BOCA RATON, Fla. — Although it viewed its credit card portfolio as central to its operations, a former credit union-turned-bank said the risks that portfolio faced outweighed other benefits, leading it to sell the cards.
Laurie Stewart, president of Seattle-based Sound Community Bank, the former Credit Union of the Pacific before its conversion in 2003, told the Card Forum & Expo here, which is sponsored by the Credit Union Journal's publisher, SourceMedia, that despite the importance of that portfolio to the institution, its limited size made it vulnerable. At the time of its sale, the 20-year-old portfolio had approximately $20 million in outstandings.
For small portfolios, Stewart said, there are five inherent risks to card issuers: attrition risk (members leaving for greener pastures), interest rate risk (shrinking margins), interchange income (and risk from merchant lawsuits), credit risk (new accounts have more risk) and fraud and identity theft. "Selling a portfolio is one way to eliminate credit card risk," she said.
Stewart also cited the increasing dominance of massive card issuers such as Chase and Bank of America, which continue to gain share and have better efficiencies. The large issuers have the cash to spend on better consumer marketing, product innovation, and dedicated staff talent, she said, which has resulted in a 75% lower cost to operate their portfolios.
Stewart said with the rising costs of card portfolio management and the jump in identity theft occurrences increased the price of having her own credit card program. She noted Sound Community could no longer justify the cost of hiring a qualified card manager for a $20 million portfolio. The bank had $213 million in assets when the portfolio was sold in June of 2006 and it closed out the year with $221 million in assets, she said.
And customers, she added, often don't object since many believe that VISA (or MasterCard) is the issuer, and not the respective institution.
Sound Community Bank is certainly not alone in selling its portfolio. The Eugene-based Oregon Community Credit Union sold its card portfolio in January 2005. Jerry Liudahl, VP of lending, said gross revenues on the portfolio had been declining for the five years prior to sale, and that over that same time penetration had declined to 36% from 42% of members.
Like Sound Community, Liudahl also cited an increase in competition coupled with a rise in fraud and delinquencies.
"We knew we were facing an uphill battle," Liudahl said.
At the same time it was exploring a sale of the portfolio OCCU was also moving to a community charter and incurring the costs related to the need for new branches and staff.
Today, Oregon CCU is healthy with $750 million in assets, 43,000 members and a $665 million loan portfolio.
Liudahl said there are many companies that will buy a card portfolio, but it's imperative to team with someone who shares the CU's core values.
Oregon CCU opted to sell to Barclays Bank, a move that Liudahl said helped it to stay in cards, offer more services, such as student and business cards, to members and eliminate losses the credit union was experiencing on its portfolio.
(c) 2007
