Four credit union entities said last week they have formed a state-chartered bank under Utah's Industrial Loan Company Act that will buy and manage credit card portfolios for credit unions.
The newly chartered company, Union Financial Services Corp., was formed to buy or serve as an agent to manage card portfolios for those credit unions that don't want to manage their own programs, or to help develop and manage card programs for small credit unions.
Though the company will start behind major players such as MBNA, InfiCorp, and more recently, credit union-owned TNB Card Services, which have been buying up credit union portfolios in recent years, its owners see additional room in the market, according to Wally Jensen, a longtime credit card banker who will head the new operation.
"I don't think we're too late for the market. I still think there's room for us," said Jensen, adding the business plan calls for the company to have as much as $100 million in assets after the first three years.
The company will be majority owned by Card Services for Credit Unions, a Clearwater, Fla.-based CUSO that processes card transactions; while CUNA Mutual Group, Certegy Card Services, and Corporate One FCU, the Columbus, Ohio, corporate, have all taken minority stakes in the venture. The group has capitalized the company with $10 million.
To obtain a charter under Utah's industrial loan company (now called Industrial Bank) laws, the group bought the ILC charter formerly held by Sears Commercial Card unit, which was sold to Citibank last year for $3.5 billion in one of the biggest card deals ever. The group has also acquired a lease Sears had on a downtown Salt Lake City office, as well telephone switches, a computer network and other infrastructure from Sears, according to Jensen.
The ILC charter, under fire by some in Congress as a "backdoor bank" that has allowed retail giants such as Wal-Mart to enter banking, will provide a number of advantages for Union Financial, including the ability to branch across state borders, and entry to federal deposit insurance provided by the FDIC. "It (an ILC) can do anything a commercial bank can do, except issue time deposits," explained Jensen. Plus, the company will not have to use the word "bank" in its name, a big deterrent to doing business with many credit unions, he pointed out.
Jensen is a long-time veteran of the credit card business, cutting his teeth for 15 years as a banker with Utah's Security Bank, then in stints with cards operations at AT&T, USAA and GE, where he helped develop the company's successful credit card program. "We're doing exactly what I learned to do at GE," he said.
By adding together the card portfolios of many CUs, Union Financial hopes to be able to create economies of scale, much in the way CUNA Mutual Mortgage, or Card Services for CUs has done, and allow smaller institutions to offer products and services to stay competitive with large banks and other issuers. Among the plans are a program that will allow small credit unions to issue their own cards and have Union Financial manage their programs. The participation of long-time credit union partners will create an environment of trust in the marketplace, said Jensen.
The group is now awaiting approval from Utah's Department of Financial Services to activate Sears' dormant ILC charter and from the FDIC for approval of federal deposit insurance.
