The ABCs of Launching a New Credit Card Program

1. The ABCs of Launching a New Credit Card Program August 2012 Timothy Kolk tkolk@trkadvisors.com • (603) 924 - 4438

2. Why Are We Talking? • Credit card program and product design • Portfolio performance analysis and improvement • New (or reentering) issuer programs • Credit card program advisory services • Agent program development • Credit Card Management School (w/Callahan & Assoc.) • Expert testimony • Affinity & cobrand program development Market Knowledge; Best In Class Practices TRK Advisors

3. Contents for Today • Market Overview: Why Now? • How Can We Win? • Getting Serious: Steps & Time Required • Performance Benchmarks & Reporting • Getting Started TRK Advisors

4. PART 1Market Overview TRK Advisors

5. Credit Card Market Size Small Issuers control about 5% of this market. OPPORTUNITY $800 billion is a really big number. TRK Advisors

6. Market Share Growth Not bad! TRK Advisors

7. Credit Card Market Pricing This is for all existing cards. New card average rates are about 15% CARD Act + Economy = More Expensive Credit CEOs want Yield. Here it is. TRK Advisors

8. Credit Card Market Risk Net Credit Losses QtrCUsAll 11,Q1 3.6% 7.0% 11,Q2 3.2% 5.6% 11,Q3 2.8% 5.6% 11,Q4 2.8% 4.5% 12,Q1 2.6% 4.4% 500+bp <200bp Clearly things are getting better TRK Advisors

9. Things Are Normal Again? New programs start with a clean slate. Card Act is behind us (but with us forever) The economy is improving (if fragile) Credit risk is under control The market wants to grow again It’s a huge market Most credit unions have ‘cash to burn’ Loans are in short supply TRK Advisors

10. PART 2How can we succeed? TRK Advisors

11. 1st: Big Bank Advantages • Financial/Structural • Lower operating costs • Higher balances per account • Dedicated card marketing budgets • More sophisticated analysis: e.g. Profit scoring • Geographic diversity • Information/Relationship • Stronger data mining capabilities • Real time behavior monitoring • Ever improving risk analytics TRK Advisors

12. How Do You Compete? • Use Your Significant Advantages: • Financial advantages: liquidity, lower return hurdles, lower cost of funds, credit loss levels, cost per new account • Relationship advantages: proprietary internal data, multi-product viewpoints, behavior signals • Market perceptions: big banks are resented and distrusted more than ever • No home runs here, but when carefully brought into a product strategy they can add up to real value for your members TRK Advisors

13. Using Your Advantages • How to translate these into action? • Member value: • Lower APR? • Reward program structure? • Lower fees? • Propositions with a purpose! • Knowledge advantages: • Membership depth • Other products/expense leverage • Better access & response: lower cost TRK Advisors

14. A Word About Rewards • Debit rewards are tough, but Durbin does open an opportunity • Relationship rewards are a stronger strategy: tie in and incent everything • Large institutions cannot do this • But need more than travel/merchandise blah, blah, blah approach • If you want to get fancy: Leverage in-market merchant relationships (or build some) TRK Advisors

15. PART 3Getting Serious: Steps to Decision TRK Advisors

16. Functional Areas Impacted • Lending • ALCO • Collections • Legal • Marketing • Accounting • HR/Training Big meetings with many participants are awful. Big meetings with many participants are necessary. Underwriting Finance Technology Compliance Servicing Branch Systems Call Center TRK Advisors

17. Segmenting Card Prospects All Consumers High Risk Low Risk Declines Credit Users (Revolvers) Convenience Users (Transactors) 50%? 30%? 20%? Is card one product? TRK Advisors

18. Product Set? “Credit Card” is a different tool for different people. As the simplest level, it points toward a two product set structure: Rewards v Low-Rate Risk-based pricing within products, not across products CARD Act makes it very important to continuously monitor and manage the book of accounts (different from most other loans) ‘Starter’ or ‘Rebuilder’ products are nice too, but understand that cards with balances under $1000 are NEVER profitable for credit unions TRK Advisors

19. A Word About “Fixed” Rates “Fixed” rate cards can provide a marketing advantage, but beware of what happens later. Actually required to call them ‘non-variable’ CARD Act dramatically increased the risk to the issuer You cannot reprice existing balances, but variable rates are safer If the rate environment changes you have to decide when to raise card rates (100 bp? 200 bp? 300 bp?) When you do you have to disclose and allow 45 day notice. Real lead time is maybe 4-6 months. If rates come up more then you do it again…and maybe again… and maybe again TRK Advisors

20. Target the Value Proposition Use Existing Data to Develop Product Value Target Population Have Card No Card Too risky (for now) Possible Target You must proactively sell the card. No credit worthy person needs to ask for a credit card. Transactor Credit User Reward or Related Value Propositions Provide and prove best rate value TRK Advisors

21. Target The Value Proposition Once You Have A Portfolio Total Portfolio Understand your card holders. Know when they change Inactive Active Newly Long-Term Revolver Transactor New(ish) Established New(ish) Established The best managed portfolios have different propositions and messages for each segment TRK Advisors

22. Marketing/Analysis/Design Product Redesign The Virtuous Circle Product Design Learnings Marketing Programs No Functional Silos! Takes Real Leadership Results Analysis Formal Review Marketing discipline + program intelligence = Growth, Profits, Long Term Value TRK Advisors

23. Timeframe: 6 months or more • Build Business Case • Use actual data with real tactical planning • Educate Board and Management • Get resource commitment and prioritization • Processor Evaluation • Be careful: Control the conversation (negotiation) • Their incentives are not perfectly aligned to yours • DO NOT use their forecasts. Make them use yours. • Evaluate more than cost: go forward resources! • Program Design • Card Types & Pricing • Association Choices and Negotiations TRK Advisors

24. Timeframe (continued) • Marketing Gets Ready • Member segmentation/analytics • Develop sales materials tied to product design • Develop 12 month rollout calendar (by channel) • Existing Agent Relationship Is Severed • Make sure you understand termination windows • Understand marketing opportunities/limits • Rebrand decisions/portfolio buyback possibilities • Policies & Procedures Get Completed • Underwriting, Collections, …everything • Compliance closely involved TRK Advisors

25. Timeframe (continued) • Internal Controls & Integration • Develop scorecards and management reporting • Define responsibilities and ‘ownership’ • Integrate card information into MIF/Data warehouse • Get Compliance up to speed (serious!) • Build Internal Skills • Leverage processor and other relationships • Card Manager needs to be either found or built • Commit to education and development • Prepare Organization • Staff-wide preparation and education (advocates!) • Launch with a bang! TRK Advisors

26. The Biggest Mistake We See:A Messy Vendor Selection Process Sloppy work up front causes pain later! (Five+ years of pain followed by a conversion) TRK Advisors

27. PART 4Benchmarks & Critical Lessons TRK Advisors

28. Fact Based Expectations We have identified 50 credit unions that started new programs. These are their ‘vintage’ results. (12) (27) (38) (46) (50) This is a blocking& tackling business, not an easy one. We’ve seen actual business cases assuming things like: 10% penetration in year 1 Card as 5% of B/S in 2 years Or no plan! TRK Advisors

29. Fact Based Expectations Risk Management discipline needed at underwriting and ongoing forever for credit card. Credit Risk is Sneaky! Growth masks risk levels Card risk follows a pattern New accounts riskier than old Underwriting tools, resources and requirements are more sophisticated than they used to be. TRK Advisors

30. While Profit Isn’t Everything. … It Isn’t Nothing Either TRK Advisors

31. Build Scorecards Now! • Overall Trends and Ratios (monthly and yr-yr) • Balance and spend patterns • Accounts (in various categories) • Delinquency and charge-offs • A Real P&L • ROA and Net Income: All line items • NOT APR, NOT YIELD, NOT NLM: Full P&L • Expenses are the trickiest and least interesting to figure out • Marketing Program Results and Returns • New Accounts: Cost to obtain & activate, expected payback, etc- By Source • Portfolio Marketing: Activation results, Balance build, Spending incentives…know what you achieved • Be honest about costs: Prove it’s worth it TRK Advisors

32. Which Way Will It Go? The Good American Airlines FCU Relaunched 2004 Now at $120+ Million (2% of assets) 21,000 accounts (14% penetration) Average Balance almost $4,000 Credit Losses 2.2% in 2011 DQ about 1% of balances The Bad & Ugly Eastern Financial Relaunched 2001 Reached $45 million by year 4 (almost 3% of assets) Reached 16,000+ accounts (8% penetration) Credit losses exceeded 10% in Yr 4 They had other problems, but they failed and this did not help There are no guarantees. TRK Advisors

33. PART 5Closing TRK Advisors

34. Be Realistic This isn’t the business you had before Safest/Transactor segments are being bombarded Balancing rate-to-risk is more difficult than before Reward programs getting richer/fancier/smarter Integrating member data in portfolio management is difficult, but must be done Marketing $ are needed every year No guarantees on economy TRK Advisors

35. Be Serious Prepare for up to a year to launch Gather information from as many sources as you can. Invest some time (and maybe some $) Build your own business case in great detail Decide who ‘owns’ it Establish definitions of success before launch Track against those. Address variances fast Accept that the macro world is changing and be ready to (re)make your decisions as you proceed TRK Advisors

36. TRK Advisors Questions?

37. Thank You Timothy Kolk tkolk@trkadvisors.com • (603) 924 - 4438 You may want to consider: Credit Card Management School (Callahan & Associates at www.creditunions.com) Email me, link on our web site or Google “CCMS TRK”