In the land where number-crunchers rule and where pragmatism trumps philosophy, the relationships that credit unions develop with banks that buy their credit card portfolios is said to be a "win-win" situation. It "makes good business sense," is another clich? trotted out when, after analysis and due diligence, a credit union gives up a program to serve the revolving credit needs of its members because credit cards turned out to be "not one of its core services."
Members, on the other hand, definitely think of revolving credit availability as a core service. But we're also told that members don't really care whose name is on the card, as long as the rate is agreeable (read low). I'm not so sure.
The cash windfall from the sale will be used, say CEOs, to expand other service options, mortgage programs, for example, or business lending operations or to build new branches. So, members don't have any loyalty to credit card programs, only to credit availability, good service and low rates, therefore, credit unions don't lose when credit unions sell off the portfolio to a mega-bank. The bank wants the credit union to believe that they simply "can't complete effectively and remain profitable in the card market," said Gary Raddon on the subject at the recent CSCU Annual Meeting.
Taking a position of neutrality, the sell-off is deemed as one where the bank is just a processor, a provider of a needed service, and the credit union is the one acquiring that service. That makes the transaction seem as innocent as a newborn baby. Because size and volume make for that holy of holies, the miraculous "economy of scale," it's "win-win" and "good business sense" and general slapping on the back all the way to the bank. But wait.
Seldom is this relationship to the benefit of both parties. The benevolence of our banker friends brings tears to my eyes. This so-called "win-win" relationship, or mutualism, is much sought-after but rarely achieved in business deals. In politics it's called bipartisanship. We see how well that works in Washington. Is the world of finance any less cutthroat?
An Example From Nature
We see in nature, perhaps, proof of such positive relationships- the tick mouse, a bird that feeds on the back of rhinos, or the ox pecker, a bird that feeds on various antelopes. In addition to removing ticks and other irritating insects, the ox peckers will often signal the presence of predators to the antelopes. On the coral reef, the Clownfish is immune to the sting of the anemone that attracts other fish only to be victimized. This mutual benefit is called symbiosis. Both parties must gain for this to properly apply. So let's look at the real world relationship between banks and credit unions, leaving the PR spin aside.
Credit card usage has increased, and the average balance hovers at the $6,000 mark. In 2003, the credit card industry collected an all-time high of $39.6 BILLION from customers. Any wonder why the bankers lust after credit unions' card portfolios? For years, credit union members have been reluctant to accept fees imposed by the credit union and credit unions have resisted the need to impose such fees. Fees will not be imposed for the sake of profit-NOT FOR PROFIT, BUT FOR SERVICE, remember?
Bankers do not share that philosophy. The attraction of the credit union card program is obvious. Credit union boards look at the rising costs of the program and the labor intensive service required, and are tempted by the perfect headache medicine: "Sell!" They are told that the card will continue to carry the credit union name and logo; (so the perception of credit union ownership will continue) and the terms will remain unchanged; (so the members won't even notice a change!) And, voila! The credit union no longer has to deal with losses, collections and charge-offs.
A closer look shows us, however, that the overall success (read profit) of the credit card program comes not from members/consumers going about their daily spending and paying monthly interest on balances. The revenues the bank is chasing are outrageous fees that can later be generated: over-limit fees, activation fees, balance transfer fees, return check fees, and the ever-popular annual fee. Piles of money come from those whopping late fees assessed the first time the credit card holder makes a late payment. That, in turn triggers an increase in the interest rate. That interest rate increase is generally well over20%!.
Credit union members whose credit card accounts have been sold are now the bank's customers. For members not subject to most fees, who handle their debt wisely and pay on time, the change isn't parasitic. While they may not immediately be marketed, sooner or later they will be asked for future business. For members who don't handle debt wisely and incur late fees, well, the spiral simply grows. Could it be that the Visa or MasterCard member is now being asked to sign-up for the American Express Card? (As a result of several lawsuits, numerous banks and their agents will soon offer the America Express card. Many of the banks and organizations are the very same ones that purchased credit union credit card portfolios.)
More affluent members are profitable and sought after, and they will receive more marketing pitches. Once a bank that already holds their credit card solicits them, aren't they more likely to consider doing more business? It's true that many may already be receiving sales pitches, but once a relationship is established, the connection is strengthened. It takes on a legitimacy that didn't exist before. It's no longer junk mail. And the line between member and credit union gets fuzzier.
It Sure Sounds Good On Paper, But...
We can allow that sometimes these portfolio deals make sound business sense on paper, especially taken one example at a time. But collectively, what are we to make of credit unions becoming "agents" for access to their members' financial services? Aren't we changing the lipstick on the pig, here? I mean, if a credit union can't (or won't) run a fair, yet disciplined credit card program (and there is no doubt that members view credit cards as a necessary service) then how can we look in the mirror and say that we're truly serving our members well? Aren't we letting ourselves off the hook? Rationalizing the sale and redirecting the cash elsewhere may be just putting off the inevitable. What's next? The mortgage portfolio? The car loan portfolio? The business loan portfolio? Checking?
Wake me up if I'm sleeping, but won't this lead us back to the good old days when credit unions just had share accounts and loans, then certificates of deposit? Is the credit union universe expanding or shrinking? When did credit unions become a sales referral service for what we strived and fought to offer our members? These programs were deemed "un-credit-union-like" at the start, and the movement had to fight to get them. Now, we are increasingly making them mere tangents to our inner circle.
I believe we should look reality in the eye and try for a better solution. I refuse to believe that selling is our best answer. As of Sept. 30, 2004 there were 9,311 credit unions, down from 9,664 in September 2003. That's 353 credit unions gone, mostly from mergers. Does this trend indicate that small and mid-sized credit unions are an unsustainable business model? Wasn't the cooperative approach meant to make them so? Are CUSOs failing to meet the needs of credit unions? And what role should be played by credit union trade associations?
There's no doubt that if a credit union doesn't serve its members, rest assured other providers will, and they will pry member relationships from them piece by piece.
Many credit unions have adapted to make their credit card programs successful-by increasing credit lines, enhancing their programs with more options and reverting to an old but proven strategy-marketing the card product. These strategies aren't very different for a credit union's success in making auto loans in a competitive rate environment or 0% APR, or continuing to offer share draft accounts when so many banks are promoting "Free Lifetime Checking" accounts. It's hard work, but it succeeds. And aren't we supposed to tell members the hard truth sometimes, like, "there's nothing free in this world. It's all based on your relationship. No one is giving away money in this life. Sorry."
Tom Reed is CEO of he mission of ENCORE Electronic Services Cooperative, Falls Church, Va. which provides access to valued service through shared resources, information and delivery systems. Mr. Reed can be reached at treed
