Credit card issuers are still targeting high-spending customers, who tend to be resilient to economic swings, but competition at the top is brutal and marketing costs are high.
At the other end of the credit spectrum, it’s a different story, and one that’s getting more lucrative to partake in.
Demand is rising for credit cards among younger and lower-spending consumers who eschewed credit cards after the economic crisis nearly a decade ago, and the new crop of credit card users is interested in perks that emphasize leisure over luxury.
“Our research shows younger consumers are just as interested in perks as consumers at the other end of the spectrum, but they want a different type of program where they can earn points fast, with high visibility about where they’re earning and redeeming rewards,” said Matt Freeman, head of credit card products at Navy Federal Credit Union, which serves military personnel and their families.
Navy Federal, which categorizes more than half of its new customers as “millennials and below,” this fall will roll out its first-ever American Express card with a set of rewards not covered by the credit union’s five other Visa and Mastercard credit card programs, Freeman said.
Millennials are a growing focus for other financial companies as well. Mastercard sees more credit card use by millennials and has made its rewards programs more flexible to suit them, Martina Hund-Mejean, Mastercard’s CFO, told The Wall Street Journal this week.
But targeting millennials can be a tricky path to profits, warned Brian Riley, credit card director at Mercator Advisory Group.
There’s no doubt the opportunity is huge. Millennials are the fastest-growing financial group, and the CARD Act of 2009 decreased issuers’ ability to market to students, exacerbating economic trends that have caused many millennials to have thin or no credit files, Riley said.
Steering too hard toward either end of the age or income spectrum is risky, and even among millennials, capturing a healthy mix of lower- and middle-income consumers revolving balances along with young professionals in higher income brackets who tend to pay off their bills each month is crucial for success, he said.
“Operating at the lower end of the credit spectrum requires caution,” Riley said. “While credit card issuers can take more aggressive lending positions with applicants who proved their reliability over many years, the issuer must be more conservative with lower-end segments, who are likely to have less income and softer credit scores.”
The largest credit card issuers, including Amex, Chase and Citi, have deep marketing programs and staff for products broadly targeting millennials, and sophisticated risk-management programs to offset those challenges, according to Riley.
“Small banks and credit unions have a limited play in the millennial market, but ironically they have the most to gain,” Riley said. “Some industry data suggests only 7% of credit union members are millennials between 18 and 24 years old, and not addressing this segment will create a larger spread between the average credit union member—at 47 years old—versus the average bank customer at 44 years old.”
Vienna, Va.-based Navy Federal, the nation’s largest credit union, is working to win and keep millennial cardholders by rewarding them for spending that is within their reach. Details of the Navy Federal More Rewards American Express Card have not been released, but Freeman hinted the card will focus on rewards for everyday purchases. The credit union's other cards have a mix of rewards for spending in various categories, including dining and gasoline.
“Younger consumers want to see results, and they like to accelerate the rewards they earn with cards that reward them more for specific activities, like going out to eat,” Freeman said.
The rewards can then be applied to experiences that are just out of reach, such as improved entertainment and travel options.
“Millennials care a lot about experiences, so perks like access to airport lounges, exclusive experiences such as early access to concert tickets or behind-the-scenes passes, all carry a lot of value,” said Kimberly Palmer, a credit card expert with the card-comparison site NerdWallet.
Millennials also tend spread their purchases more broadly than elite customers, who concentrate their spending on certain brands and merchandise categories to maximize their rewards, she said.
“The ease and flexibility of redemption is important to millennials who may not yet be loyal to a specific airline or hotel—they want to be able to redeem their points anywhere ... which is why cash is so appealing for its flexibility,” Palmer said.
Navy Federal made several tweaks to improve its credit card platform this year, including adding the ability for customers to freeze and unfreeze their cards in case of loss or theft, and displaying customers' credit scores within the mobile app.