Pricing Card Products
As with enhancements, you do not have to offer the same rate to all of your cardholders. You are free to offer discounted rates to target markets,
whether it’s senior citizens or employees at the local college or customers who apply for your card during a special promotion. FIS allows you to code
multiple rates within a bank plan (each card product you offer).
Pricing your card also involves setting fees and certain terms of the account that will affect revenues. Be sure to check with your bank’s compliance officer or state regulators about any fee or pricing restrictions. Although there has been a competitive shift toward eliminating annual fees in recent years, some banks still charge between $15 and $20 a year for a card with rewards, but that will vary depending on your market and competition. An option here is to waive the fee in certain situations. The fee can also be waived for the first year after an account is opened.
Most community banks price their credit cards below national industry averages, but the comparatively small volume of their card operations prevents them from pricing at rock bottom. There are several reasons that community banks tend to price their card below average:
- They utilize conservative credit policies, which reduces their credit losses.
- Many banks use card accounts as a customer retention strategy.
- Lower prices are a solid competitive advantage against the industry giants.
- Credit cards remain a very profitable product, even at lower rates.
Depending on your objectives for your program, you may prefer to choose an Annual Percentage Rate (APR) that is low enough to be competitive, but not
lower than your cost of funds. The profit cushion of that approach enables you to fund an attractive enhancement package and a liberal marketing budget for
continued growth. Offering tiered rates (APR is lower for higher balances) encourages consolidation of balances on your card. Many banks are instituting risk-based rates to cardholders depending on their credit scores.
Pricing for User Segments
In designing and pricing a credit card, it is important to consider how it will be received by the three user segments of the card market.
Convenience users, also called transactors, tend to pay off their credit card balances every month. When they are shopping for a credit card, they are less concerned about the APR because they rarely pay interest. They will accept a card with overlimit and late fees, because they do not expect to pay them, but they are resistant to annual fees. Your bank still earns interchange revenue on all purchases.
Casual users use credit occasionally, such as after the holidays, while on vacation or in the event of a major unexpected expense. When shopping for a credit card, they tend to think that they are convenience users – and they evaluate the features of the card in the same way. This group makes up about a third of all card users.
Revolvers is the industry term for credit card users who typically carry an outstanding balance. When deciding which credit card to carry, they are interest rate-sensitive so they may be willing to pay an annual fee for a card with a low APR. Revolvers generate the lion’s share of industry profits, while convenience and casual users tend to produce fewer credit losses.
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