Revisiting Authorization Parameters Boosts CU's Income

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Credit unions can mine their existing credit card portfolios for more revenue simply by reevaluating their authorization parameters. Just ask Navy Federal Credit Union, which is already seeing a difference after working with MasterCard to update those procedures.

"We're projecting a 2% to 4% increase in our authorization rate, and that translates to an increase in outstandings, which translates to higher interest income and better interchange success, too," said Navy FCU's VP-Credit Cards Tom Steele. "That's a direct impact on the bottom line, and without incurring any greater risk."

Plans To Expand Program

So happy with the changes made following a study of its portfolio by MasterCard that recommended the alterations, Navy plans to implement the same changes across the rest of its other credit cards, as well, Steele noted.

"We took Navy's data and did an analysis of their authorizations, and we concluded that they were being overly cautious with their authorizations," explained Bill Mathis of MasterCard International. "Their authorization rate was low compared to their peers and the industry in general."

MasterCard did a three-month test to show the CU how making some changes would allow the credit card portfolio to perform better without adding to its risk. "We helped them increase revenue by about $1.4 million," Mathis added.

The credit card association pored over the transactions that were being denied under Navy's former authorization parameters and then looked at the actual customers being denied. "We were able to show them that here's a transaction that you denied that should have been approved," Mathis offered. "And it's not just a matter of increasing your authorization rate to boost that bottom line, it's also about the cost involved when you lose the good will of a good member."

Such an analysis is not limited to CUs the size of Navy Federal, the largest in the world.

"Sure, Navy is a big, sophisticated financial institution, but this is something we can provide to all credit unions regardless of size," Mathis claimed. "What typically happens is that a credit union will set certain authorization parameters, and then those parameters never get reviewed. They should be reviewed regularly by experts who can determine if the existing standards are still appropriate."

Steele agreed, explaining that Navy Federal had initially moved quickly to set its MasterCard parameters in order to get the credit card program launched as soon as possible. The time to review and reevaluate those parameters had long since come by the time MasterCard stepped in to do its study, he explained.

"It takes a while to reinstate all the parameters, so we had fairly simple, broad-brush authorization parameters," Steel observed. "This allows us to be more specific."

For example, Navy can set up a different set of parameters based on the type of merchant where the card is being used.

"If we're noticing that fraud happens to be a particular problem in a certain type of merchant, we can delineate a different procedure for that merchant code," he related. "Or, even deeper, if we're having problems in, say, London, but at only certain kinds of merchants, we can have a different standard set up for that while having more lenient standards for other types of purchases in other areas."

Automatic Increases

Similarly, procedures can be put in place to help members when they are pushing up against their credit limits, allowing for an automatic increase in the credit limit or to allow the member to go over the limit by a certain amount- and make that whole process seamless to the member, who knows only that his credit card wasn't denied, until notified after the transaction has taken place.

There is, of course, a fee involved when MasterCard undertakes such a study, but Steele said he believes the ROI is evident for Navy, and would be for other credit unions, as well.

"I think it was affordable, and the return (other credit unions) would realize, unless they are already very sophisticated in this area, would make it well worth it," he commented.

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