The pandemic has fundamentally changed the way consumers use credit cards and the long-term profits financial institutions generate from these cardholders.
Consumers have used a portion of their stimulus payments to pay off their credit card balances, wiping out some $ 83 billion in credit card outstanding in 2020. These consumers have also shifted their spending from credit to debit.
Spending on credit cards has also evolved from experiences outside the home – dining out and traveling – to products to products loved at home, such as groceries, furnishings, delivery. food and streaming services. This change in the way cardholders use their cards not only impacted spending, but also the value of the travel-related rewards programs they no longer did or were doing as much.
Financial institutions (FIs) unable to align their credit card programs with their cardholder’s spending behaviors and customer service expectations risk losing cardholders and the profits earned from credit card programs. credit for the benefit of competitors who can.
FIs that issue credit cards earn income primarily through interest on revolving balances and interchange income; late payment fees and international transaction fees are secondary. Changes in cardholder behavior impact the ebb and flow of that revenue.
Finance charge revenues decrease when fewer people simultaneously renew card balances, while expenses related to supporting the card program remain the same or even increase. For example, upgrading customer service programs to resolve issues across all digital touchpoints and fraud management systems are necessary investments, as the cardholder pays a balance at the end of the month. or how much he puts on his card each month.
As cardholders evolve their relationship with card products, FIs will be challenged to create products and programs that reflect cardholder behavior, balancing the costs to operate the programs. to profit.
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Measure the performance of a credit program
Credit card programs are considered a high yield asset for financial institutions. The reality is that they can also be the riskiest of all loan assets in a highly competitive and dynamic market. A lot of “hard work” is involved in running a card program. Banks and credit unions need to constantly evolve their products and services by adapting their card programs and providing modern digital tools.
A critical look at credit card programs will lead to continuous improvement and enable leaders of financial institutions to make decisions that promote cardholder satisfaction and, ultimately, their financial success.
Understanding card program performance helps issuers balance future risk, expense, and investment with strategic planning and capital budgeting. This will force banks and credit unions to conduct ongoing performance reviews of their card programs. By evaluating performance, institutions can understand whether they are meeting the needs of their clients and members, maintaining a safety margin in their risk tolerance, and achieving a reasonable return for all these efforts.
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Banks and credit unions need to look at profit margins: card program pricing and expenses to manage the profitability of the program. Revolving credit card balances show large variations in profit due to high service costs, ongoing maintenance and the constant need to evolve with digital technologies.
In addition, credit card write-offs can represent a significant portion of a financial institution’s loan losses despite their relatively low balances. Since credit cards are an unsecured loan that the institution gives to the cardholder on a monthly basis, FIs should define the appropriate underwriting strategy taking into account economic conditions and product design.
New data suggests consumers are once again using their cards to make purchases for many things they gave up during the throes of the pandemic. Banks predict that consumer spending on cards will increase through the remainder of 2021 and into 2022, and an increase in card spending is already evident. It is now extremely important for card issuers to carefully consider economic conditions, as the actual flow of losses may change unexpectedly if the economy changes and for FIs to put in place underwriting criteria for their credit programs. credit card.
The dynamic nature of the credit card environment means that the design of card program products must balance a proposition that is both compelling to their customers with digitally-centric technologies and manages the risk and expense associated with running a card program so that it does not become a strain on the institution.