THE ABCS OF LAUNCHING A
NEW CREDIT CARD PROGRAM
AUGUST 2012
Timothy Kolk
tkolk@trkadvisors.com
• (603) 924 - 4438
Why Are We Talking?
• Credit card program and product design
• Portfolio performance analysis and improvement
• New (or reentering) issuer programs
• Credit card program advisory services
• Agent program development
• Credit Card Management School (w/Callahan & Assoc.)
• Expert testimony
• Affinity & cobrand program development
Market Knowledge; Best In Class Practices
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Contents for Today
• Market Overview: Why Now?
• How Can We Win?
• Getting Serious: Steps & Time Required
• Performance Benchmarks & Reporting
• Getting Started
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PART 1
Market Overview
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Credit Card Market Size
The Credit Card Market
Total Card Assets (Billions)
$1,200
$1,000
$800
$600
Small Issuers
control about 5% of
this market.
$400
OPPORTUNITY
$200
$0
'00
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'01
'02
'03
'04
'05
Total Revolving Balances
'06
'07
'08
'09
'10
'11
Credit Union Cards
$800 billion is a really big number.
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Market Share Growth
Change In Card $: Banks v. CUs
Change in Balances
60%
55%
50%
40%
30%
22%
20%
11%
10%
3%
0%
2001-2005
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2005-2011
Bank Growth
CU Growth
Not bad!
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Credit Card Market Pricing
Average APR: CARD Act & Market Impacts
16.0%
14.0%
12.0%
10.0%
8.0%
This is for all existing
cards. New card
average rates are
about 15%
CARD Act + Economy
= More Expensive Credit
6.0%
4.0%
2.0%
0.0%
2006
2007
Avg Rates
2008
2009
2010
2011
2012
Amount Over Prime
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CEOs want Yield. Here it is.
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Credit Card Market Risk
Bank v. CU Charge-Offs
10.0%
9.0%
8.0%
7.0%
6.0%
Net Credit Losses
Qtr
CUs All
11,Q1 3.6% 7.0%
11,Q2 3.2% 5.6%
11,Q3 2.8% 5.6%
11,Q4 2.8% 4.5%
12,Q1 2.6% 4.4%
500+bp
5.0%
4.0%
<200bp
3.0%
2.0%
1.0%
0.0%
'00
'01
'02
'03
'04
'05
Credit Union Charge-Offs
'06
'07
'08
'09
'10
'11
'12
Bank Charge-offs
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Clearly things are getting better
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Things Are Normal Again?
• Card Act is behind us (but with us forever)
• The economy is improving (if fragile)
• Credit risk is under control
• The market wants to grow again
• It’s a huge market
• Most credit unions have ‘cash to burn’
• Loans are in short supply
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New programs start with a clean slate.
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PART 2
How can we succeed?
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st
1 :
Big Bank Advantages
• Financial/Structural
–
–
–
–
–
Lower operating costs
Higher balances per account
Dedicated card marketing budgets
More sophisticated analysis: e.g. Profit scoring
Geographic diversity
• Information/Relationship
– Stronger data mining capabilities
– Real time behavior monitoring
– Ever improving risk analytics
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How Do You Compete?
• Use Your Significant Advantages:
– Financial advantages: liquidity, lower return hurdles,
lower cost of funds, credit loss levels, cost per new
account
– Relationship advantages: proprietary internal data,
multi-product viewpoints, behavior signals
– Market perceptions: big banks are resented and
distrusted more than ever
– No home runs here, but when carefully brought into
a product strategy they can add up to real value for
your members
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Using Your Advantages
• How to translate these into action?
• Member value:
–
–
–
–
Lower APR?
Reward program structure?
Lower fees?
Propositions with a purpose!
• Knowledge advantages:
– Membership depth
– Other products/expense leverage
• Better access & response: lower cost
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A Word About Rewards
• Debit rewards are tough, but Durbin does open
an opportunity
• Relationship rewards are a stronger strategy:
tie in and incent everything
• Large institutions cannot do this
• But need more than travel/merchandise blah,
blah, blah approach
• If you want to get fancy: Leverage in-market
merchant relationships (or build some)
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PART 3
Getting Serious:
Steps to Decision
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Functional Areas Impacted
•
•
•
•
•
•
•
Underwriting
Finance
Technology
Compliance
Servicing
Branch Systems
Call Center
•
•
•
•
•
•
•
Lending
ALCO
Collections
Legal
Marketing
Accounting
HR/Training
Big meetings with many participants are awful.
Big meetings with many participants are necessary.
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Segmenting Card Prospects
All Consumers
High Risk
Declines
50%?
Low Risk
Credit Users
(Revolvers)
Convenience Users
(Transactors)
30%?
Is card one product?
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20%?
Product Set?
• “Credit Card” is a different tool for different people.
• As the simplest level, it points toward a two product set
structure: Rewards v Low-Rate
• Risk-based pricing within products, not across products
• CARD Act makes it very important to continuously
monitor and manage the book of accounts (different
from most other loans)
• ‘Starter’ or ‘Rebuilder’ products are nice too, but
understand that cards with balances under $1000 are
NEVER profitable for credit unions
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A Word About “Fixed” Rates
• Actually required to call them ‘non-variable’
• CARD Act dramatically increased the risk to the issuer
• You cannot reprice existing balances, but variable rates are safer
• If the rate environment changes you have to decide when to raise
card rates (100 bp? 200 bp? 300 bp?)
• When you do you have to disclose and allow 45 day notice. Real
lead time is maybe 4-6 months.
• If rates come up more then you do it again…and maybe again…
and maybe again
“Fixed” rate cards can provide a marketing
advantage, but beware of what happens later.
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Target the Value Proposition
Use Existing Data to Develop Product Value
Target Population
Have Card
Too risky (for now)
You must proactively
sell the card. No credit
worthy person needs to
ask for a credit card.
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No Card
Possible Target
Transactor
Reward or Related
Value Propositions
Credit User
Provide and prove
best rate value
Target The Value Proposition
Once You Have A Portfolio
Total Portfolio
Inactive
Newly
Understand your card
holders. Know when
they change
Active
Long-Term
Revolver
New(ish)
Established
Transactor
New(ish)
Established
The best managed portfolios have different
propositions and messages for each segment
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Marketing/Analysis/Design
The Virtuous Circle
Product
Redesign
Design
Learnings
No Functional Silos!
Takes Real Leadership
Formal
Review
Marketing
Programs
Results
Analysis
Marketing discipline + program intelligence =
Growth, Profits, Long Term Value
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Timeframe: 6 months or more
• Build Business Case
– Use actual data with real tactical planning
– Educate Board and Management
– Get resource commitment and prioritization
• Processor Evaluation
–
–
–
–
Be careful: Control the conversation (negotiation)
Their incentives are not perfectly aligned to yours
DO NOT use their forecasts. Make them use yours.
Evaluate more than cost: go forward resources!
• Program Design
– Card Types & Pricing
– Association Choices and Negotiations
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Timeframe (continued)
• Marketing Gets Ready
– Member segmentation/analytics
– Develop sales materials tied to product design
– Develop 12 month rollout calendar (by channel)
• Existing Agent Relationship Is Severed
– Make sure you understand termination windows
– Understand marketing opportunities/limits
– Rebrand decisions/portfolio buyback possibilities
• Policies & Procedures Get Completed
– Underwriting, Collections, …everything
– Compliance closely involved
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Timeframe (continued)
• Internal Controls & Integration
–
–
–
–
Develop scorecards and management reporting
Define responsibilities and ‘ownership’
Integrate card information into MIF/Data warehouse
Get Compliance up to speed (serious!)
• Build Internal Skills
– Leverage processor and other relationships
– Card Manager needs to be either found or built
– Commit to education and development
• Prepare Organization
– Staff-wide preparation and education (advocates!)
– Launch with a bang!
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The Biggest Mistake We See:
A Messy Vendor Selection Process
Sloppy work up front causes pain later!
(Five+ years of pain followed by a conversion)
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PART 4
Benchmarks & Critical
Lessons
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Fact Based Expectations
Member Penetration Rates
10.0%
8.8%
8.1%
(27)
4.7%
5.0%
2.5%
(12)
6.7%
7.5%
2.1%
(38)
(46)
Credit Union
Average = 18%
(50)
0.0%
YR 1
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YR 2
YR 3
YR 4
YR 5
Card as % of Total Assets
2.5%
2.1%
We’ve seen actual
business cases
assuming things like:
10% penetration in year 1
2.1%
Card as 5% of B/S in 2 years
1.8%
2.0%
1.4%
1.5%
1.0%
We have identified 50 credit unions that
started new programs. These are their
‘vintage’ results.
Or no plan!
Credit Union
Average = 5%
0.5%
0.5%
0.0%
YR 1
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YR 2
YR 3
YR 4
YR 5
This is a blocking & tackling
business, not an easy one.
Fact Based Expectations
Delinquency Rates
2.5%
2.1%
2.0%
1.7%
Growth masks risk levels
1.6%
1.5%
1.1%
1.0%
Credit Risk is Sneaky!
Card risk follows a pattern
0.8%
Credit Union
Average = 1.2%
0.5%
New accounts riskier than old
0.0%
YR 1
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YR 2
YR 3
YR 4
YR 5
Gross Credit Loss Rates
3.7%
4.0%
3.5%
3.0%
Credit Union
Average = 2.5%
2.9%
Risk Management discipline
needed at underwriting and
ongoing forever for credit card.
2.5%
1.7%
2.0%
1.3%
1.5%
1.0%
0.5%
0.2%
0.0%
YR 1
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YR 2
Underwriting tools, resources
and requirements are more
sophisticated than
they used to be.
YR 3
YR 4
YR 5
While Profit Isn’t Everything.
New Card Program Returns
Return on Card Assets
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
Year 1 includes start-up expenses
-8.0%
-10.0%
Yr 1
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Yr 2
Annual ROA
Yr 3
Yr 4
Life of Program ROA
… It Isn’t Nothing Either
Yr 5
Build Scorecards Now!
• Overall Trends and Ratios (monthly and yr-yr)
– Balance and spend patterns
– Accounts (in various categories)
– Delinquency and charge-offs
• A Real P&L
– ROA and Net Income: All line items
– NOT APR, NOT YIELD, NOT NLM: Full P&L
– Expenses are the trickiest and least interesting to figure out
• Marketing Program Results and Returns
– New Accounts: Cost to obtain & activate, expected payback, etc- By Source
– Portfolio Marketing: Activation results, Balance build, Spending
incentives…know what you achieved
– Be honest about costs: Prove it’s worth it
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Which Way Will It Go?
The Good
The Bad & Ugly
American Airlines FCU
Eastern Financial
Relaunched 2004
Relaunched 2001
Now at $120+ Million
(2% of assets)
Reached $45 million by year 4
(almost 3% of assets)
21,000 accounts
(14% penetration)
Reached 16,000+ accounts
(8% penetration)
Average Balance almost $4,000
Credit losses exceeded 10% in Yr 4
Credit Losses 2.2% in 2011
DQ about 1% of balances
They had other problems, but they
failed and this did not help
There are no guarantees.
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PART 5
Closing
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Be Realistic
• Safest/Transactor segments are being
bombarded
• Balancing rate-to-risk is more difficult than before
• Reward programs getting richer/fancier/smarter
• Integrating member data in portfolio management
is difficult, but must be done
• Marketing $ are needed every year
• No guarantees on economy
This isn’t the business you had before
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Be Serious
• Prepare for up to a year to launch
• Gather information from as many sources as you
can. Invest some time (and maybe some $)
• Build your own business case in great detail
• Decide who ‘owns’ it
• Establish definitions of success before launch
• Track against those. Address variances fast
• Accept that the macro world is changing and be
ready to (re)make your decisions as you proceed
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QUESTIONS?
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THANK YOU
Timothy Kolk
tkolk@trkadvisors.com • (603) 924 - 4438
You may want to consider:
Credit Card Management School
(Callahan & Associates at www.creditunions.com)
Email me, link on our web site or Google “CCMS TRK”
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