit card with a rewards component to incent cardholder activation and usage. Mintel Comperemedia reports that eight in 10 credit card offers received by U.S. consumers contain some type of rewards. Offering a credit card product with rewards, such as cash back or travel rewards, is now nearly essential for financial institutions, especially those looking to compete with the largest banks for a share of the market.
Financial institutions should also strongly consider credit card offerings geared toward their more affluent customers. Not only is this market segment growing quickly, but affluent households are also able to spend more, are less likely to default and tend to have multiple relationships with their financial institution, including mortgages, investments and wealth management.
Embrace a multichannel customer acquisition strategy. Financial institutions have traditionally focused on the branch as the primary channel for credit card acquisition. However, as digital channels become increasingly important, banks and credit unions must also consider the benefits of acquisition through online, email and social channels. In 2014, Mintel Comperemedia found that 52% of all credit card applications are now through online channels.
There are also bottom-line costs to consider. According to a 2013 McKinsey report, online acquisitions can be 60% less expensive than direct mail and costs drop even lower for in-branch acquisitions.
While it’s clearly important to have a good digital strategy, financial institutions should also seek to optimize the branch channel by empowering front-line staff members. To accelerate application volumes in the branch, financial institutions should provide enhanced training regarding various credit card offerings and implement incentives for staff members who bring in new credit card applications.
Thoroughly analyze both risk and rewards strategies to reduce fraud and credit risk. Implementation of the proper fraud risk solutions will help protect both customers and the financial institution, and mitigate the impact of any data breach. It’s also important for financial institutions to accelerate implementation of chip-based cards using Europay-MasterCard-Visa (EMV) specifications to help protect against fraud for card present transactions, as well as tokenization to mitigate fraud for card-not-present transactions, including mobile point-of-sale payments using Apple Pay.
From a credit risk perspective, financial institutions should move away from offering a standard price across all customer segments. Not all customer segments are equally risky, and basing price on the credit risk each segment brings to a financial institution can greatly improve the profitability of an organization’s credit card portfolio.
Adopt digital channels for customer servicing. Customers increasingly expect their financial institution to provide robust mobile and online channels, in addition to call centers and the branch. Digital channels not only enhance the customer experience, they will also help lower a credit program’s operating costs. According to a July 2013 Javelin Strategy & Research study, an in-person branch transaction costs $4.25, while a mobile transaction costs only about ten cents.
Consumers are especially mindful of security in light of recent data breaches, with more and more consumers looking to new digital solutions to help fight credit card fraud and security risk. Self-service mobile card management applications help financial institutions improve customer engagement and reduce fraud losses by allowing cardholders to monitor and control how, when and where their cards are used. For instance, credit cards can be turned off when not in use, spending limits applied and transactions monitored or controlled for specific merchant categories.
Financial institutions must also engage with cardholders at key moments in the customer lifecycle. Ideally this would occur at regular intervals, typically 30 days after onboarding to encourage activation, three months later to reinforce the benefits and rewards of the credit card and in 12 months to encourage or reinforce engagement with the program. This regular contact helps ensure cards are activated once issued, and goes a long way in establishing a card as top of wallet.
Mr. Bansal is a vice president at Brookfield, Wisc.-based Fiserv. He can be reached at email@example.com.