Credit Unions

Deep Dive: Why CU-Issued Credit Cards Face An Uphill Battle

Customers weigh various factors when selecting their financial institutions (FIs). A recent study conducted by financial services provider Kasasa and The Harris Poll found approximately 84 percent of Americans determine the products and services they desire first, then search for banks or CUs that offer them. Seventy-one percent of respondents said credit cards were imperative when deciding the FIs with which they want to do business, for example.

“This means financial institutions must evaluate their existing offerings and ensure they are meeting consumer demand,” said Gabe Krajicek, CEO at Kasasa. “Otherwise, they will lose out to megabanks.”

Approximately 60 percent of credit unions — 92.7 percent of all CU members — currently offer some sort of credit card. Credit unions held $61.5 billion in credit card debt as of March 2019, according to the U.S. Federal Reserve, which was an increase of 8.1 percent from the year prior. Such rising popularity is good news for CUs, but only encompasses 6.1 percent of the nation’s $1 trillion total credit card debt. The figure is also dwarfed by the 89.8 percent of credit card debt held by banks.

The Appeal of CU-Issued Credit Cards

Credit union-backed cards offer several advantages, despite their comparatively miniscule market footprints. A CUNA study found that those from CUs typically offer lower interest rates than banks’ products, with the average for a credit union card coming in at 11.6 percent compared to banks’ 13.5 percent.

In fact, CU interest rates are capped by federal regulations. The Federal Credit Union Act, signed into law by President Franklin D. Roosevelt in 1934, gave the National Credit Union Administration (NCUA) the authority to set maximum credit union interest rates. It was set at 15 percent in 1980 and raised to 18 percent in September 2018, but is expected to revert back to the 15 percent in March 2020.

Consumers are drawn to CU-issued credit cards for reasons other than lower interest rates, though.

“You’re much less likely to be charged an annual fee for a credit union credit card,” Mike Schenk, CUNA’s vice president of research and policy analysis, said in an interview. “Only about 10 percent of all credit union credit cards charge an annual fee, compared with the 45 percent of banks [that] do.”

Schenk also pointed out that credit unions have much lower annual costs of ownership. Bank-issued cards average $101 per year to own, but CU-backed offerings cost $47. Late payment fees for the latter tend to be lower, too, at $22.50 compared to banks’ average of $35.

CU-Issued Credit Cards Struggle to Compete With Banks

Despite these advantages, credit unions’ cards face unique struggles  traditional banks do not have. The largest of these is the interest cap, which may be advantageous to customers, but makes it more difficult for CUs to compete with other card issuers due to a lack of capital.

Credit unions are also prohibited by federal law from accessing several revenue streams that are available to banks, including a cap on outstanding business loans at 15 percent of the CU’s net worth — or $100,000, whichever is greater. This lack of revenue means CUs often cannot match banks’ offered credit card rewards programs or signing bonuses.

Traditional banks have no cap on credit card interest, but the advantage is a relatively recent development. Many states had usury laws that held interest rates between 10 percent and 20 percent until 1978, when the unanimous Supreme Court decision in Marquette National Bank of Minneapolis v. First of Omaha Service Corp. held that such rules could not be enforced against nationally chartered banks. The ruling resulted in an explosion of credit card issuance: Thirty-eight percent of American households had credit cards in 1978, but the number ballooned to 71 percent by 2014.

Can Legislation Level the Playing Field?

There have been numerous legislative attempts to ensure fair competition among FIs since 1978. The most recent came in May, when Sen. Bernie Sanders (I-VT) and Rep. Alexandria Ocasio-Cortez (D-NY) unveiled the Loan Shark Protection Act. The bill imposes a 15 percent interest rate on all credit cards — bank-issued or otherwise — returning the cap to 1980 levels and placing credit unions and banks on a more even footing. It has been hailed by progressives not only for its significance to CUs, but also for its advantages to consumers.

“By effectively overriding the Marquette Bank [decision], which [was] based upon hotly contested and quite controversial interpretations of federal statutes, the Loan Shark Prevention Act would close one of the principal finance-regulatory loopholes allowing unjust and destabilizing exploitation to pervade our financial system,” Robert Hockett, law professor at Cornell University, recently wrote in a Forbes article.

Its reception by banks has been chillier, however.

“This specific proposal will only harm consumers by restricting access to credit for those who need it the most, and driving them toward less regulated, more costly alternatives,” Jeff Sigmund, senior vice president of public relations for the American Bankers Association, said in a statement.

Although the current partisan deadlock in Congress leaves the bill with little chance of becoming law, the future of credit union-issued credit cards makes for worthwhile discussion.

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