Credit union program aims for card clout.

Keith Floen wants credit unions to get their due from credit cards.

As senior vice president of the Credit Union National Association, Mr. Floen, 38, oversees an effort to put those generally small, service-oriented institutions on an equal footing with the card industry giants.

The program, Credit Union Card Services, established in 1977, has more than 2,200 participating credit unions with $4 billion in outstanding balances.

Although they are still a small factor in an industry dominated by larger financial institutions, the credit unions are growing 10% annually in card receivables.

They fully intend to have a competitive impact on the $200 billion U.S. bank card business, if not actually challenge the leaders for market share.

Mr. Floen joined the Madison, Wis.-based credit union trade group after leaving IBM-Mid America Credit Union in 1984.

At that time, credit unions did not have much in the way of liquidity. Mr. Floen said it was not unusual for a credit union to have $1 10 million in assets, including $100 million in outstanding loans.

Seeking a Niche

Rapid deposit growth in the 1980s, stemming largely from the savings and loan troubles, and a flattening in traditional loan demand led the credit union movement to seek a niche in the growing and robustly profitable card business.

"Our role initially was to promote and market and sell credit unions on the idea of credit cards," Mr. Floen said.

Over time, Credit Union Card Services developed an array of support services and product enhancements that allow participating institutions to compete with the giants at low cost.

The services include statement production, underwriting, collections, and answering inquiries. According to Mr. Floen, a small credit union can have the "economies of Citibank" and deliver a high level of customer service.

Shopping List

"We have a kind of a la carte shopping list," Mr. Floen said, "where they can have us do everything or a few things."

The services are packaged to take a credit union "from infancy to maturity," he said. They can enter the business using a full turnkey service from the Credit Union National Association. As the individual credit union grows and feels its oats, it can step in and slowly take over various aspects of its program.

The very small credit unions -- some with assets of only about $1.5 million -- can offer members a full-scale program. In fact, 10% of the trade group's card issuers have less than $10 million of assets.

Below-Market Rates

Cutting-edge technology, such as the Triumph software from Banc One. Corp. and Andersen Consulting that the group uses to process accounts, contributes to the cost-effectiveness of small-scale programs. It allows the trade association to single out individuals for specific promotions, and track profitability.

The low costs give the group an edge on the big financial institutions, Mr. Floen said. Banks' credit card interest rates average about 16.9%, three percentage points higher than the credit unions'.

The trade group's program started slow, growing from 10 participants in 1978 to 500 credit unions with 550,000 accounts in 1984. Since then, the program has added about a million new accounts every two years. The group accounts for 40% of the $10 billion in outstanding balances on all credit union cards.

Mr. Floen projects that 85% of the credit unions in his organization that are able to sustain a card program already have one, and he hopes to bring the, remaining 300 or so into the fold.

The Credit Union National Association, meanwhile, has a "Project Moonshot," aiming to boost total credit union membership from the current 65 million individuals to 100 million by 2000.

Consumers generally have closer, almost emotional ties to credit unions than to other financial institutions, because membership is based on group affinity. The typical credit union member has five account relationships -- a cross-selling record many bankers would envy.

According to Mr. Floen, these bonds carry over to the credit card relationship. Credit union members' heightened sense of responsibility makes them less likely to become delinquent.

While banks have a delinquency and chargeoff rate of 4.5% to 4.75%, Mr. Floen said credit unions are down at 2% to 2.25%, half of them chargeoffs. "We do a better job of quality control on the front end."

This connection has also given credit unions a profitable piece of the much-maligned market for secured cards, in which cardholders, often in need of establishing a credit history, will set aside a deposit as collateral for a credit card loan.

Under the trade association's program, credit unions might start a cardholder off with a fully secured card and gradually wean him to a conventional unsecured credit line.

Also unlike most other financial institutions, credit unions are still in the business of "character lending," approving credit based on personal knowledge rather than only on "the numbers." In general, Mr. Floen claimed that credit unions approve 60% to 65% of applications for credit, about double banks' approval rate.

"We're good at getting that first card into the wallet," he said. "Where we tend to be weaker is that we don't tend to give as large a credit line."

But even these limits have not inhibited the growth rates, which exceed industry averages.

Mr. Floen and his associates have bigger plans for the future of the trade group's card program. Over the next couple of months, the group plans to roll out rebate options, a tie-in with frequent-flier plans, individual retirement accounts, purchase protection alternatives, and a debit card.

"When debit is active, we have the potential to be one of the financial industry leaders in debit cards," Mr. Floen said.

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