As consumers and lenders rethink how they use or issue credit cards, you’d think credit unions would have much to lament.
But two experts say credit card profitability for many credit unions is surprisingly robust, and the techniques for attaining healthy returns aren’t difficult to learn and employ.
Mitch Raymond, senior vice president of credit products at TNB Card Services, a Fifth Third Processing Solutions LLC Company, says it’s easy to list factors causing a drop in credit card issuance or use.
“The first is unemployment, which is still relatively high, especially depending on your geographic region,” Raymond says. “Being located in a high-unemployment area affects an issuer’s ability to find qualified credit applicants.
“Then there’s the housing market,” Raymond continues. “A recent federal bulletin estimates that 20% of consumers’ net worth has evaporated since the housing market crash. This has greatly affected consumers’ confidence and ability to pay, and has delayed the purchase of big-ticket items.”
Raymond says credit issuers have been digesting recent regulatory changes brought about by the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act, and repositioning their products accordingly. Consumers ultimately will bear the brunt of reduced credit lines, new fee structures, modified reward programs, and higher overall costs for risky cardholders.
He says credit unions, however, have been relatively fortunate. They weren’t participating in unfriendly practices disallowed by the CARD Act so they attracted new cardholders who were leaving the major issuers.
“They haven’t had to make significant adjustments,” Raymond says. “Before the CARD Act, credit unions often offered credit cards to members that major issuers wouldn’t underwrite, and they did so without accompanying losses due to their strong ties to their members. Therefore, their losses are much lower compared with banks.
“Many credit card users already saw credit unions as safe and secure places to have accounts, where they would be treated fairly,” he continues. “Credit unions weren’t doing double-cycle billing, and they charge fair and reasonable fees based on fair risk analysis.
As a result, when the CARD Act took away many of the lucrative billing practices of the larger issuers, credit unions were right there to provide an alternative to consumers.”
While positive member attitudes toward credit union credit card practices are gratifying, Kenton Potterton, vice president at PSCU Financial Services, cites hard figures that show just how rewarding a successful credit card program can be.
When a member has the credit union’s card, that household also has more services—3.64 vs. 1.75—more deposits—$20,000 vs. $13,000—and higher profitability per account—$119 vs. $71, according to Raddon Financial Group.
“This increased revenue and profitability helps the credit union fund more research and development, improve member service, and grow capital,” Potterton explains.
He says almost all credit unions offering credit cards make money on them, “although our experience is that most don’t look at the profitability of their portfolio. They may look at outstanding balances, revenue, and credit losses, but they don’t examine the amount of net income the portfolio generates. While the economy has hit everyone, the return on assets for most credit card portfolios is 2.5% to 4%.”
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