Balance transfers can be a powerful tool for consumers who are struggling with mounting credit card debt, but such offers come with their fair share of risks. For consumers, there is the risk that rolled-over debt can avalanche if unforeseen circumstances arise and they can’t to pay off their obligations in time.
Because roughly half of consumers do not pay off balance transfers in the allotted period, issuers face the risk of default. However, as Brian Riley, Director of Credit and Co-Head of Payments at Javelin Strategy & Research, detailed in the report Credit Card Balance Transfers: A Consumer’s Opportunity and an Issuer’s Bet, significant opportunities remain for those small- to mid-market issuers considering credit card balance transfer products.
Paying the Piper
Even if there are risks for consumers, the benefits of a balance transfer, when leveraged properly, are substantial. The main benefit is it allows consumers to get off the revolving debt wheel and secure a minimal or zero interest rate loan for a fixed time period. Although customers pay a fee for this right, the long-term savings often far outweigh the costs.
For issuers, one of the main advantages to offering credit card balance transfers is they realize this fee immediately, which often ranges from 3% to 5% of the balance.
Additionally, balance transfers are a straightforward way to bulk up an issuer’s portfolio because the borrowers have been pre-screened and carrying over a balance is often a lighter lift. In turn, many crucial portfolio metrics get a boost, which is typically how financial institutions gauge their performance.
Although the consumers who leverage balance transfers are often revolvers of debt, it can be beneficial for banks to have this knowledge up front. Unlike some consumer groups for which delinquencies can be unforeseen, issuers are aware that they must watch credit card balance transfer customers more diligently because of their penchant for revolving debt.
Financial institutions will have to proceed with care with these products, especially as consumers continue to battle high inflation and interest rates. If the consumer doesn’t pay off their balance within the prescribed timeframe, usually 12 to 20 months, they will be forced to pay off the remainder of the balance at the prevailing interest rate.
“Sooner or later, they’re going to hit a bump in the road, whether it be a loss of a job or some other piece,” Riley said. “That can kick off lots of interest income, but there’s a piper to be paid. Consumers can also misuse these without a doubt, where you take it out under the pretense of doing a balance transfer, transferring a 22% rate over, and then sometimes they get misdirected.
“The consumer might not be living up to that promise, and they start stacking up more debt and that can create an issue that takes years to resolve. Interest revenue is important in cards, but it also indicates the cardholder cannot extinguish their balance, so issuers must remain cautious.”
Timing and Selection
Although the nature of credit card balance transfers bring additional considerations, these are not novel products. Banks have been conducting balance transfers for years, and major banks like Citi and Chase have their own balance transfer infrastructure. However, these tools are now available to issuers of all sizes.
“Banks that use Fiserv and FIS have these tools available, but sometimes they don’t like the risk tolerance,” Riley said. “Sometimes they’re concerned about doing it, but when you look at how you’re going to compete against the top issuers, you have to have similar tools—and they’re available and they should be used.”
To mitigate the risks, these tools help issuers implement controls to keep customers current and ensure institutions are aware of any line increases. It is critical for issuers to know if customers are veering toward default so they can take steps to ensure the institution doesn’t bear the brunt of the risk.
This risk means issuers must also be judicious in how they offer credit card balance transfers. These tools shouldn’t be offered to every customer; institutions should identify demographics where there are balances within accounts that are at other institutions and start there.
Additionally, issuers should be cognizant of seasonal concerns. For example, September may not be the best time to offer a balance transfer because summer is over, many borrowers or their families are returning to school, and there are often too many financial balls in the air.. The beginning of summer or the winter holidays are two better opportunities to send balance transfer offers.
These two aspects—selecting the right customers and choosing the right time—are critical to the success of credit card balance transfers. When offered properly, balance transfers can be a powerful tool for customer retention.
“Credit card issuers have an issue on the number of people that have tried either voluntarily or involuntarily over the year and they have to make that gap up when the next year rolls around if they want to grow,” Riley said. “It would be covering attrition rates that could be 7% to 10% and the next year’s bogey, so being able to hold these in place is important.
“This is a good retention tool because it does keep the customer engaged. It’s giving them something of value in a controlled situation, and you’re not lending the money forever. It’s on a specific term.”
The Retention Potential
Some banks have been aggressive with the terms they offer for credit card balance transfers, but the risks involved mean a more measured approach may be prudent.
“I saw one recent offer on a zero balance transfer that puts you out to 2027 already,” Riley said. “That’s about the limit that you want to do. It’s maybe 16 months. But being able to integrate that in the strategy for retention is important.”
This retention potential, coupled with immediate fee realization and portfolio enhancement, means that properly managed credit card balance transfers offer a significant opportunity for financial institutions.
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