George H.W. Bush’s acceptance speech for the Republican Presidential candicacy in 1988 was a classic, where H.W. spoke of a kinder, gentler nation. This often comes to mind when I deal with credit unions. There often feels to be innocence, or at least compassion for their credit card members, not least of which is the driving theme behind their capped interest rates which may not exceed 18% in the U.S. Market.
Today’s read comes from the Credit Union National Association, also known as CUNA, in their annual report to the CFPB, and an associated media analysis by the same.
- The CFPB is seeking input on several aspects of the consumer credit card market. This review marks the fourth such review of the credit card market, as required by the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). While CUNA continues to support the stated intent of the CARD Act, which is to eliminate predatory credit card practices.
- Credit cards as a service offering (measured by if the bank or credit union reported any outstanding credit card loans) is more common at credit unions compared to banks. 60% of credit unions serving 92.7% of all credit union members offer consumer credit cards, but only 18.21% of Federal Deposit Insurance Corporation (FDIC) banks had outstanding credit card loans despite banks holding most of the market for revolving credit.
- Additionally, if outstanding credit card debt is organized by a bank holding company, the top 10 bank holding companies (by outstanding credit card debt) control over 90% of the bank market, and have for most of the last two decades. As of 2018, the amount of credit card loans outstanding at credit unions stood at $62 billion whereas banks and the top 10 bank holdings companies had $903 billion and $856 billion in outstanding loans, respectively.
- Despite credit unions’ continued growth in the credit card marketplace, credit unions remain responsible credit card providers as evidenced by the industry’s low delinquency and charge-off rates.
- In fact, the delinquency and charge-off rates for credit unions’ credit cards remain lower than those of their bank counterparts.
The fact is that credit union credit cards are a cheaper offering than top tier issuers present.
- The Federal Credit Union Act caps credit union interest rates at 15% but provides the National Credit Union Administration (NCUA) Board limited ability to increase the cap in certain instances. During its July 2018 meeting, the NCUA Board approved a continuation of an 18 percent maximum loan interest rate for federal credit unions, effective September 11th, 2018 through March 10, 2020. Federal credit unions are unable to provide interest rates on credit cards and most other loan products higher than this threshold.
- Although the average credit union credit card interest rate is significantly below the statutory limit, the cap does potentially affect credit unions’ ability to compete with other credit card issuers. For example, credit unions can struggle to match other issuers rewards and signing bonuses when consumers chase extras instead of focusing on interest rates alone. There are also challenges associated with supporting a credit card program during in an increasing interest rate environment
Credit unions have an interesting history, as Wikipedia notes.
- Modern credit union history dates from 1852, when Franz Hermann Schulze-Delitzsch consolidated the learning from two pilot projects, one in Eilenburg and the other in Delitzsch in the Kingdom of Saxony into what are generally recognized as the first credit unions in the world. He went on to develop a highly successful urban credit union system.In 1864 Friedrich Wilhelm Raiffeisen founded the first rural credit union in Heddesdorf (now part of Neuwied) in Germany. By the time of Raiffeisen’s death in 1888, credit unions had spread to Italy, France, the Netherlands, England, Austria, and other nations.
- The first credit union in North America, the Caisse Populaire de Lévis in Quebec, Canada, began operations on January 23, 1901 with a 10-cent deposit. Founder Alphonse Desjardins, a reporter in the Canadian parliament, was moved to take up his mission in 1897 when he learned of a Montrealer who had been ordered by the court to pay nearly C$5,000 in interest on a loan of $150 from a moneylender. Drawing extensively on European precedents, Desjardins developed a unique parish-based model for Quebec.
With low rates, albeit less risk tolerance, credit cards offer consumers with a good option, and with several service providers dedicated to the market, such as PSCU and Co-op financial, features can often match mass-market lenders.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group