What Does a Low Rate Increase Through 2022 Mean for Your Card Portfolio?

After cutting its benchmark Federal Funds interest rate three times in 2019, the Federal Reserve followed up with two emergency rate cuts in March 2020 in an attempt to shield the economy from the devastating impacts of the COVID-19 crisis. The Federal Funds Rate now matches the historic lows of the 2009-11 Great Recession, sitting within a target range of 0-0.25%.

Don’t expect rates to rise any time soon. At the Federal Open Market Committee’s most recent meeting of June 9-10, 2020, Federal Reserve Bank Chair Jerome Powell anticipated “no rate increase at least through 2022.” The Fed’s goal is to get money back into the real economy, and the Fed Funds rate is one of its most potent tools.

Lower Rates Encourage Borrowing

In response to the Fed’s recent actions, credit card interest rates have fallen. Most credit cards carry variable rates tied to the so-called “Prime” rate, the rate banks charge their most credit-worthy customers. Prime is generally set at three points above the Fed Funds Rate.

As a result of the Fed’s actions, Prime has dropped by more than 2% since July 2019 and now stands at 3.25%. Actual credit card rates are much higher, since issuers charge their cardholders a healthy, self-determined margin over Prime to cover program costs and credit risks. That said, credit card rates have fallen as the Prime rate has dropped, now averaging 15.99% as of June 24, 2020, according to Bankrate.

With more than 40 million Americans having applied for unemployment benefits since March, lower borrowing rates are welcome relief. Many of these workers were already living paycheck to paycheck and carrying high credit card balances. Lower rates reduce both the costs of borrowing and monthly minimum payments.

How Do Low Rates Impact Credit Union Card Portfolios?

The link between interest rates and card portfolio profitability is complex. Certainly, as rates decline, issuers earn less interest income on carried balances. This is especially true in the current extremely low rate environment, as the rates credit unions offer their share depositors can’t be reduced any further. This creates a mismatch between the cost of funds and interest earned on credit balances, resulting in compressed net interest margins.

Yet, these low rates also present credit unions with an opportunity to grow their credit portfolios. For one, issuers can earn higher interchange income as cardholders increase their credit spend and are less concerned with their interest expense on balances carried from month to month.

3 Steps to Supercharging Your Credit Program

We recommend taking the following three steps today to right-size your payments portfolio and to address your members’ most urgent needs during the current economic downturn:

1. Analyze your members’ spending patterns: Now is the time to adjust your rewards program to meet your members’ current spending patterns and needs. For instance, if you notice your members are spending more on take-out dining and grocery shopping, you may wish to introduce triple points for those merchant categories. On the flip side, if members are spending less on travel and tourism, or at dine-in restaurants, it may make sense to reduce the number of points you offer for those categories to offset total program expense. Your credit union will benefit from higher spend in the most popular categories and increased member loyalty, helping to position your card top of wallet.

2. Talk up your credit union’s value proposition: Since all credit cards are offering low rates in the current environment, look beyond interest rate and promote the true value of your program. How does your credit program stack up against the competition? Focus on the additional benefits you offer, like rewards points, introductory fees, low annual fees and other unique perks.

3. Solidify your PFR: Now is not the time to penalize your members with late payment and over-limit fees. Many of your members may be struggling to pay their bills and they need your help in getting through these tough times. Taking an empathetic approach and being there for your members in their time of need will give a boost to your status as the Primary Financial Relationship (PFR) over the long term.

Bottom line: With interest rates as low as they can go, now is the time to review your credit and debit portfolios for profitability. Consider adjusting your mix of payment products and offering incentives (such as reward points, introductory rates and other benefits) to encourage your members to boost their credit spend.

Deb Wieczorek is Vice President, Portfolio Growth and Advisory, for the Rancho Cucamonga, Calif.-based payments and financial technology provider CO-OP Financial Services.