CUs Getting Back in the Card Game
Seeking increased control and revenue, many CUs are bringing their card programs back in-house.
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.”
With the promise of opportunity, however, comes a caveat: Know what you’re getting into and determine whether your credit union is prepared to handle it.
For starters, decide if you want to take on the risks of card fraud and loan losses. Those risks aren’t your problem when you have an agent relationship or outsource your portfolio. But when you’re an issuer, those loans are on your books, not on the third party’s books.
Stay on Top of Portfolio Performance
When Jeremy Pinard and Greg Hill joined $126 million asset Community Financial Credit Union, Broomfield, Colo., as chief lending officer and president/CEO, respectively, they made plans to take back the credit card portfolio that had been sold a few years earlier.
“We knew we’d do that as soon as our noncompete period was up,” Pinard says. “We came from a credit union that had a great credit card portfolio, and we knew if managed correctly, it’s extremely beneficial.”
A credit union deciding whether to resume card issuing must check the noncompete clause in the contract with its former third-party issuer to see what restrictions are in place and for how long, Pinard notes.
As he sees it, the top reason for being a card issuer is to give members what they need. “We should offer our members a competitive, viable option without excessive late fees, over-the-limit fees, and all the other things a lot of banks do just to generate income.”
Community Financial began issuing credit cards in March 2011, and Pinard is pleased with the first year’s results: 490 cards, $3.3 million in credit lines, and $550,000 in outstanding balances.
“We haven’t marketed it at all yet,” he says, “because we wanted to make sure there were no glitches.
“It can be profitable if it’s well-managed,” Pinard continues. “But it’s not like an auto loan that you can throw on the books and when it’s delinquent you go and collect.”
Rather, a credit card portfolio demands ongoing risk and performance management, he emphasizes. For instance, are average balances getting too high and, if so, why? Are members’ credit scores changing?
Monitor profitability and keep current on the program’s costs and income.
“This is not a program you just set up and let go,” Pinard says. “You have to look at whether it’s profita-ble—monthly, quarterly, and annually. And if it isn’t, you have to figure out what to change.”
Card issuing can make sense for a credit union that thinks of its credit card as a core product, he adds. “But if you don’t think it’s an important part of your business plan for the future, work with a third party. Have them set up the program and stamp your credit union’s name on the cards. You’ll have very little risk.”
“You have to be sure your underwriting is tight and that you know what you’re doing,” Daniel says.
And be prepared to spend some marketing dollars to make your card competitive, advises Kerry. This includes having the right add-ons or enhancements, such as loyalty programs, debt protection, and credit life insurance.
The ultimate deciding factor in the decision to issue credit cards is whether doing so aligns with your credit union’s strategic priorities, says Bill Lehman, vice president of portfolio consulting at Card Services for Credit Unions (CSCU). That requires some “soul-searching,” he says.
“Ask yourself if there’s room in your shop for this strategic initiative,” Lehman advises. “This is not a service you can put on the shelf, turn on, and let run. If you let the program sit idle and don’t have procedures for actively managing it, growing it, and measuring profitability, it won’t be successful. If it’s just something you want to offer so you can say you offer it, then consider an agent program.”
If your credit union wants to become a credit card issuer, it will have to contract with a card processor, and that’s an expense. The size of that expense depends on the type of processing decision you make. Your processing options range from an internally driven arrangement (called “pass-through”) to a completely outsourced ar-rangement, or some hybrid of the two options.
Card processors have made their service options more of an “a la carte” menu than in the past,” Lehman says. “So credit unions are finding out the processor can do more than they thought.”
For instance, besides transaction processing, a credit union might have its processing partner do data analysis and dispute resolution, which reduces the need for internal expertise and staff time.
Before your credit union decides to become a card issuer, it’s important to know what your processor can and can’t do. That’s why the “whether-to-issue” and “how-to-process” decisions go hand in hand, says Lehman. “Don’t assume you can’t do it.”
NEXT: Listen to members
Listen to members
Member demand was the primary motivator behind Omega Federal’s decision to return to issuing credit cards in September 2011. Many members were unhappy with the service they received after the credit union sold its credit card portfolio.
“Members were seeing changes in interest rates and response times they didn’t like,” Garvin reports. And during the financial crisis, “our members perceived less flexibility in response to their needs. They just wanted us to bring this back in-house.”
Now that Omega Federal is issuing cards again, it has the flexibility to waive fees and make other adjustments if a member’s situation calls for it. “This has given us another way to better serve our members and to deepen member relationships,” Garvin says.
Omega Federal also aims to generate income from its program. In the first six months, the credit union exceeded its goals by issuing more than 300 credit cards and attaining nearly $2 million in credit lines and $750,000 in outstanding balances.
“We think this will pay off in the coming years as we get more cards out there,” Garvin says.
As for the risks, time will tell on that, too. Omega Federal felt comfortable taking on credit risk given its track record. “We’ve traditionally had a low delinquency rate,” Garvin says, “and our charge-off ratio has been under peer averages for many years.”
The major challenge at this stage is to get members to understand that their credit union is offering them a new card. Capturing the first few hundred accounts in the early months was relatively easy because “those members came looking for us,” Garvin notes. They were, for the most part, members who had bad experiences under the former arrangement.
“We’re getting the word out to members that the new credit card is actually issued, serviced, and held at the credit union,” says Garvin. “That’s the biggest obstacle we’re working to overcome, but we’re making headway.”