Yet another new player emerged last week in the increasingly competitive market for credit union credit card portfolios, this one to be the first bank owned by a single credit union.
Credit union giant Wescom CU said last week it has acquired an industrial loan company charter in California and will partner with credit union cards processor PSCU Financial Services in a new credit card bank that will acquire loan portfolios from credit unions and manage the programs.
The emergence of the new credit union-owned cards bank comes as a group headed by CUNA Mutual prepares to launch its own cards bank and after four years of intense competition for credit union portfolios from InfiCorp., a unit of First National (Bank) of Omaha, MBNA, Elan, a unit of U.S. Bancorp., and TNB Card Services, a subsidiary of credit unions-owned Town North National Bank of Dallas.
Executives with the two new credit union projects are especially eyeing the sale of MBNA to Bank of America, banking, if you will, on the expectation that credit unions would rather sell their cards programs to another institution owned and controlled by credit unions, instead of the U.S. banking giant. It also comes as more credit unions, swept under by large bankruptcy-related card losses in the wake of last fall's record bankruptcy filings, are expected to shed their cards programs.
"We've been talking with a number of credit unions and there's a widespread sentiment or preference for keeping their cards program within the credit union system," said Darren Williams, president of Wescom CU, one of the nation's biggest credit unions with more than $3-billion in assets.
To facilitate the credit card project, Wescom has acquired Silvergate Capital Corp., a San Diego investment company with more than $500 million in assets, which owned an ILC charter-making the credit union the first to own its own banking charter. Williams said they plan to manage the Silvergate assets, most of which are commercial loans. He would not disclose the price paid for Slivergate's banking operations, but one analyst put it at around $60 million.
Plans call for PSCU Financial to perform the servicing and other related services on cards programs acquired by the Wescom bank. St. Petersburg, Fla.-based PSCU, which is owned by about 525 credit unions, already performs processing for almost 10-million CUs around the country, according to David Serlo, president of the CUSO. He said the credit union-centric project is a natural for PSCU.
"We see this is an alternative and an opportunity to keep these loans with the credit union industry," said Serlo. "Hundreds of portfolios are leaving the industry and we're concerned about that."
Serlo predicted the slowdown in the sale of credit union card portfolios over the past year will speed up again. "We think this will give many of the credit unions who are contemplating this another option."
He also predicted that the credit union-owned option will be seen as preferable to a bank-owned one. "When it comes to over-limit fees, late fees and interest rates, the banking community still has substantially higher fees. We see this as an extension of the credit union relationship with the customer," said Serlo.
The launch of the project comes as CUNA Mutual and three credit union partners-Corporate One FCU, Card Systems for CUs and Certegy-are working to obtain final approval for their ILC from regulators. An application with the FDIC for federal deposit insurance has been stalled because of ownership issues that ran afoul of NCUA's rules and the group was working to resolve that last week. Kevin Thompson, CMG's vice president for product development who is heading the credit card project, said they were optimistic they had resolved the ownership conflict and were hoping for FDIC approval in the coming months. The target date for launch of the project is around the third quarter.
The CUNA Mutual project is one of the cornerstones of the credit union insurer's plans to develop a secondary market for credit card loans, mortgages, business loans and community development loans orginated by credit unions. Plans call for the loans acquired by Union Financial Services and by CUNA Mutual under its new CU Systems Funds for member business loans, to be pooled into mutual funds, then sold back to CUs, thereby creating a new source of liquidity.
Thompson said CUNA Mutual has already acquired $16 million of MBLs for its CU System Fund and plans to start selling shares to credit unions when the fund hits $25 million. "Hopefully, that will be sometime later in the first quarter," he said.
The Wescom project must also pass muster with the FDIC and with the California Department of Financial Institutions, which has authority over state-chartered Wescom and its state-chartered ILC. "We feel pretty good that the application will be looked upon favorably by both the DFI and the FDIC," said Williams, who worked in credit card banking more than 20 years ago, before going to Wescom. He also predicted a third quarter launch.
But an ongoing controversy at the FDIC over an ILC banking charter sought by retail giant Wal-Mart Stores could spill over into the credit union bids for FDIC approval, according to several credit union observers. The worry is that community bankers, who have shifted from fighting credit unions to fighting Wal-Mart, could convince regulators that non-banks should have a more difficult time obtaining FDIC coverage unless they can prove a necessity for the banking charters.
Williams said he is not concerned about the politics and noted that the FDIC has approved insurance coverage for credit union projects before.
"The FDIC is not unfriendly to credit unions," said Williams. "Credit unions do own FDIC-insured institutions." Among them are TNB, which credit unions acquired more than two decades ago to obtain access to the Federal Reserve system, and MEMBERS Trust, another CUNA Mutual project that provides national trust services. NCUA is not authorized to insure deposits of either venture under the NCUSIF.
Asked whether the credit union market is big enough for two more players, Thompson said, "that's a good question. Right now, my answer is yes, but it's going to play out over time," he said.
