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Want to Increase Share of Unsecured Credit? Help Shrink the Market!

Rather than seeking to compete on credit cards and unsecured debt head-to-head, credit unions have an opportunity to both grow revenue and improve member well-being by helping to reduce members’ revolving credit balances.

  • Corey Stone Senior Advisor at Financial Health Network

Executive Summary

This brief proposes something counterintuitive: that the best way for credit unions to compete in the lucrative market for unsecured revolving credit (principally credit cards) is to help members reduce what they owe. Research has found that consumers tend to regret their card debt and the overspending, inattention, or emergency borrowing that led to it. Credit unions that offer coaching and tools to develop repayment plans—and personal loans to members who demonstrate their ability to stick to such plans—will be taking a page from the book written by fintechs like Lending Club. And they will build members’ trust and financial health in the bargain.

What is the Research About?

With the exception of overdraft, credit cards are by far the most profitable of all mainstream credit products offered by depository institutions. Unsecured personal loans are a distant second. The consulting firm Mercator Advisory Group calculated the ROA earned by credit card banks in 2018 was, at 3.8%, more than 2.5 times that earned by commercial banks. Bank cards and retail cards grossed $116 billion in interest and fees in 2020, with roughly an additional $40 billion in revenue from interchange. In contrast, personal loans, the other major source of unsecured credit, grossed only $17 billion in interest. But credit unions have historically performed poorly in the credit card market and recently underperformed in the market for personal loans where they have long been strong.

But there are no obvious strategies for capturing market share in a market in which a mere 15 institutions account for more than 88 percent of outstanding balances. Like it or not, issuing credit cards is a scale game.

What are the Credit Union Implications?

Most credit unions likely have large portions of their membership who owe debt to other financial institutions that they regret taking on—or that they would like to pay down more quickly. Credit unions can proactively help assuage members’ debt regret by offering products that better meet their aspirations to control and reduce their debt. One candidate would be a coaching service that helps members avoid racking up more debt and pay off their existing card debt more quickly. Another—under the right conditions—would be personal loans for debt consolidation.

Filene's Center for Innovation & Incubation is generously funded by:

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