FIs rethink credit card program design as consumers rethink how they use them


The pandemic fundamentally changed how consumers use credit cards and the long-term profits financial institutions generate from those cardholders.

Consumers allocated some of their stimulus payments to pay down their credit card balances, wiping some $83 billion from credit card outstanding in 2020. These consumers also shifted spending from credit to debit.

Spending on credit cards shifted too, from experiences outside of the home — dining out and travel — to products to products enjoyed at home, such as groceries, home furnishings, food delivery and streaming services. This shift in how cardholders use their cards didn’t just impact spending, but the value of rewards programs pegged to travel they no longer did or did as much.

Financial institutions (FIs) unable to align their credit card programs with their cardholders’ spending behaviors and customer service expectations risk losing cardholders and the profits derived from credit card programs to competitors that can.

Monetizing the Shift

FIs that issue credit cards earn revenues primarily through interest on revolving balances and interchange income; late payment fees and international transaction fees are secondary. Changes in cardmember behavior impact the ebb and flow of these revenues.

Finance charge revenues decline when fewer people revolve card balances simultaneously while expenses of supporting the card program stay the same or even increase. For example, upgrading customer service programs to address issues across all digital touchpoints and fraud management systems are necessary investments, regardless of whether a cardholder pays off a balance at the end of the month or how much they put on their 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 at a profit.

Measuring Performance of a Credit Program

Credit card programs are regarded as a high-yielding asset for financial institutions. The reality is that they can also be the riskiest of all loan assets in a highly competitive and dynamic marketplace. There is a lot of “heavy lifting” involved in running a card program. Banks and credit unions need to ensure a steady evolution of their products and services by tailoring their card programs and providing modern digital tools.

Taking a critical look at the credit card programs will lead to continual improvement and empower financial institution leaders to make decisions that drive cardmember satisfaction and, ultimately, their financial success.

Understanding the performance of the card program helps issuers balance future risks, expenses and investments with strategic planning and capital budgeting. That will require banks and credit unions to continually conduct performance assessments on their card programs. By assessing the performance, institutions can understand whether they’re meeting the needs of their customers and members, maintaining a margin of safety within their risk tolerance and earning a reasonable return for all of those efforts.

Understanding Profitability

Banks and credit unions must look at profit margins: pricing of the card program and expenses to manage program profitability. Revolving credit card balances have significant variabilities in profits due to high servicing costs, ongoing maintenance, and the constant need to evolve with digital technologies.

Additionally, credit card credit charge-offs can make up a considerable portion of a financial institution’s loan losses despite their comparatively small balances. Since credit cards are an unsecured loan that the institution makes to the cardmember every month, FIs must set the appropriate underwriting strategy considering economic conditions and product design.

New data suggests that consumers are once again using their cards to make purchases for many of the things they gave up during the throes of the pandemic. Banks project that consumer spending on cards will increase during the rest of 2021 and into 2022 and an increase in spending on cards is already evident. It’s now critically important for card issuers to closely consider economic conditions, as the actual flow of losses can change unexpectedly if the economy changes and for FIs to put underwriting criteria in place for their credit card programs.

The dynamic nature of the credit card environment means that card program product design must balance a proposition that is both compelling to their customers with digital-centric technologies and manages the risk and expenses of running a card program so that it does not become a strain on the institution.

To learn more about the fees associated with running a credit card program, download Elan’s whitepaper Evaluating a Credit Card Program’s Profitability: Fee vs. Interest Income