Several years ago, selling a credit card portfolio was a smart financial move, says Troy Garvin, president/CEO of Omega Federal Credit Union in Pittsburgh.
Although he didn’t work at Omega Federal when the $85 million asset credit union sold its portfolio in 2006, he knows it faced liquidity, capital, and earnings challenges at the time, as did many credit unions. And card-portfolio buyers were extending attractive offers.
The credit union “was 110% loaned out,” Garvin explains. “Selling the portfolio maybe wasn’t what [the credit union] wanted to do in some respects, but financially it made the most sense. It solved a lot of problems—and created some new ones.”
Other credit unions have arrived at the same conclusion. That’s why they, like Omega Federal, have taken back their card portfolios and once again have become credit card issuers. Other credit unions that are launching credit cards for the first time also are issuing their own cards instead of outsourcing the program to a third party or agent.
More credit unions will take on card issuing going forward, predicts Lynn Daniel, senior electronic funds transfer product specialist in Fiserv’s Credit Union Solutions division. “We’ve seen some momentum building. I believe we’re on the front end of this trend.”
♦ CUs want to regain control over their credit card programs and increase revenue.
Why the shift?
Multiple forces are driving the switch. Some credit unions dislike the loss of control that came with selling their card portfolios. While outsourcing solved some problems, it also meant a loss of control over underwriting, fee-setting, and interest-rate decisions.
“Credit unions want to take back control,” Daniel says, “and they want to regain the full revenues that credit card programs can generate.”
These revenues are of special concern in light of recent regulations that will reduce debit card interchange fee income, Daniel adds. Feeling squeezed, credit unions are looking for new revenue streams.
Bank of America’s announcement last December that it would stop issuing credit cards in agent relationships with credit unions and small banks also forced those institutions to make a decision: Find another agent, get out of credit cards altogether, or start issuing cards themselves.
But the most compelling reason behind credit unions’ decision to become card issuers is to better serve their members. By becoming issuers, they determine rates, credit lines, policies, and eligibility.
“When credit unions didn’t control the underwriting, for instance, members who had their card applications turned down thought the credit union was making that decision,” says Jennifer Kerry, vice president of credit card services for CO-OP Financial Services. “Getting back into issuing is a huge boost from a member relationship per-spective.”
And as credit unions continue to build on their reputation as fair, pro-consumer lenders, they feel compelled to offer a credit card that reinforces that brand and reputation, she notes.
Kerry says credit unions should seize the opportunity to issue credit cards—if they’re equipped to handle it. “With the new regulations, credit unions don’t have as many choices for reinventing themselves and creating new products. Issuing your own credit cards is a great way to do that.”