Credit cards have become an integral part of most consumers’ financial lives and it’s no wonder why – they provide financial flexibility, revolving access to short-term credit, and often, a range of perks like cash back, travel points, and exclusive member access.
The benefits for issuers are even greater – they drive billions in revenue, create ongoing (often lifelong) relationships with cardholders, and generate mountains of actionable data. But the industry is incredibly consolidated and notoriously difficult to tap into. Just 15 institutions control over 90% of the $890B market, leaving the other 10,500+ smaller institutions to fight for a small piece of the pie.
Smaller banks and credit unions have made countless attempts to tap into the market, but they’re fighting an uphill battle. Despite offering lower APRs, fewer fees, and greater support, they struggle to compete against larger institutions’ reputations, budgets, and partnerships.
But there’s another way in.
The opportunity
Despite what the major card issuers would have consumers believe, credit cards are not all sunshine and rainbows. Over 150 million American consumers are indebted to the big 15 institutions, costing them over $115 billion in interest and fees on their credit cards each year. This leaves community banks and credit unions with consumers who have less money in their wallets, lower credit scores, and fewer banking opportunities.
Rather than expanding their credit card programs and trying to compete with the major issuers, smaller financial institutions should look inwards to unlock the revenue opportunity hidden amongst their consumers: refinancing.
By refinancing their consumers’ third-party credit card debt into their own personal loan and balance transfer products, community banks and credit unions can tap into the market while improving their consumers’ financial health.
Obstacles
So what’s stopping smaller institutions from refinancing their consumers’ third-party debt into their own loan products? A few things:
Lack of insight. Unless consumers are upfront about their revolving third-party debt, community banks and credit unions don’t know about it. And even if they are aware, they don’t have processes to keep track of or act on it.
Consumer behavior. The local, community-oriented feel of smaller institutions is a selling point for many consumers. However, since there is often shame associated with credit card debt, consumers may shy away from discussing it or visiting a branch if they don’t want others to know about it.
Nimble competition. Since credit card debt is often a private issue, some consumers take to the internet to find a solution. But as soon as they search for refinance options, they’re targeted by fintechs that spend millions of dollars on ads to beat traditional institutions to the punch.
Limited risk assessment. Revolving credit card debt hurts consumers’ credit scores. And since most banks and credit unions still rely heavily on credit scores to assess risk, many consumers do not meet eligibility requirements, even if they have a long history of making payments.
Lack of resources. Even though most banks and credit unions have the data to unlock these revenue opportunities, few have the resources to analyze it, identify candidates, create refinance campaigns, handle applications, and issue loans.
Rigid operations. Banks and credit unions operate on proven business models that have been in use for centuries. Creating new departments and processes for alternative revenue models is a drastic change that would take time, resources, and money that they are not ready or able to spend.
How can financial institutions take action?
It’s clear that thousands of community banks and credit unions are sitting on a massive opportunity, so what can they do next? In order to move forward, institutions must first consider how they will handle refinancing from an operational perspective:
1. Analysis
Institutions that want to help their consumers overcome debt and tap into the third-party credit card market can start with analysis. The opportunity is clear and the data is there, they just need to find the resources to dive in. By analyzing consumers’ checking account data, they can identify which of its consumers are paying which of the major providers, and how much they’re paying. However, without Nickels, they won’t know how much their consumers owe and whether or not they are revolving on their debt – two key data points for identifying refinance opportunities.
2. Outreach
After an institution has identified which of its consumers are paying the major providers, it can build an outreach campaign to connect with them. With dedicated landing pages and targeted offers, banks and credit unions can drive consumers to apply for their personal loan and balance transfer products. However, without deeper insights into their consumers’ payment patterns, institutions will only have a broad list of consumers paying the major providers and may struggle to target the right consumers at the right time.
3. Review
Once an institution has completed a refinance campaign, it should dedicate time to review and assess outcomes. This will help them better understand what is and isn’t working, where they’re falling short, and how to improve their approach. With the right resources, banks and credit unions can create processes for the entire campaign to turn it into an ongoing revenue stream.
A more effective and scalable solution
As a community bank or credit union, refinancing third-party credit card debt is not as easy as 1-2-3. It requires a great deal of expertise, commitment, time, and resources to execute, and many smaller financial institutions are not equipped to take on such a task. Fortunately, there’s a better way.
Nickels can analyze an institution’s checking account data to identify the best candidates for refinancing and quantify the market opportunity for refinancing their debt into loan products. Then, we can target the identified revolvers with the right messaging and timing to drive refinance applications. It’s a consistent, scalable process that allows smaller institutions to tap into the third-party credit card market by helping their consumers.
