Credit card issuers have traditionally relied on interest earned on revolving balances to generate the lion’s share of their card income. And while those customers paying high interest rates on revolving balances will remain an important revenue segment, issuers should also consider tapping into the revenue opportunity of interchange fees generated by affluent customers who use their credit cards but pay the balance in full each month.
Another reason to focus on consumers who pay their balances each month is that there are simply more of them. Post-recession, American consumers are working to rid themselves of credit card debt and are more cautious as a result of increases in unemployment, foreclosures, bankruptcy, and a decrease in home equity.
According to a Federal Reserve study, the number of families with credit card debt decreased from 25% in 2010 to 18% in 2013. According to a 2014 survey from the National Foundation for Credit Counseling, only about one in three U.S. adults say their household has revolving balances, down from 44% in 2009.
And even as the economy and consumer’s personal balance sheets improve, the aging baby boomers will likely continue to deleverage their finances to fund their impending retirements and be less likely to carry revolving balances.
Spend, Not Just Lend
Based on changing consumer habits, it may be time to look at the ‘spend’ side of the credit card business in addition to the ‘lend’ side and aggressively market to transactors as well as revolvers.
These transactors, long the domain of American Express, tend to be more affluent than those cardholders that pay only a portion of their balance each month. Additionally, they tend to have higher credit scores, are less risky and have lower loss rates. Whereas a middle market customer may charge a few hundred dollars per month, affluent transactors tend to use their card for thousands of dollars each month and then pay off the balance. The interchange income from these high value transactions can be substantial.
Transactors not only provide more interchange income, but these customers are less likely than revolvers to default on their balances.
Big Banks Smell Money
The biggest banks have been active in the affluent credit card market for several years, launching cards designed to attract affluent consumers and compete with American Express. For example, Chase’s Sapphire Preferred and Barclay’s Barclaycard Arrival Plus are marketed as high-end, prestige credit cards. Even the plastic on the card has a more upscale feel.
Capital One, long thought of as more ‘everyman’s’ credit card company, has aggressively marketed it’s uber travel card Venture to high-spend travelers.
Citi long the American Airlines co-brand credit card partner now markets the Citi AAdvantage Executive World Elite MasterCard. In addition to accelerated mileage earnings this card provides access to the American Airline Admirals Club. As with American Express Platinum with Delta Airlines
Visa and MasterCard are encouraging bank issuers to co-brand cards targeted to more affluent transactors as well. Visa markets the Visa Signature card as “the card that goes beyond ordinary rewards.” MasterCard describes it’s World Elite MasterCard as a “personalized service that can help you experience life’s most memorable moments.” These cards typically offer the issuer a higher interchange rate to encourage use.
Opportunities for Regional and Community Banks
Community banks can seize potential interchange revenue. While a small bank obviously can’t compete on a national scale like a Chase, Citi or Capital One, community banks can be successful in the affluent credit card market—if they make the strategic business investment, aggressively market the cards and revamp their rewards program.
No matter what your market segment, it’s likely that your customers include affluent consumers or business travelers who are carrying an American Express card in their wallet. You also likely have customers who have large balances in their demand deposit account but are accustomed to using debit cards. Those consumers may be interested in a credit card—perhaps positioned as a charge card with a rewards program–that is convenient to use.
To market the card requires an investment in product development and branding. Affluent customers may be debt averse so you’ll need a carefully crafted strategy that positions the credit card as a way to track spending while earning rewards for items they could pay for with a debit card.
Most credit cards offer rewards programs. Get off the ‘me-too’ rewards bandwagon and update your rewards program to engage affluent customers. Offer exclusive experiences such as VIP tickets to a sporting event or access to private wine tastings rather than earning points toward a flat screen TV or a tablet computer.
As a community bank, you can compete with national card issuers. Since your market is your existing customer base, you won’t need the same horsepower as a larger bank does. But you’ve got a weapon in your arsenal that the national brands do not: Access to data tied to people’s demand deposit accounts. You know how much your customers earns because their paychecks are deposited directly into accounts you maintain. You know what bills they pay and how much money they have left over at the end of the month. You know everything you need to know.