The number of credit unions opting to sell their credit card portfolios to other-typically larger- financial institutions has risen steadily over the last few years. Of the approximately 157 payment-card portfolios that traded hands in 2002, nearly 80% were small-sized sales-below $15 million-and the vast majority of small deals continue to be among credit unions, according to data released in March 2003 by payment card advisory firm R.K. Hammer.
The data suggests that many credit union executives are questioning their ability to compete in the credit card category-or larger payment card arena-and no longer view their card portfolios as a viable profit channel. Having weighed the portfolio's current revenue performance against the costs involved, some credit unions see the short-term profits from selling as more attractive than the modest annual returns they might gain from maintaining the cards.
News accounts of recent portfolio sales indicate that some credit union leadership teams are choosing to pull out of the credit card business-even after years of modest success-because they don't consider payment cards to be a core product. Others lament that they don't have the resources to effectively and affordably market their cards. With large credit card-issuing banks more actively pursuing smaller portfolios-those under $15 million in outstanding balances-the pressure to consider a sale is even greater.
Pause & Consider
Even so, credit unions should pause to carefully consider what tangible and intangible benefits they might lose in other aspects of their business if they let another institution take over their credit card portfolio. They must not lose sight of the broader role that a properly managed portfolio can play in the credit union's ability to cross-sell other lucrative services to customers and strengthen the bonds that keep those customers loyal.
To appreciate the full value of its card portfolio, a credit union needs to view payment cards not as a mere commodity, but rather as an essential member relationship bond. With that perspective in mind, credit unions should make sure they're optimizing their internal resources and taking maximum advantage of outsourced assets, to achieve the full profit potential of their portfolio.
What distinguishes a high-performing card portfolio from one that isn't living up to its potential? Often, it's a matter of whether the credit union has sufficient resources-in marketing, operations, consulting-to cultivate and expand its card program(s). Therein lies the difficulty for many smaller credit unions that lack the in-house expertise and financial clout to raise the stature of their card offerings. Yet, according to RAM Research Group, Ltd., average balances per active account among credit union portfolios totaled $2,562 compared to $2,385 among the top 10 U.S. credit card issuers-which suggests that being a smaller issuer need not be a roadblock to portfolio success.
One thing is true: Smaller institutions will gain much-needed leverage from enlisting a business partner that can provide specific consulting expertise in all aspects of payment card operations, and help craft marketing initiatives that attract new members, as well as encourage all cardholders to use their cards more.
Penetration of New Accounts
If a credit union is converting a below-average percentage of its members to credit, debit and other payment card offerings, the problem may lie in how those cards are being promoted. A marketing specialist from a card association's member relations group should be able to help the institution develop clearer objectives and support them with more effective promotions -from informative direct-mail and telemarketing materials to co-branded cards and community event sponsorships-that appeal to customers' lifestyles and interests. Consultants also can recommend specific loyalty and incentive programs, such as rewards and promotions, designed to boost consumers' card usage and average purchases.
One Example Worth Noting
For example, MasterCard offers credit card and debit card reward programs that credit unions can easily roll out to their members to help acquire or retain cardholders, boost transactions, and influence payment behavior among new accounts, non-users, casual users and other cardholder segments.
One ongoing debit MasterCard rewards program continues to yield impressive activation and usage results for a particular East Coast financial institution. MasterCard consultants helped the issuer design and execute a tiered cash rebate offer to reward and motivate changed payment behavior among non-users. Over a five-week period in fall 2002, the financial institution notched a 26% response rate from former non-users, with an average of seven purchase transactions and a $50 ticket price. The issuer recouped nearly all of the incentive program costs by the end of the promotional period and recently reported that six-month sustained card usage among these cardholders remains consistent with the promotion period results.
In the same way that a grocery store uses weekly special offers to get customers in the door and fill their baskets with a variety of convenience goods, payment cards make a credit union a more attractive place for its members to shop for all kinds of financial offerings-such as mortgages, automobile loans, personal loans and investments -that yield a higher total profit margin on that member relationship. The institution's payment card partner can help define and execute those cross-selling opportunities to strengthen the bonds that keep members loyal.
Maintaining a Full-Service Relationship
Convenience and variety are highly prized among today's multi-tasking consumers as they try to wring more time out of each day. The presence of debit cards and credit cards among a credit union's offerings enhances its value as a one-stop destination for members' financial needs.
Credit unions can further enhance their full-service profile by aligning with a payments provider that offers a universally recognized brand, broad acceptance, flexible loyalty and reward programs, extensive ATM network accessibility and world-class security measures to support its member institutions. As highlighted in the earlier example of a debit MasterCard cash rewards program, credit unions can receive customized support at every stage -aligning card programs with the issuer's strategic objectives, forecasting the expected revenues, creating mailers, tracking qualifying purchases and rebate eligibility, and analyzing cardholder profitability based on sustained card usage.
These types of in-depth, yet turn-key and affordable, consulting resources can help even the smallest credit union to significantly extend its appeal among members, in turn maximizing profitable portfolio results.
Bill Mathis is senior vice president, Member Relations, at MasterCard International.
