Remember the good old days, when credit card portfolios managed themselves and a credit union could focus solely on their core loan products? Well, times have changed and the complacent portfolio manager is a thing of the past. Those credit unions that have elected to keep their card portfolios have recognized that their member's credit card is often the key that a money center bank uses to unlock the value of an overall lending relationship.
At the same time that the market is demanding new and better card products, many credit unions are tied to processing relationships that aren't able to offer a cost-effective and efficient means of getting new credit card programs out to their membership.
"Historically, credit unions have led with the credit card and then marketed their core products to their members," observed William Groves, VP of Client Services and partner of Bridgeforce Inc. He added that now, with third-party service processors that offer leading-edge credit-processing solutions, it has become more cost-effective for credit unions to take back control of their credit card portfolios and manage them in a more proactive manner than ever before. "Without these third-party service processors developing new products specifically to address this niche market, it wouldn't make much sense for the credit unions to do it themselves because the portfolios are so small that the cost of processing them would wipe out any profit," he said.
According to Chip Filson, president of Callahan & Associates, the reasons for selling portfolios in the first place were as varied as credit unions themselves. "When it looked like they could collect several years' worth of earnings in a single sale, it was tempting to go in that direction rather than to reinvest and try to put some internal resources behind their portfolio programs," Filson said.
Groves said that credit unions are now showing a renewed interest in credit card portfolios, backed by third-party processing services for this rapidly expanding marketplace. "Credit unions have decided that if third-parties can run these programs successfully, maybe they should take a hard look and put more effort into their portfolios," he said. "The reality is that credit unions now recognize this as a critical part of their future."
With $947 billion in outstanding receivables in the credit card market, and $387 billion in outstanding receivables in the private-label card market, according to Groves, it's no wonder that credit unions are taking a fresh look at their portfolios. They realize that credit cards are probably one of their better lead-in products. They certainly are preferable than trying to lead with a mortgage or auto loan, both of which are large transactions that don't necessarily guarantee members will also take advantage of other products available.
For the first time in years, however, credit unions are not only looking at their portfolios as gateways to other services, but as actual revenue generators. With the maturing of the credit card market, issuers need to be able to offer new and innovative programs, many of which carry with them the opportunity for additional revenue streams. The impact in the reduction in debit interchange income can be relieved by an increase in credit interchange income. Additionally, by efficiently overseeing risk management, CUs can reduce exposure and set price-points for services that more closely match an account's credit status.
The Two Types Of Cardholders
"There are primarily two types of people who use credit cards-transactors and the people who roll the balances, which require a lot of servicing," Groves said. "Just on transactors alone you can make a profit with the amount of purchasing people put through their cards in today's environment. The strengthening of the economy, as well as behavioral patterns of the users, has contributed to how credit unions now view their portfolios. Better technology, reduction in processing costs and the ever increasing use of credit card products have made it more attractive than it was maybe 10 years ago."
Even though there may only be minuscule fees involved when an individual pays off the balance every month, the member may still be considered profitable if he or she conducts enough transactions that outweigh the costs of processing the account. And even if traditional card revenue streams are still marginal, the key is the cardholder is still the credit union's customer, so now other products can be marketed at them.
"This, however, may become more of an issue with some of the do-not-call laws because companies cannot market to you the way they used to," Groves said. "It hasn't really been enforced yet, but if it is enforced to the letter of the law, only companies that have relationships with you can market to you. That means, say, if a husband is a member of one credit union and the wife is a member of another, and neither belongs to the other's credit union, neither establishment can market to the spouse who is not a member. But should they get a joint credit card each becomes a valid target and is available for marketing."
As the credit union market continues to mature and reach out to emerging markets, such as small business, card programs must be able to keep up with the pace. The more time that's spent managing changes required by a processor means less time spent designing the credit programs that can deliver the top line increases that are the purpose of your card program to begin with.
Times have changed and the ability to deliver a flexible and contemporary set of card products is what's needed today. Building and maintaining wallet share is all about more personalized interest rates, loyalty programs, compelling card designs, and making your member want to use your card product over any other. Credit unions need to be able to automatically analyze their portfolios, efficiently create credit limit increase programs, and price accounts according to their risk profile.
Card portfolios hold the promise of deepening relationships with members and offering real product value to the marketplace. It couldn't be a better time to evaluate your card program and make sure it's all it can be.
Patricia Hewitt manages Strategic Business Alliances at Fiserv Credit Processing Services in Lake Mary, Florida.
