Credit Unions' Credit Card Chimera

I don’t have stats to back this assertion, but it seems to me that credit unions are looking at the credit card market as a growth opportunity these days.

Anecdotally, after linking to a news story about how Chase would drop 15% of its cardholders as a result of the new regulations, one of my Twitter buddies tweeted “time to find a credit union card.” And the CU twittersphere jumps on every mention of CUs from Suze Orman, like this one:

Don’t get me started with these credit card companies….here’s the answer: Credit unions. So many credit unions are giving you no balance-transfer fees, low interest rates. [And] most credit unions aren’t staffed by the dumbest people you will ever meet.”

As a side comment here, I’m not sure why Ms. Orman thinks card issuers employ the “dumbest people you will ever meet.” Personally, I’m very impressed that my card issuer can detect fraudulent patterns in card use, and called me when they noticed that my card was used in both Massachusetts and Texas on the same day.

But the bigger question here is this: Why do credit unions think that the customers that the big issuers will drop are such a great business opportunity? Does it occur to credit unions that the reason why the large issuers are dropping these people is that they’re not profitable customers?

There’s a new definition of “good customer” in the credit card industry these days. The old definition: Someone who revolves balances and pays late. Translation: Someone who pays a lot in interest and late fees.

New definition: People who use their credit card a lot. These folks often don’t revolve, and if they do, don’t do it for long, and make way more than the minimum payment. They drive profits for the issuer through interchange fees, not interest fees. And they’re way more concerned about the quality of the rewards program than they are interest rates or balance transfer fees.

Translation: The card customers that credit unions are likely to obtain by digging through the large issuers’ trashcans may not be very profitable.

If credit unions see this a springboard to obtaining new members and growing the relationship, then why are so many CUs so proud of letting deposit accounts walk out the door when the member wants a good or better rate?

Credit unions can beat their chests all they want about how superior their card programs are. The reality is that only certain types of the cards they offer are a better deal. On the rewards front, the CUs are lagging. And that’s what luring and retaining the “best” cardholders today.

5 thoughts on “Credit Unions' Credit Card Chimera

  1. Pingback: CU Water Cooler » Blog Archive » CU Water Cooler 4/7

  2. Credit Unions are not digging through the trash cans of the mega bank issuers credit card customers- American consumers are retaliating against the numerous unfair and unethical practices from the banks- that the banks themselves caused- most of the movement has been by consumer choice.

    Banks have been unfair to their very best customers- those with credit scores higher than 760 and squeaky clean payment histories. Fair for someone with a 750+ FICO to have a 29.99% APR?

    Only 15% of a credit card programs revenue comes from interchange- so I don’t believe the “transactors” will be making any big money for ANY card issuer in the near future- hence the ridiculous fees banks are charging- not to mention the cost of the rewards programs. Card programs must have at least 70% of revenue coming from finance charge income to offset expenses.

    Are Credit Union credit cards for everyone? No- and certainly not the high end user accustomed to conceierge services, etc- but considering there is over $800 Billion in credit card debt in the USA, there is a pretty good indicator that credit union cards can be a good option for a lot of consumers- and not all consumers are high-risk deadbeats-

  3. Ondine: “American consumers” aren’t retaliating. A handful of vocal consumers, maybe, but not all, and I don’t even believe that it’s “many”. The government is taking the lead on this. A government that, on a daily basis, is seeing its approval ratings slip.

    Is it “fair” for someone for 750+ FICO to pay 29.99% APR? I don’t know, and I don’t care — because it’s not a valid question to ask. Is it “fair” for Maserati to charge $250,000 for a car? If you don’t want to pay that much, you go elsewhere. If someone w/ a FICO score of 750+ is paying 29.99% on their credit, it’s THEIR fault. People w/ credit scores > 750 should be doing their homework to understand their options and alternatives. (If I spill coffee on myself at McDonalds, should I sue them for serving me hot coffee? No. It’s called personal accountability).

    Ondine, I agree wholeheartedly that many of the banks’ practices have been wrong. But I won’t call them “unfair” or “unethical” because fairness is not an appropriate criteria, and ethical is a judgement call. Their practices were within the letter of the law. What was missing from their thinking and execution was the realization that their practices were not conducive to developing a long-term, sustainable relationship with customers. THAT was their failing. That, and the lack of foresight to see that if they didn’t proactively change their policies that some government would come in and do it for (to) them.

    And while it’s true that 15% of revenue comes from interchange (the data I’ve seen suggests it’s a little higher, but that’s getting nitpicky), it’s not about “making big money” from transactors. It’s about displacing lost revenue. Two-thirds of revenue comes from interest. All of it isn’t at risk. For the sake of an example, assume an issuer has $1m in revenue. So ~$667k comes from interest, and $180k from interchange. If 20% of the interest ($133k) is at risk because of regulatory changes, than how will the issuer recoup that lost revenue? If it can drive transaction volume and make an additional $60k in interchange, it will replace almost half the lost revenue. If you’ve got better ideas for how issuers can recoup the potential lost revenue, then you’re in the wrong business, because they’ll pay good money for those ideas.

    Where we also agree is that credit union credit cards aren’t for everyone. And that’s exactly what spurred this post. In all the discussion I’ve seen and had with credit unions regarding the credit card market, I don’t hear, nor do I get any sense, that there’s a lot of clarity about exactly who CU cards ARE for, and who they’re not for. That was my point. You clearly don’t like my analogy of “digging through the trash cans”, but when CU people react to a story about large issuers cutting off some percentage of their cardholder base, and seeing this as an “opportunity” for CUs, then the trash can image is the one that comes to mind.

  4. Card-issuing credit unions and community banks don’t long for new cardholders from among those dropped; rather those frustrated.

    Our clients offer an alternative for responsible consumers who pay their bills, maintain their credit ratings, understand the role of credit and yet still suffer fee hikes and limit slashes.

  5. If other issuers can’t make money off the cardholders who are frustrated and looking to switch, what makes credit unions think they can make a profit off these customers? I think the reality here is that many (if not most) credit unions have no idea whether or not the cardholders you describe — “pay their bills, maintain their credit ratings, understand the role of credit, yet suffer fee hikes and limit slashes” — will be profitable or not.

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