2 Missed Opportunities Common to Credit Card Portfolios
posted by Corey Skadburg, Director of Credit & Risk on Wednesday, April 5, 2017
Credit card conversions often come as a result of a credit union or community bank learning of missed opportunities within their portfolio. Today, we see most of these discoveries falling into two categories: pricing and/or credit limits.
Many community financial institution shy away from risk-based pricing. This leaves a significant opportunity on the table in terms of both revenue and cardmember satisfaction.
Setting custom-tailored rates to fit an applicant’s credit history does require specialized expertise, but the return is worth the extra effort. This is true not just for the financial institution, but also for members of the local community who may be turned down for credit with traditional underwriting. Risk-based pricing allows issuers to lend to consumers of higher risk and still be profitable.
Cardmembers are accepting of a switch in pricing when it is communicated early, often and in a way that provides the bigger picture. A smart issuer will communicate that the switch from one rate to multiple means a healthier overall portfolio. And a healthier portfolio means innovation and greater benefits, such as more robust rewards programs and digital / mobile integration.
Often community financial institution issuers will determine they have not been appropriately managing the credit lines of their existing cardmembers. As we know, consumer risk profiles change as individuals experience life’s ups and downs. For a financial institution, those ups and downs can be very costly.
When a cardmember has a positive change to his or her risk profile, that individual pops onto the radar of other, often larger, credit card issuers. With the resources to execute highly targeted marketing campaigns with customized offers, these issuers represent a sizable competitive threat. This is especially true if the community financial institution is not also recognizing the positive change in the cardmember’s financial wellness and offering to reward that change with an increased credit limit or lower rate.
On the flipside, not recognizing a negative change can open the financial institution up to the risk of unnecessary losses. Catching wind of those changes early in the process gives issuers the ability to limit dollars lost by decreasing the credit line to a level the cardmember can manage given his or her new circumstances.
Making changes to the credit limit based on changes in a cardmember’s risk profile does require a certain level of expertise, particularly with regard to regulatory compliance. Financial institutions have to be sure they are meeting Reg Z ability to repay rules, for instance. At the end of the day, the extra attention is well worth the returns, which come in the form of increased cardmember loyalty, spend and account-level profitability.
It’s so important to continually evaluate your credit card program for missed opportunities. If a conversion to a partner with the expertise and the resources to do that on your behalf is in your future, go into it with an open mind. Program decisions and settings made in the past may be ready for an upgrade that will not only benefit the financial institution, but the cardmember, as well.
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