Heading For The Penalty Box?
In most cases, members at credit unions that have sold their card portfolios are seeing changes in the attractive pricing that attracted them in the first place.
"If you don't want your portfolio to be repriced, then don't sell your portfolio," said Glen Lee of TNB Card Services. "In most cases, the new card issuer is going to review pricing. That's just the way it is."
Even TNB Card Services, which is a subsidiary of the credit union-owned Town North Bank, reprices the CU card portfolios it buys. "We have rates ranging from 4.9% to 18%, and we try to remain as consistent with the credit union philosophy as we can, but we have to risk-price the portfolio. When we look at a portfolio, usually better than 50% end up with some sort of benefit, either the product is enhanced, the credit line is increased or the pricing actually comes down, but you are going to have some who feel a negative impact."
"Credit card issuers are looking at a few areas to enhance their revenue streams," said Mike Gulledge of PSCU Financial Services, St. Petersburg, Fla. "They've really done away with the grace period, and those that still have them have shortened them to a day or two, typically. They have tiered late fees based on the size of your balance, and where those fees used to be maybe $25, now they're up to $35 and even $45. Over limit fees is another one. In the past, if you went over your limit by about 5%, the authorizations would still go through and there would be no fee. Today, those authorizations are still going through, but you're getting zapped with a fee, and those fees have gone up just like the late fees. But we've really not seen that approach in the credit union market."
Although TNB does acquire CU card portfolios, the firm has long encouraged its credit union clients to keep their portfolios, noting the value of the credit card program. After all, with a variety of card issuers out there interested in buying up CU card programs, it stands to reason there's a value to be had there. And credit unions do run the risk of hurting their relationships with their members when they sell.
"A credit union card portfolio from our file was sold to another party, and we got several calls from disappointed cardholders who had been happy working through our system for years. They were concerned about the levels of service," Lee related. "In this case, the member definitely didn't come away with a positive feeling."
Making Adversaries Of Your Members
Moreover, if a card issuer increases penalty fees or more aggressively goes after those fees, "you get into an adversarial situation with your member, and you don't want that," he suggested. "Suddenly they're hit with a $29 late fee, the interest rate is jacked up and the credit bureau is notified, and that's when you get into that adversarial situation."
But for the most part, situations like this typically only occur with a small amount of members. "There can be some real negatives among specific members, but some members are never going to feel it," Lee noted.
'Handcuffs' Can Sour The Deal
When credit unions choose to sell their portfolios, they can negotiate a variety of issues with the acquirer, including pricing structure, but putting such "handcuffs" on the acquirer could sour the deal.
"You're going to have a hard time being very effective in terms of trying to control this once you sell," he advised. "The issuer sees this as a business decision, and it's one they want to be able to make."
Keith Floen of InfiCorp, Atlanta, which has acquired a number of CU portfolios, agreed. "Credit unions have considerable say during the negotiations," Floen said, stressing that CUs continue to have input into many aspects of the portfolio even after the sale is final. "But if a credit union puts significant restrictions on how the portfolio will be handled, you can expect to see the premium [paid for the portfolio] to decrease. If you want the highest premium, then put no constraints on the buyer."
But Floen and Lee both noted that because most credit unions haven't made the most of other ways to increase the profitability of a credit card program, they are often able to boost income without resorting to some of the tougher strategies.
"When we work on a portfolio, about 90% to 95% of cardholders will actually see lower interest rates, by an average of 50 bps," Floen commented. "We want the lowest rate we can have. But we are able to implement a much more sophisticated system where, for example, a cash advance at an ATM at a casino, is going to be priced for the additional risk we are taking on. We offer both variable and fixed rates, but variable is our core."
Similarly, recognizing what type of cardholder is drawn to rewards and pricing such programs appropriately, for example, is another way to maximize a portfolio, Lee suggested.
"Because credit cards are just a part-time job for credit unions, they can't dedicate the resources to a card portfolio that we can," Floen counseled. "For example, most credit unions check a member's credit score at the time they're approving the member for a card, and then they don't look at it again until that card has gone into delinquency. We're checking those credit scores on a regular basis and can reprice accordingly."
Fees Not A Profit Center
As for the increase in late fees and over limit fees, Floen suggested such changes aren't driven so much by profit as by recouping collections costs. Instead, an issuer is more likely to look to a positive lift in interchange rates for an increase in fee income, he said. "We would gladly trade off any late fee revenue stream in exchange for having no delinquencies," Floen offered. "Delinquencies and trying to collect on them cost us money. Most issuers don't call late fees a profit center. It's simply the fairest way to recoup our collections costs. And we usually do not raise the interest rate until a member is three times late or 90 days delinquent. Once an account is 90 days delinquent, fewer than 25% will ever repay you. This is a collection management tool."
Gulledge agreed that issuers have to try to defray the cost of collection efforts when accounts go delinquent, but what it really comes down to, he said, is the differing philosophies of doing business.
"Credit unions aren't ever going to be as driven by profit as other issuers. They are going to avoid making a lot of these changes, and that means they will continue to see shrinkage of their margins, and that's what makes selling the portfolio so attractive," Gulledge commented. "The issuers offer these huge premiums because they know that credit unions are historically conservative on credit limits and pricing, so they know they can increase those credit lines to boost outstanding balances and reprice those cards.
"I hope that what credit unions will take away from this is that if they are thinking about selling the portfolio, and they know some of these changes are going to be made, they should consider making some of those changes themselves," he continued "and keep the portfolio so they can keep control over how those changes are made and keep those relationships."