Issuu on Google+

Sources brass|cu magazine, Bryan Sims, Editor and CEO. Credit Card Management Magazine, October 2003. “Credit Card Offers Stacking Up at Homes of the Newly Bankrupt,” New York Times, December 11, 2005.

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Filene Research Institute, COOL Solutions: Say Hi to “Y”, 2004. “Firms Aim Prepaid Cards at Young Consumers,” U.S.A. Today and CardWeb.com, 2003. Forrester Research survey of 5,216 North American youth. 2005.

BUILD CREDIT WITH “Y”

“Midstream: When Debit Cards Get Training Wheels,” New York Times, August 24, 2003.

They’re as big as the boomers.

National Association of Student Financial Aid Administrators Journal of Student Financial Aid. A Study by the Georgetown University Credit Research Center on college student usage of credit cards. November 2004.

Custom-fit, Online, and

“Small Payments Market Survey,” Peppercoin, Inc and Ipsos Insight, December 2005.

they’re fiercely Loyal!

They like financial services

Outrageous. And, oh yeah,

“Study of Consumer Payment Preferences 2003-2004,” American Bankers Association and Dove Consulting Group, 2003. University of Wisconsin Credit Union, Madison, Wisconsin, proprietary membership study of credit card use, 2004.

Filene Research Institute P.O. Box 2998, 5910 Mineral Point Road Madison, Wisconsin 53701-2998 608.231.8550 www.filene.org 1752-P1050(0106) © FILENE RESEARCH INSTITUTE

A Guide for Credit Unions


ACKNOWLEDGEMENTS The Filene Research Institute would like to thank PSCU Financial Services, the nation’s largest CUSO organization, for its generous financial support for this and pending studies of the under-30 population and the potential that young adults represent for the continued success of the credit union community.

The Filene Research Institute would also like to acknowledge Diane Gurtner, Jim Jerving and Bryan Sims for their contributions in creating this Special Report. The report includes examples and information from journalistic sources to add insight and understanding into

the young adult market. It also contains profiles of organizations, products, services, advertising and information in the public domain. This report does not endorse any of the organizations, products or services contained here. Also, please note all trademarks, patents and service marks are the sole property of their respective holders.

AUTHOR’S COMMENT In COOL Solutions: Say Hi to “Y,” we explored the Gen Y demographic and its influence on financial services, including the importance of aligning products and services with key life events—“the firsts” that occur between the ages of 16 and 30.

Mark Meyer Director of Innovation Filene Research Institute Madison, Wisconsin

Mark can be reached at the Filene Research Institute P.O. Box 2998 5910 Mineral Point Road Madison, Wisconsin 53701-2998 608.231.8554 markmeyer@filene.org www.filene.org

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COOL Solutions: Build Credit with “Y” is the second in a series of COOL Solutions special reports by the Filene Research Institute. The purpose of this report is to motivate credit unions to target the first creditbuilding opportunities of Gen Y, specifically first-credit card programs and student-loan products. Using journalistic sources and interviews, this thought-provoking report provides strategies and options for credit unions to create responsible credit-building opportunities for Gen Y, including the first debit or credit card, student loans and other gateway products.

Mark Meyer is Director of Innovation for the Filene Research Institute. He founded and leads Filene i3, a group comprised of next-generation credit union leaders focused on identifying and implementing new products, services or business models that will transform the credit union industry. Mark received his J.D. degree from the University of Nebraska and his B.S. in Business Administration from Northern Arizona University. He is licensed to practice law in Arizona and Colorado. The Filene Research Institute is a unique nonprofit organization that examines issues vital to the future of credit unions and the millions of members they serve. Its national research program is an ongoing source of innovative financial product ideas.


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BUILD CREDIT WITH “Y” Profiling Gen Y

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The Market Need

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Your First Credit Card Builds a Lifetime Relationship

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A New Profitability Model

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Case Studies

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Student Loans—A New Frontier

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Banks and Starbucks Embrace Plastic

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Gen Y Needs Credit and Education

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Concluding Thoughts on Building Credit With Y

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Profiling Gen Y Gen Y—a generation 76 million strong—is transforming industries as well as American culture. “The Dew,” Redbull and Jones, for example, are soda brands embraced by this market segment born between 1977 and 1995, diminishing the power of established brands like Coca-Cola. Who will emerge as the financial institution of choice for Gen Y? Will it be credit unions? It won’t be without some strategic changes. Credit unions today have a problem. In 2002, 18- to 24-yearolds made up 10% of credit union membership. In 2004 that number dropped to 5%, according to the Credit Union National Association.

Will your credit union provide an 18-year-old lacking a credit history a credit card with a $500 limit? In recent years, credit union membership and loan growth have sputtered. Interest income is sagging and the average member age is up to 47. Although some have recognized the power of Gen Y, few credit unions have expanded their lending products or policies to serve this demographic. Credit unions are starting to get Gen Y in the door, but many fail to offer starter lending products to meet their needs and lifestyle.

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Annual Membership Growth Credit Union Membership Growth is Sputtering

Source: As reported by Credit Union Times, July 2005

Should the average adult age of credit union members continue past 50, the results for credit unions will be devastating. An aged membership with diminishing borrowing needs will demand higher dividend rates. Credit unions may struggle to find investments with a higher return than member loans. “You can’t pay high dividends, if you don’t make more loans!” says Bob Hoel, executive director of the Filene Research Institute. The social purpose of credit unions is also being called into question. Credit unions have a rich history of providing loans that build credit and blend

financial education while enabling consumers to achieve the American dream. For a variety of reasons, credit unions appear to have tightened the lending belt on young adults.

Are credit unions relevant to today’s young adults? Could the lack of lending growth be the result of an aging membership with diminishing borrowing needs? Will the real tragedy for credit unions be a dying membership?


For most young people, one of the first financial products they acquire is a credit card. If your credit union fails to offer an attractive credit card package and other products like student loans, young members will turn to Citibank or other financial institutions. Citibank is making inroads to emerge as the premier financial services provider to Gen Y. Where Gen Y is, Citibank is, willing and able to assist in building credit. It’s not too late for credit unions to turn the tide, and like Jones Soda, create the emotional traction to earn the financial services business and loyalty of Gen Y.

2004 Credit Union Member Satisfaction Are Young Adults Satisfied with Credit Unions?

How does a credit union make the first step in creating a relationship with Gen Y while growing its lending portfolio? • Offer credit-building opportunities that align with Gen Y’s needs, including: stored-value, debit, first credit cards and student loans. • Stop treating “no credit” like “bad credit.” • Consider or evaluate how to expand risk-based lending efforts to include first-time loans for Gen Y.

Source: CUNA Economics and Statistics, 2004 National Consumer Survey

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The Market Need Credit unions should consider offering credit and debit cards to young adults because of the growing demand for plastic, aging baby boomers who are borrowing less and investing more, and the sheer numbers of today’s young adults. Banks are building lifetime relationships with Gen Y via creditbuilding products while many credit unions are slow to enter this market.

Credit and debit cards have become the preferred method of payment for in-store purchases, surpassing checks and cash for the first time in 2003, according to the American Bankers Association 2003-2004 Study of Consumer Payment Preferences. Checks and cash payments accounted for only 47% of consumers’ in-store purchases, down from 57% in 1999 and 51% in 2001. A young adult’s first experience with credit is likely to be with a credit card. Young people are driving this shift in payment preferences—they are more comfortable with technology as well as with debit and credit cards than their baby-boomer parents. A contributing factor is the retail trend to make purchases online, which usually requires a credit card.

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Plastic microspending is also on the rise. Credit cards were originally used for big-ticket purchases, such as a television or furniture. That has changed. Plastic cards are being used for all types of purchases, including a cup of coffee or a hamburger at McDonald’s. Younger consumers are also more apt to use plastic for small purchases, according to the “Consumer Small Payments Survey,” conducted in 2005 by market research firms Peppercoin, Inc. and Ipsos Insight.

Based on the survey, it’s estimated that 45 million Americans are willing to use credit or debit cards for purchases of $5 or less, an increase of 23% since September 2004. Nearly 20 million Americans have made an online purchase for less than $2 in the past year. “Credit and debit cards are steadily becoming a more common method of paying for low-priced goods and services, and not just in the online world,” says Matt Kleinschmit, vice president of Ipsos Insight, which helped survey 1,115 Americans age 12 and over. “This suggests that merchants, retailers and card issuers alike could benefit from increased consumer access to this type of transaction, as consumers appear to be increasingly willing to use credit or debit cards in small-payment purchases for a variety of items.”

Debit cards—which withdraw money from a checking or savings account immediately—are also experiencing rapid growth, especially from micro spending. In 2005, about 33% of in-store purchases were made with debit cards, compared to 21% in 2001, according to Dove Consulting and the American Bankers Association. Also, a recent survey by Teenage Research Unlimited identifies debit cards as the “in” thing for the younger crowd. Financial institutions are innovating to meet the emerging plastic-card needs of Gen Y. In 2004, more than five billion solicitations for new cards were distributed, according to a December 11, 2005, report in the New York Times.

One 21-year-old said he received more than 100 credit card applications from banks in the mail last year, but not one from a credit union. Credit unions are losing ground in the card market. Penetration in the credit union card market decreased in the third quarter of 2005, according to the credit card portfolio brokerage firm AssetExchange. To remain competitive credit unions must evaluate the lending products and policies on how they currently serve Gen Y.


Your First Credit Card Builds a Lifetime Relationship When you ask someone, “When did you get your first credit card?” the response is typically: “By the time I was 19.” When you ask, “How long did you keep your first credit card?” the answer is: “Ten years!” . . . How many times do you hear, “My first credit card was from my credit union!”? Most consumers select their first financial institution before they are 25, and they remain with this institution for about 15 years. Therein lies the challenge for credit unions—reaching young people who are simply not becoming members in the numbers needed to replace their parents. The result is a graying membership, relegating credit unions to minor players in serving young adults.

Credit card use has garnered negative media attention for tales of abuse by financial providers and increasing indebtedness of young Americans. Problems exist, of course, but progressive credit unions are offering credit cards and other programs geared to young members that emphasize responsible use of credit and earn a reasonable return on investment for the organization. Research and interviews with credit union lending executives point to a growing consensus: Debit or credit card programs, like checking accounts and student loans, are a portal to other services as well as an entrée to building a lifetime financial relationship with young members. If properly crafted, these programs can be a profitable anchor for a loan portfolio, especially during times of rising interest rates and shrinking margins.

Jean Yokum, president and chief executive officer of Langley Federal Credit Union in Newport News, Virginia, ($1.12 billion assets) understands the urgency to reach young members. Her goal in 2006 is to put a starter credit card in the wallets of each member who is a senior graduating from high school, before they go off to college. Her plan calls for parental involvement, an initial low-limit card and a special “platinum” brand to make the young adults aware that the credit union sees them as special. Visions Federal Credit Union in Endicott, New York, ($1.63 billion assets) has created a Lifestyle Chart that illustrates the concept of reaching young adults early with credit-building opportunities. The first product identified in the Smart Start Program is a Student MasterCard® for 18-to 24-year-olds.

Lifestyle Chart

Source: Visions Federal Credit Union, New York

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A New Profitability Model Credit cards contain an element of risk, but few financial instruments are as lucrative. The numbers paint a fascinating story. Visa®, MasterCard®, Discover® and American Express® earned about $2.6 billion in profit on prepaid card sales in 2003, a 73% increase compared to 2002, according to CardWeb.com. Credit card profits went up 163% from 1995-2003 to $30.2 billion, according to a report filed with the House Judiciary Committee. A case can be made for a new profitability model that emphasizes loans and manages risk—especially since loan delinquencies and chargeoffs are relatively low. Credit union lenders have instead opted for safety, avoided risk and been left holding the bag of shrinking margins. A frightening trend is emerging as credit unions are challenged to live on less. From 1990-2005, credit unions have seen a declining return on assets (ROA) and a negative ROA when fees and other income are removed from the equation. The traditional earnings model is at risk. This could affect credit unions’ ability to offer higher yields on savings programs.

“Credit unions have traded yield for safety,” says Tom Glatt, former executive vice president and chief operating officer of OnPoint Community Credit Union ($2 billion assets) in Portland, Oregon. “We used to make more unsecured and credit card loans, now we make mortgages and home-equity loans. We are seeing margins shrink and we have to look at other forms of income.” By changing the mix of the lending portfolio and avoiding unsecured loans, credit unions have made an “unconscious decision” to drop young adults, who represent a large market for unsecured loans like credit cards, Glatt says. Other financial institutions are reaping the profits of the credit card market. When it comes to offering credit card programs, many credit unions are adopting a risk-avoidance strategy rather than electing to exercise sound risk management. In essence, some prefer to use bankruptcy, plastic fraud and identity theft as reasons to avoid offering young adults a credit card. While the issues are real, a

Source Data: CUNA Economics & Statistics and CUNA Mutual Group

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“Today you need a 90-95% loan-toshare ratio, instead of 72-73%,” Glatt says. “You can still make money on low-yielding loans, but you need to make more unsecured loans, like offering credit cards to young adults who need and are building credit.” Despite reports to the contrary, young student members can handle credit cards responsibly.

A Georgetown University Credit Research Center study found that 88% of undergraduate student credit cards are, on average, paid on time and in good standing. The average for all adults is 91%. The average balance on a student credit card is $552, about one-fourth the size of older adults and one-third the size of a non-student cardholder. A membership study by the University of Wisconsin Credit Union ($800 million assets) in Madison, also found that 95% of charge-offs were from non-students.

CUs Greatest Challenge: Living on Less

New markets and additional sources of income are needed to buck this alarming trend.

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well-managed and diverse portfolio is profitable and a better strategy.


To Sell or Keep? A Tale of Two Card Portfolios

With the drop in interest income, some credit unions have opted to sell their credit card portfolio. Does selling the portfolio hamper the delivery of an effective credit card program to young members? Interviews with lending executives and the experience of two credit unions indicate that selling or keeping the credit card portfolio shouldn’t impact a credit union’s ability to offer an effective first-credit card program. Heritage Credit Union ($120 million assets) in Madison, Wisconsin, was formed in 1934 to serve Oscar Mayer employees. It is now a community credit union and is in the process of selling its card portfolio. “The portfolio is profitable now, but will we be able to defend it in the future?” asks CEO Bob Lestina. “Can we give it the focus and attention to compete with the large credit card companies? The answer is no.” Lestina says it makes more sense to invest resources in current products, and selling off the portfolio is a “win for the credit union, because the provider can give more options to your member. You need to give rewards and offer a platinum card to compete.” After selling its card portfolio, Heritage Credit Union will be able to serve young members with more options, such as

a 24-hour call center. Retaining the credit union’s identity is essential. “We still retain our identity and it’s invisible to members,” Lestina says. “The first services—credit card, car loan, student loan—are very important to establish the lifelong relationship. It allows you to have that member for many years.” Heritage did a financial analysis and found that the credit card sale was revenue neutral. Once the provider buys the portfolio—usually a six-month process—it handles the delinquencies and charge-offs. The provider also gets access to the credit union’s database for marketing purposes. A recent twist in the credit card market is that MBNA—a leading credit union partner in the plastic market—was recently acquired by Bank of America. It’s unknown how this acquisition will impact credit union member perceptions, as Bank of America is aggressive in many markets with retail banks.

Concerned by the departure of credit union credit card assets to the banking industry, Wescom and PSCU Financial have partnered to create a CU-owned card-portfolio purchase option. The complex deal involves Wescom’s CUSO

purchasing an industrial loan company and PSCU providing servicing to cardholders. The belief: those credit unions that do not have the economies of scale to support a credit card program will choose a credit union-owned purchaser of their portfolio rather than a direct banking competitor with real brick and mortar outlets. Larger credit unions tend to keep their portfolios because they have the staff and resources to devote to the processing, collections and fraud issues. Credit union identity and control are key retention reasons, according to Crystal Long, SVP consumer lending and remote services for GECU ($1.1 billion assets) in El Paso, Texas. “It’s important for us to keep our credit card portfolio,” Long says. “It’s a GECU card; if members have questions, we can tap into our database. Members associate the card with GECU. If you sell the portfolio, you are opening the door for the provider to market directly to the member. We don’t want to lose control of the process.” The marketing provided by credit card processors is “cookie cutter and generic” so that several credit unions can use it, Long says. This is an advantage, though, for smaller credit unions seeking economies of scale.

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With many Gen Yers thinking about computer games or the latest high school drama, credit cards and financial services can be a tough sell.

Case Studies Credit unions across the country are experimenting with innovative credit-building products to serve Gen Y. The following case studies offer insight into the dynamic of reaching young members via plastic cards and student loans.

GECU: Family Credit Card Crystal Long, GECU SVP of consumer lending and remote services, asked her daughter to serve in GECU’s pilot project for the first youth credit card, the “Family Credit Card.” She was surprised by the reaction. “My daughter’s photo was in the newspaper explaining the credit card program,” Long says. “She received a lot of flack from teachers in the school; they said it wasn’t a good idea. Credit cards are a hard sell to parents because so many people are indebted to credit card companies. Card issuers are viewed as vultures preying on innocent people. There’s a lack of understanding of what a credit card is.” To educate members about the credit card, GECU did radio and television commercials. GECU also set up booths at malls on “tax-free” weekends—a time period when a tax holiday is declared by the state of Texas and no sales taxes are collected. “We also go to vocational schools and teach classes—the importance of credit, protecting and not abusing your credit, and how important good credit is to your future, especially when you want to buy a car or a house,” Long says.

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“We need to tailor our image to be more appealing to the young adult,” Long says. “Financial terms are not sexy—they are stuffy to kids. I talked to a 20-year-old and he said that a credit union was something his grandparents belonged to.” GECU’s Family Credit Card requires a co-signer or sponsor. Controls on the card include an allocation of a specific line of credit. The program assigns a portion of a creditworthy member’s line of credit to other family members with an existing credit line. The amount assigned is deducted from the primary cardholder’s available limit. The primary cardholder can assign up to 10 separate credit card numbers with a minimum age of 13 for an assignee cardholder. Parents receive a courtesy statement that includes the transaction and payment history for assignees under their card. This encourages primary cardholders to monitor early credit activity and coach the assignee if there are problems. For example, Long sponsors a card for her daughter—a college student—with a $1,000 limit. Her 16-year-old son has a $100 limit. Both the sponsor and

the cardholder receive a statement and a credit history. This gives the sponsor the opportunity to monitor and mentor the young adult.

Window on activities “We go through the statement together,” Long says. “This gives me a window on my children’s activities; I know what my son and daughter are spending their money on, what they are doing, where they are going. It brings me back to what’s going on in their lives.”

GECU members have gotten creative in how they distribute the Family Credit Cards. “Cards were used up and down the generational levels,” Long says. “We have an example of a grandmother sponsoring a card for a grandson. Three brothers sponsor a card for younger siblings. Members have sponsored cards for their parents and spouses use it to give to the other spouse as a loan or an allowance.”

Credit cards for young adults are a great opportunity for credit unions since there is a “very large audience that is coming of age and we need to court them since they are tomorrow’s borrowers,” Long says. “Young adults are the viability for our future.”


Linn Area CU: profitable cards Linn Area Credit Union has a young membership—the average age is 37. The $130 million asset credit union in Cedar Rapids, Iowa, introduced the “Plugged In” credit card in March 2005. When members hit 16, they can receive a credit card with a parent’s permission and a credit limit of $500. If they handle the credit card responsibly, the limit increases each year, up to $3,000. At 23, members are transferred to a VISA® Platinum card. “We want to make sure that parents are comfortable with the program and that we have an educational element,” says Alice Hagerman, marketing director. The “Plugged In” credit card is offered at a 9.9% APR fixed rate, without an annual fee, and a 25-day interest-free grace period. The credit union’s Web

State Employees’ CU: Zard card Credit and debit cards are considered a natural progression of services for young members at State Employees’ Credit Union in Raleigh, North Carolina. Young members have their own Web site and program, “Zard,” which represents a lizard or chameleon that goes through changes—just as a teenager does. The Zard program has more than 40,000 members. At age 12, members are encouraged to start with “Z-Shares,” a savings account with a special rate. “Z-Checking” is offered to members 18 and under with a parent’s co-signing. Auto or personal computer loans are also offered. “You need to offer more than just a credit card; if you establish a

site (www.linnareacu.org) has a link to the “Plugged In” services—checking, savings and loans—for the qualifying members. An inventive feature is the “Credit Card Quizlet,” an educational piece that provides an introduction to credit cards. A voluntary quizlet is given at the end of the instruction with a prize for successful completion. The prize is a compressed T-shirt, packaged to look like the credit card. The credit card was designed after a survey of 60 young members. The colors chosen were a patriotic red, white and blue. Before the program started in February 2005, 101 cards were held among the 1,610 members age18 to 22. Through November 2005, that number was up to 268 cards among 1,926 members in that age group. The credit card program is viewed as a gateway to a primary financial relationship.

checking account, you’ll have the primary relationship,” says Leigh Brady, SVP of education services for the $13 billion asset credit union. “A lot of young adults start with a Visa® check-cashing card, or an ATM card. This gives parents a chance to help children manage their finances.” The Visa® credit card is offered at the same rate as adults receive—9.75% APR and a 30-day grace period. Young members start with a $250 to $500 limit and parents co-sign if the member is under 18. The credit union lacks separate numbers for the Zard credit card, but 16,136 Zard debit cards were issued from 2002 through November 2005.

“If you establish a relationship early, you’ll have the member for life,” Brady says. “Once they go away to school, they’ll be bombarded with offers.” The Zard program offers educational programs as well as “Sharebuilder,” an account that allows young members to invest in the stock market at whatever dollar amount they wish. “Work with the parents and establish those relationships,” Brady says. “Be sure to keep it simple. At State Employees’ CU the youth accounts— checking, money market, share term and loan products—are nothing more than our standard products. They’re just marketed in a different way.”

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Student Loans— A New Frontier The U.S. Department of Education is projecting education lending to grow from $48 billion in 2005 to almost $64 billion by 2009. With tuition costs and college applications on the rise, student loan programs are emerging as a sizable business opportunity for credit unions and provide another link to building a coveted financial relationship with Gen Y.

USC CU: profitable student loans Student loan programs have a checkered past due to the experience of banks and credit unions in the 1980s and 1990s. Technology and suitable platforms were expensive and difficult to locate. Credit unions that had programs lacked sufficient volume to earn a reasonable margin, and there were few outsourcing options. The Department of Education required burdensome procedures when loans soured, and financial institutions sought the guarantee. The lending environment has changed dramatically since 2001. Student loans now have the potential to be a lucrative and secure part of the loan portfolio.

“Credit unions need to revisit student loans if we are serious about making inroads in the 18- to 24-year-old market,” says Gary Perez, CEO of USC Credit Union in Los Angeles. “We’ve failed to develop credit union solutions to finance a young adult’s most important dream— a college education.”

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Regulatory compliance is easier and there are a wealth of outsourcing options. The technology is available and more affordable, and there is a strong and viable market for student loans. A sophisticated secondary market has also evolved to resell student loans, if needed, although many credit unions are “cash rich and loan poor” and will likely want to keep the loans, Perez says.

Department of Education charges an origination fee of 3% and most financial institutions pass this along to the consumer, USC Credit Union origination fees range from no fees to 1.5%, with the credit union picking up the difference. If the student makes timely payments for a period of 30 months, the interest rate charged is reduced up to 2 percentage points.

USC Credit Union ($250 million assets), keeps the student loans during the in-school years and later sells them in the secondary market at fixed-forward purchase-commitment premiums. The premiums range from 0.5% to 2.0%, Perez says.

Perez likens the evolution of the student loan market to mortgage lending in the 1980s, when credit unions were given the regulatory authority to offer long-term mortgages. The old studentservices model was one of simply putting up with students during their in-school years, something akin to a loss leader, with the hope of developing a profitable relationship with them after they graduated. The new model is profitable and offers services to students while they are still in school.

The credit union serves students, faculty and employees of the University of Southern California, a private school that costs around $45,000 a year to attend. With this hefty price tag, most students are going to need some type of loan to attend. Their credit union offers one of the best deals available anywhere, according to Perez. “We offer the lowest-cost student loan in the country,” Perez says. “Instead of reselling the student loan, we eliminate some of the fees and increase the benefits.”

Balance sheet friendly A closer look at the credit union’s student loan program reveals that it is hard to argue with Perez. While the

“Students can be profitable. They are our most profitable sector,” Perez says. “Student loans are balancesheet friendly, especially in a risingrate environment. They are variable rate based on a 91-day Treasury and guaranteed by the government.”

A statistic that would bring a smile to even a wary lender: USC Credit Union has not suffered a loss or even a delinquency on more than $300 million in student-loan originations since 1997.


UW CU: offering cards and student loans There are a few—albeit not many— credit unions that offer credit card and student loan programs tailored to young members. The $800 million asset University of Wisconsin Credit Union in Madison has a progressive tradition.

“Our research shows that 95% of all charge-offs for members without a credit history were due to nonstudents; students were responsible for only 5% of the charge-offs,” says Mike Long, VP of lending. “Of all of the new student accounts we open, 35% take out a credit card.”

The UW Credit Union Student Visa® is offered to students at the University of Wisconsin and Edgewood College. If the student lacks a credit score, he or she will start with a $1,000 credit limit. If payments are made on time, the credit limit is increased in increments of $1,000 on an annual basis. The APR is 18% or the same as its “D” paper members. Lower rates are offered to members who have already established a credit history. About 1,500 students sign up for the credit card each school year, and the numbers show that students are a good credit risk.

Student loans and rewards checking

The bank of mom and dad

Service 1st FCU: If you want to reach young members, you need to reach their parents.

Gen Yers are likely to choose providers based on recommendations from trusted sources: parents, peers and employers. A recent survey of 375 undergraduates revealed these and other findings, available in a Celent Communications report titled, “Gen-Y College Students, Financial Services, and the Web.”

Parents as catalysts With a nod to the influence of parents, MasterCard® offered the “Allow Card” in 2005 as a PIN-based stored-value debit card. The prepaid MasterCard® has more than 35 parental controls. Parents can limit their children’s spending by locking out certain merchant categories. Up to $2,000 can be loaded on the card. The Web site (www.allowcard.com) allows parents to load the card from any credit card, checking or savings account. The card is described as “changing the relationship between children and parents by building a strong relationship of trust, understanding, financial freedom and responsibility.”

Even though the annual cost of attending the University of Wisconsin is less than a private school, it is still considerable—$16,000 to $18,000. The credit union developed a program that is similar to the one at USC Credit Union. About 20% of UW Credit Union’s loan portfolio is student loans. The credit union waives the 3% origination fee for all student loans. If the student makes 36 on-time payments, the interest rate is decreased 2 percentage points. There is also a 25

basis-point reduction given for signing up for automatic-loan payments. UW Credit Union offers an alternative student loan program to cover costs unmet by traditional student loans. The alternative student loans have terms similar to other student loans, including deferment periods and terms up to 12 years. The current rate ranges between 7% and 8% and is based on the London Interbank Offered Rate, or Libor, which is a rate index that international banks dealing in Eurodollars charge each other for large loans. The 100,000 member credit union offers a rewards checking program and markets it on its student loan Web page. Four rewards checking accounts are offered, with no minimum balance requirements. To qualify, the student needs to use services ranging from Web statements, savings, credit cards, student and other types of loans.

More than 65% of college undergraduates ranked parental recommendations as “very important” or “important” in choosing a financial provider, according to the Celent survey. Service 1st Federal Credit Union ($100 million assets) of Danville, Pennsylvania, offered an “I Got It” event to educate students about credit cards and other financial topics in August 2004. At the event, the credit union received credit card applications initiated by the parents. “Parents are the catalysts and initiators of applying for credit cards,” says Linda Brown, Service 1st’s EVP. “Parents are the ones who ask about the details of the credit card. We need to marry the education to the credit card offer. Young adults are really novices with credit cards—they think the minimum payment is an easy payment and don’t realize how expensive it is.”

The parents were happy there were no hidden fees and no rate increases. They also liked the $500 limit on the credit card, says Brown. The “Credit Builder” credit card offered by Service 1st FCU requires a co-signer with a minimum credit score of 650 without any derogatories on the credit report. It was a new product that was launched at the “I Got It” promotion. The student must be at least 16 to qualify.

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students at fairs and campus events with gifts and other enticements.

Banks and Starbucks Embrace Plastic Other industries get it! The following are examples of innovators in building credit with Gen Y:

Citibank and MTV Citibank and MTV formed a partnership to offer a credit card for students. The “Citi® mtvUTM Card for College Students” represents a significant change in strategy. With its new card, Citibank rewards students for paying bills on time and paying more than the minimum monthly payment via “Thank You” points. Students also get rewards for building good credit and can save points to obtain coveted rewards, like tickets to the MTV Video Music Awards or tours of the MTV studios. The partnership between MTV, one of the most popular brands with young people, and Citibank is a wake-up call for credit unions, says Bryan Sims, 22, CEO and publisher of brass|CU, a money magazine for young adults distributed through credit unions. “This is the biggest push for young adults and college students the financial sector has ever seen,” Sims says. “The credit card is the first major financial product members of Gen Y purchase. Citibank has some of the best crossselling strategies. Their philosophy is to build a relationship with each customer through sticky products like bill pay.” Credit unions fail to do a good job of cross-selling, he says. “You can’t expect people to know what you offer,” Sims says. Citibank is one of the more aggressive players in the youngadult credit card market. It pursues

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“Citibank has decided they’re going to be the first to help a young person’s credit,” Sims says. “Credit unions need to ask themselves, do they want to be the first to help a young adult, or do they want to lend based on the credit history a young adult built at Citibank.”

Showering of gifts The showering of gifts falls beyond college tables. A promotional letter to a University of Minnesota student for a Citibank Platinum Select MasterCard® offers a free DVD player if approved. The card offered no interest rate for six months and after that an APR of 10.49%, a cash advance rate of 20.24%, a default rate of 29.24%, and a grace period of “not less than 20 days if you pay your total new balance in full each billing period by the due date.” The opening line of the offer would appeal to any 19-year-old college student’s interests: “Whether you use the Internet to shop, download music or when you make purchases online, the Citi Platinum Select MasterCard® is right for you. It gives you added security,

0% APR on purchases for six months and more—with no annual fees. Plus, respond now and you can get a free DVD player upon approval.” Citibank’s Web site lists four Visa® “college cards” for students. The table below summarizes some of the features of those cards. The college cards offer a number of benefits, including the “Thank You” points rewards program. Rewards are given for a “good gradepoint average,” which ranges from 250 points for a 2.5 average, to 2,000 points for a 4.0 average. “Thank You” points are also given for purchases at selected stores, paying on time, and staying within one’s credit limit. Rewards can be redeemed on the “Thank You Redemption Network” for gift cards, merchandise and travel. The Driver’s Edge Card offers rebates on used- or new-car purchases. Citibank also offers free online services—bill paying, 24/7 customer service, security options and educational information on its Web page. The Web page includes information on how credit cards work, using credit, how to gain financial control, fraud prevention and legal rights. The Web site also offers a free booklet, “Use Credit Wisely.”

Citibank’s College Cards Card

Rate

Special Offers

Citi mtvU Platinum Select® Visa® Card for College Students

• 0% APR on purchases for six months • 15.49% APR on purchases after six months • 29.49% APR default rate

• Earn up to 2,000 “Thank You” points a year for a good GPA • 25 points per month when you pay on time, and don’t exceed your credit limit • Earn up to 75,000 “Thank You” points per calendar year

Citi® Platinum Select® Card for College Students

• 0% APR for six months • 15.49% APR on purchases after six months • 29.49% APR default rate

Citi® Dividend Platinum Select® Card for College Students

• 0% APR for six months • 15.49% APR after six months • 29.49% APR default rate

• 5% cash back on all supermarket, drug store, gas station purchases • 1% cash back on all other purchases

Citi® Driver’s Edge® Card for College Students

• 0% APR for six months • 15.49% APR after six months • 29.49% APR default rate

• Rebates of up to $2,500 can be used toward purchase of new or used car, or purchase to lease • Earn 5% rebates on purchases for nine months, 1% after

Citibank Teen Credit Card

• Offered to youth between ages 13 and 19 as a supplement to a parent’s or guardian’s card

• Revolving credit limit • Discounts at a variety of stores

®

TM


Go Blue! Guerilla marketing and promoting freebies catches the attention of Gen Y. American Express initiated a marketing campaign in Chicago in September 2003 that featured a free concert by Sting, which drew a crowd of more than 40,000, according to Credit Card Management. The focus of the promotion was American Express® Blue Card, which contained a built-in computer chip that provided additional security for online shopping.

Visa® Buxx Card The Visa® Buxx card was launched in 2000 and positioned as a prepaid debit card that can be loaded online or over the phone. It allows the parents to monitor and review spending habits of their teenage cardholder. The Buxx card allows teens to only access the prepaid amount of money on the card. The Buxx Card has a zero-liability policy, which means the cardholder is no longer required to report fraudulent activity within two days and is not responsible for any fraudulent transactions made over the Visa® network. The policy covers all Visa® debit and credit cards with a few exceptions, according to Visa®. The marketing strategy for the Visa® Buxx Card is geared toward education, financial responsibility and ease of use. Teens and parents can access their account history online. Parents can suspend the account at any time. The Visa® Buxx card offers teens “financial independence within safe, comfortable, and structured limits,” according to the Visa® Buxx Web site. Parents can also automatically load a preset amount on a monthly basis to encourage teens to budget their money. A New York Times editor wrote about his experiences with the Visa® Buxx card after his daughter received the card from an aunt. James Schembari admits to being “very controlling with his children … I ask them how they are

spending their money,” he wrote in the New York Times, August 24, 2003. “Teaching children about money is not easy, but considering how it will consume their lives, it is one of the most important lessons we’ll teach them,” Schembari wrote. “The problem is we’re often not the best teachers. …They see us spending, but don’t see the bills coming in. When we don’t have cash for something, they see us pull out our credit cards. It’s like magic. And a horrible lesson.” Schembari praised the feature that allows parents to set up a system to receive e-mail alerts whenever the card is used. But the teenager may view the parental control through a dark lens. ‘’It’s a little like a big-brother syndrome,’’ said Rhett Z. Godfrey, 17, of Chester, N.J., who has a Visa® Buxx card. ‘’But it puts me in check. I took a few friends out to dinner and it cost $200. When the bill came in, I got the classic mother yell, when they scream your name a certain way and you know you’ve done something wrong.” MasterCard® has also jumped into the game and introduced a prepaid card called MYPlash, a reloadable debit card that can be stocked with a limited amount of cash. The card has pictures of music celebrities like Clay Aiken, appealing to young consumers.

Depending on usage, consumers can get up to 5% cash back on the Blue Card, which surpasses the usual 1% offered by reward programs. Customers who carry balances every month earn the highest rewards. The campaign also included posters on buses, trains, cabs and transportation centers.

Sugar or plastic with your latte? Starbucks offers wireless Internet service and in some locations the ability to download music. In 2004, the coffee connoisseur jumped into the financial-services arena by enhancing its stored-value card to include credit by introducing the Duetto™ Card. Two cards in one, the Duetto™ Card is a partnership with Visa®. That means customers can use it as a Visa® credit card, or it can be used as a reloadable Starbucks card in most Starbucks locations. Starbucks promotes the Duetto™ Card as fast, secure and with some pretty delicious perks. Rewards include extra “Duetto™ Dollars” or charitable contributions made just for signing up. With credit comes responsibility. A young adult buying a latte a day at almost $4 can spend over $100 a month on coffee, totaling over $1,000 during the freshman year at college or $4,000 over a college career. If all lattes are charged on a credit card, that serious caffeine buzz can be accompanied by some serious debt.

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Elements of a successful first credit program

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A Successful Young Adult Credit Card Program

Two immediate steps credit unions should consider in assisting a young adult in building credit: Avoid treating “no credit” like “bad credit,” and consider risk-based lending practices. Fair Isaac recently implemented the FICO expansion score to assist lenders to extend credit to consumers in new markets, such as the young adult. It is based on non-traditional data and attempts to predict risk for consumers that lack a traditional FICO score due to non-existent or thin credit histories. Also, a sizable number of credit unions fail to offer risk-based lending. The result is that many consumers are turned away from the credit union for their lending needs. Risk-based lending will enable credit unions to serve young adults.

• Avoid turning an applicant down simply for “no credit.” On average, a negative experience will cause someone to relay their bad experience to seven people through word of mouth.

Rewards programs can be meaningful— consider a rewards program that promotes a savings account or favorite charity. Build a brand difference. Consider taking what Starbucks is doing with its sense of community and charity programs to the next level. Offering an effective credit card program to young members includes a number of considerations, as summarized in the table at right.

• Charge a $20 fee if the card is not used at least once per year.

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• Automatically approve any applicant with no credit history up to a $500 limit. • Use credit-based lending practices with lower rates for high scores, and higher rates for low scores. For no credit, use a C-level rating as a standard. • Allow automatic limit increases from $500 to $1,000 if an applicant provides a copy of a student ID, military ID or proof of employment. • For limits over $1,000, do one of the following: verify proof of employment, increase credit based on the length the card has been held, or have a co-signor. • Issue cards to 16- and 17-year-olds with lower limits of $200 and $300. For higher limits, require a co-signer. • Reward cardholders for positive habits such as paying bills on time, and paying more than the minimum monthly payment. • Reward cardholders for using online banking, online bill pay, and e-statement features for reduced costs for the credit union, and increased activity of the member. • Reward members for maintaining high GPAs. • Avoid an annual fee. • Begin with 0% APR for the first six months and then begin charging interest. Source: Bryan Sims, Editor and CEO, brass|cu magazine


Gen Y Needs Credit and Education Credit unions are uniquely positioned to offer credit cards along with appropriate life coaching on credit use and education. One of the missions of credit unions—arguably the most important—is educating members about the importance of regular saving and the wise use of credit. Evidence suggests that young people need basic information and education about credit cards. These topics are not complex, but they can save young adults from serious problems later. A strong educational component is an integral component of a credit union’s young-adult credit card or student-loan program. Creativity can make this laudable outreach effort fun while earning the trust of young consumers. College toolkits, education seminars with a free concert by a local band, or visits to the local high school are just a few of the ideas credit unions have explored. As young adults build credit they will need help in understanding their credit score. Consumers’ credit scores can affect future loan eligibility, housing and employment. BestSource Credit Union in Pontiac, Michigan, implemented Smarscore, a program developed

by Filene i3. The credit union sends a quarterly credit score information packet to a specific membership segment. The mailing includes personal credit history and information about how to improve the score. Smarscore is an example of how credit unions can responsibly assist Gen Y in building credit. For more information on Smarscore visit www.filene.org and go to i3 project information. Credit unions should look for opportunities to assist young adults in saving and building wealth. One might consider a partnership with

Sharebuilder, a brokerage firm that does discount trading and partners with credit unions to allow members to buy small or partial shares of stock. The investment program is designed for those on tight budgets, like young adults. Visit www.sharebuilder.com for more information. Teaching the basics of credit and debit cards need not be complicated or time consuming. Some of the information can be posted on the credit union’s Web site. The table below provides a credit card primer for young adults that can be included in educational efforts.

Credit Card Educational Primer For Young Adults

• Consider using a debit card instead of a credit card. A debit card accesses funds on deposit; it can be used like a credit card without the potential damage. • Avoid cards with an annual fee. A majority of credit cards no longer charge an annual fee. • Read and understand all of the terms of the credit card agreement. Make sure you understand all of the fees. Avoid cards with multiple fees. • Avoid cards with an APR of 20% or more. There are many credit card offers with more reasonable rates. • Pay off the balance every month. If you are unable to do so, cut up the card. • Stay within your credit limit. If this is a problem, consider a credit card with a low limit of $500. • Understand that the introductory rate is typically for six months or more, and some card issuers use it as a “bait and switch” technique. The attractive introductory rate is often followed with an excessive rate after the introductory period is completed. • Keep track of your bills and pay them on time. The Universal Default Clause allows credit card companies to increase your interest rate if you are delinquent on any payment, even if you are up to date on your credit card. • Call your credit card company after your first late-payment fee. The first late-payment charge will often be forgiven if you have a good history of making timely payments. • Pay your credit card bill well in advance of the due date, preferably when you get the statement—waiting until the last minute invites a late payment fee. • Remember that a poor credit record can affect a student’s future employment, ability to get a car loan or a mortgage. • Notify your credit card company of your new address as soon as possible.

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pay attention to developing trends in new media channels, young consumers are just as likely to read and respond to printed material such as flyers, circulars, catalogs and newsletters that reach them through the mailbox.

Marketing considerations As credit unions reach out to Gen Y they must remember to evaluate their branding, marketing and communication efforts and consider today’s young adult frame of reference. Young consumers from 12 to 21 communicate much differently than their parents, according to a 2005 Forrester Research survey of 5,216 North American youth. Seven out of 10 youth say they go online daily, as opposed to 61% older than 21. And 83% of the young people use instant messaging compared to only 32% of online adults. Three out of four have a mobile phone. These findings reflect a growing comfort level with multiple forms of electronic communication. Marketing to young adults includes not just multi channel, but cross channel, according to Forrester Research.

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Young consumers’ attitudes “toward marketing are more receptive, and these users are more reliant on the advice and recommendations of their peers in addition to mom and dad. Viral marketers must tap instant messaging— the dominant form of electronic exchange among youth—but have little hope of joining users’ networks. The answer? Use e-mail and shortmessage service to initiate campaigns, and give users incentives to propagate the message via instant messaging.” However, direct mail efforts can be effective when it comes to solicitation for credit cards. Some 60% of Gen Yers who shop for credit cards online are more likely to respond to mail offers than e-offers, and 70% are more likely to open and read credit card offers in the mail than by e-mail, according to a U.S. Postal Service study released in October 2005. Although credit unions should

Robert Hogeboom, Chief Operating Officer, Building Brand Preference LLC, identifies the following critical elements for financial institutions in connecting with young adults: • Position yourself as a powerful tool that satisfies the emotional needs for personal freedom, control and lifestyle. • Highlight your ability to empower their unique and active lifestyle. • Sell your brand, distinct features or benefits, not generic financial services and benefits. • Foster a sense of belonging— promote brand ownership among young adults by projecting an attractive group identity.


Concluding Thoughts on Building Credit With Y Despite the possible debt trap and fraud issues, stored-value, debit and credit cards remain the most convenient vehicles for young adults to build credit, and are how they begin a lifetime relationship with a financial institution. Over the past century, credit unions have earned the trust of consumers. Credit unions can help Gen Yers get a handle on their first credit experience. If they are able to garner their philosophical spirit, credit unions can top the list as the preferred financial provider of Gen Y. This generation is a powerful demographic that can add loans to your books. Research, interviews and case studies provide a clearer view of credit usage with young adult members:

• Most consumers select their financial institution before they reach 25, and stay with this institution for about 15 years. • You can still make money on lowyielding loans, but you need to make more unsecured loans, like offering credit cards to young adults who need and are building credit. • Despite reports to the contrary, young members can handle credit cards responsibly. • Whether you sell or keep the credit card portfolio shouldn’t affect your ability to offer an effective credit card program to young members.

• Credit and debit card programs, like checking accounts and student loans, are a portal to other services as well as an entrée to building a lifetime financial relationship.

• Credit unions should consider strategies for marketing credit and debit cards to young people because of the growing demand for plastic, aging baby boomers who are borrowing less and investing more, and the sheer numbers of today’s young adults.

• If properly crafted, these programs can be a profitable anchor to the organization’s lending portfolio, especially during a rising-interest-rate and shrinking-margin environment. Most important—these programs provide services that attract young members and ensure future membership growth and survival.

• Credit and debit cards have become the preferred method of payment for in-store payments, surpassing checks and cash for the first time in 2003. Young people are driving this shift in payment preferences—they are more comfortable with technology as well as with debit and credit cards than their baby-boomer parents.

• Credit cards and financial services are a tough sell to young adults. Most are thinking about computer games or the latest high school drama. Credit unions need to tailor their images to be more appealing to young adults. • The student-lending environment has changed dramatically since 2001. Student loans now have the potential to be a lucrative and secure part of the loan portfolio. • Regulatory compliance for student loans is less complicated and there is a wealth of outsourcing options. The technology is available and more affordable, and there is a strong and viable market for student loans. A sophisticated secondary market has also evolved to resell student loans, if needed, although many credit unions are “cash rich and loan poor” and will likely want to keep the loans. • Parents are the catalysts and initiators of applying for credit cards. If you want to reach young members, you need to reach their parents. • Teaching young adults about money is not easy, but considering how it will consume their lives, it is one of the most important lessons we’ll teach them. • Think differently—outside your comfort zone—to reach this segment. Get edgy in marketing and keep your promises in service. Don’t pretend to be something you are not.

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Sources brass|cu magazine, Bryan Sims, Editor and CEO. Credit Card Management Magazine, October 2003. “Credit Card Offers Stacking Up at Homes of the Newly Bankrupt,” New York Times, December 11, 2005.

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S O L U T I O N S

Filene Research Institute, COOL Solutions: Say Hi to “Y”, 2004. “Firms Aim Prepaid Cards at Young Consumers,” U.S.A. Today and CardWeb.com, 2003. Forrester Research survey of 5,216 North American youth. 2005.

BUILD CREDIT WITH “Y”

“Midstream: When Debit Cards Get Training Wheels,” New York Times, August 24, 2003.

They’re as big as the boomers.

National Association of Student Financial Aid Administrators Journal of Student Financial Aid. A Study by the Georgetown University Credit Research Center on college student usage of credit cards. November 2004.

Custom-fit, Online, and

“Small Payments Market Survey,” Peppercoin, Inc and Ipsos Insight, December 2005.

they’re fiercely Loyal!

They like financial services

Outrageous. And, oh yeah,

“Study of Consumer Payment Preferences 2003-2004,” American Bankers Association and Dove Consulting Group, 2003. University of Wisconsin Credit Union, Madison, Wisconsin, proprietary membership study of credit card use, 2004.

Filene Research Institute P.O. Box 2998, 5910 Mineral Point Road Madison, Wisconsin 53701-2998 608.231.8550 www.filene.org 1752-P1050(0106) © FILENE RESEARCH INSTITUTE

A Guide for Credit Unions


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