Nickels partnered with five credit unions ranging from $200M to $7B in assets. We analyzed a year’s worth of their member checking account data and collaborated with Filene Research Institute to report the results.
More than half of Americans revolve on their credit card balances, deflating their credit scores and depleting their savings, especially when they prolong their indebtedness by making smaller monthly payments than they could. Members’ card indebtedness presents an opportunity for credit unions to grow their loan portfolios and net interest margin, while bolstering members’ financial health.
Analysis by Nickels of five credit unions’ checking account activity found:
- Payments to card issuers among those with credit card accounts equaled an astounding 29% of their spending.
- About one-quarter of all checking account holders were identifiable revolvers who make more than the minimum payment each month, demonstrating both interest and ability to pay down their debt.
- The credit unions in the study could increase their overall loan interest revenue and net interest margin by as much as 25% and 17%, respectively, by making card refinance loans to these members (like those popularized by Lending Club, SOFI, and other fintechs).
- One credit union’s market test of refi loan offers among likely revolvers shows how this growth opportunity can be tapped.
Credit unions have long envied credit cards’ profitability, but most lack the size necessary to compete with the dozen or so issuers that dominate that market. In credit cards, scale matters and the largest companies invest hundreds of millions annually in national marketing campaigns and have the national reach to establish loyalty programs with major airlines, hotel chains, etc. are rewarded with dominant market shares.
This shouldn’t be a cause for regret: credit cards’ elevated profits depend mostly on chronic indebtedness among the quarter to a third of cardholders who are heavy revolvers and carry unpaid balances through most of the year. Our analysis shows that many credit union members are revolving debt on their credit cards—overwhelmingly to the top issuers. And a large portion of them are making sincere efforts to pay down their debt, making them attractive candidates for refinance loans.
Members who owe credit card debt are hidden to credit unions. We analyzed a year’s worth of transaction data from members’ primary checking accounts at five participating credit unions. Of members who use their credit unions for their primary checking accounts, about sixty percent made identifiable payments each month on credit cards not issued by the credit union, and those payments (both to cover recent spending as well as to pay off principal and interest debt) were equal to an astounding 29% of all payments debited from their accounts. That spending includes both lost interchange volume and interest that depletes those members’ deposits and savings. And three-quarters of those card payments were to the top six national credit card issuers.
Tools that credit unions can offer their members, like white-labeled versions of Nickels’ Credit Card Coach, can help members avoid adding to their debt (for example, by removing recurring expenses from their credit cards—or moving them to their debit cards). And they can help members overcome behavioral biases that issuers have exploited to prolong revolving indebtedness. (An example of such biases is the way many consumers vastly underestimate how long it would take to pay off their card debt if they just made the minimum monthly payment.)
Offering members who qualify for installment loans to refinance their card debt can enable them to accelerate their debt pay-down by lowering interest costs (allowing a greater portion of loan payments to go to principal) and by providing a commitment device in the form of a fixed term and equal monthly payments that are easy to remember and budget for. And it represents a growth opportunity for credit unions. Ultimately, helping members pay down their card debt makes more funds available for them to build savings and resilience, and it can help members improve their credit scores.
Our analysis indicates that among the three-fifths of checking account members who hold one or more “foreign” credit cards, nearly 40% (or about one-quarter of all checking account holders) are identifiable revolvers who are making more than just the minimum payment each month, demonstrating interest and ability to pay down their debt. Among the five credit unions who took part in this study and shared their members’ checking transaction data, the numbers suggest that making refinance loan offers to such members could enable the credit unions to triple their personal installment loan balances while immediately lowering members’ monthly interest costs and shortening their time in card debt
The Untapped Opportunity
Translating into dollar figures: the participating credit unions had combined assets of $17 billion, but only $315 million in personal loans outstanding. Adding another $534 million in personal loans (the amount of revolved balances owed by members whom Nickels estimates would qualify for refinancing) would add 3% to assets but provide a much larger bump to net interest margin, assuming such loans were made at between 9 and 12% APR, a typical amount for personal loans.
Card revolvers as a group aren’t a homogeneous bunch. Some use their cards in lieu of installment sales finance (of which newly popular buy-now-pay-later loans are a new form of competition) to make large purchases. Others use their cards regularly as a source of liquidity financing, racking up balances during cash shortfalls or to cover unanticipated expenses and trying to pay down balances when cash isn’t so tight. These borrowers present different levels of risk to refi lenders, but analysis of card spending and checking account transactions can differentiate one from the other.
Using analysis of checking account holders to target qualified revolvers (using evidence of making more-than-minimum-payments as a proxy for ability-to-pay), one credit union was able to obtain impressive results from a card refi marketing test: after identifying nearly 22,000 likely revolvers, they sent a single email and/or post card to 15,800 of those members and yielded a 1.2% conversion rate with over $2.4M of third-party card debt refinanced. The loans averaged $11,000, a 10% increase over their average
personal loan size for the same period of time.
How credit card management tools can build trust, lower credit risk, and bolster refi opportunities
Refinancing credit card debt helps those members who can avoid racking up more debt on their cards. Unfortunately, the experience of Lending Club, Prosper, and others suggests that reloading high card balances is exactly what many refi borrowers end up doing. As one credit union loan officer explained: “I would love to make loans to people who are over their heads in card debt if I could tell those who will succeed in avoiding more card debt from those who won’t.”
Tools like Credit Card Coach start by asking the member to link their credit card accounts and make data on their card spending and repayment available to the credit union. The granular spending data provides more insight into how the member is using their credit cards that wouldn’t be available on a typical credit report. Moreover, establishing such links enables the credit union to provide immediate benefits such as helping the member fully understand how much they’re paying each month/year in interest and what recurring or discretionary card spending they can easily cut down on to reduce or reverse their debt accumulation. Most importantly, the member’s shared card data can enable the credit union to serve as a confidential coach, there to help the member pay down debt, build savings, and improve their credit score and overall financial health.
As most car borrowers are also card borrowers, such tools are also a promising way to expand relationships with indirect auto borrowers, something that has always seemed attractive in theory but elusive in practice.
Strategically targeting credit card revolvers to help them shed their card debt is a new and evolving art. The benefits to the credit union—increased loan revenue, expanded debit card use and interchange, and ultimately increased member savings and deposits—are readily apparent. The credit unions that participated in the Nickels study are committed to learning when and how members can best take advantage of coaching tools and refi loans as they test how to capture this opportunity.