MADISON, Wis. - The largest card processor for credit unions is at a crossroads.

Keith J. Floen, senior vice president of the Credit Union National Association's card services group, believes it is poised to become a critical provider for the industry. Detractors - and there are more than a few - say the operation has bitten off more than it can chew and will be hard-pressed to be competitive.

Depending on whom you ask, the 39-year-old Mr. Floen is either cocky or merely confident.

From the outside, the card services unit looks like an enterprise on the go. Last month it moved into a state-of-the-art, 155,000-square-foot headquarters that houses virtually all its operations. The total price tag: $13 million.

Now its organizational structure is undergoing renovation as well.

To retire debts and enter new lines of business, the group plans to raise $12 million to $30 million by selling common stock and subordinated debt. The stock sale is expected to start next month.

Most of the money is to be raised through private placements to credit- union-related organizations. Only 20% of the total will come from organizations not associated with credit unions.

"I would suspect there's a value in having a predominantly customer- based board and also companies that bring a specific knowledge base, whether it's in technology or capital markets or in outsourcing," Mr. Floen said.

Ultimately shareholders should receive a 20% return on equity, but they should not expect a dividend for two to three years, while the enterprise works its way out of a debt position, he said.

To reflect the new ownership, the group will get a separate board from its parent, CUNA Service Group, and a new name: CUNA EFT Corp.

As the new moniker implies, the outfit believes it is outgrowing its old name as it moves into new technology. This drive is one reason for the capital infusion.

The card services group faced a decision of "staying as a credit card processor or going into EFT processing," Mr. Floen said.

Already a handful of credit unions are offering home-banking services through the company's new Visa Interactive pilot program.

And this month some Wisconsin credit unions are signing on to the card services group's link to national and regional ATM and debit card networks. Credit unions in other states are expected to follow starting in September, and Mr. Floen wants the card services group to become the chief industry "switch" within three to five years.

But cards will remain the core business, Mr. Floen said. Working through state credit union leagues, the group serves 2,500 credit unions that have five million cardholders and $5.5 billion in receivables. It is by far the largest card processor for its part of the industry.

Mr. Floen said the group's primary focus is going to be on increasing its current customers' membership penetration. A chief tool for this is the Triumph software that the group licenses from Banc One Corp., Columbus, Ohio.

Mr. Floen said the processing software gives credit unions marketing flexibility - for example, they can single out individuals for certain promotions - that used to be available only to big banks.

Although Mr. Floen is confident the group will make rapid progress, other observers predict a pratfall. And the group has already blundered in one area: converting its clients to the Triumph software. All customers were to be on the Triumph system by the end of last year, but so far only 60% have been moved over.

A snag came when Banc One - which has an 18-year support relationship with the card services group - decided to convert its affiliated banks to Triumph before converting credit unions, sources said. The card services group then turned to the licensing arrangement, relying on Alltel Information Services, Little Rock, to process the accounts.

The delays in the conversion and the cost of shifting functions away from Banc One hurt the group's net income last year.

"We reimbursed credit unions that had gone in for training that they couldn't use," Mr. Floen said. "If they paid $500 for air fare to go to training, we reimbursed them. We weren't going to leave them holding the bag."

The outfit netted $375,000 last year, a fraction of the $1.9 million it had expected. Reimbursement-related expenses accounted for most of that shortfall.

David Serlo, president of a competitor, Payment Systems for Credit Unions, sympathized with the group's predicament.

"They have many, many end points, and besides getting the new technology they have to get 2,500 credit unions from point A to point B," said Mr. Serlo, whose company has 400 clients and 2.7 million accounts.

Triumph has its critics. Mr. Floen said some think the software is "a dog" - but he is sure it can increase credit unions' membership penetration by 10% to 20%.

Besides delays in the Triumph conversion, there have been suggestions that the card services group isn't pricing competitively.

Michael B. Bush, senior vice president at Equifax Card Services, a Florida-based processor, said that in the past seven months it has signed 97 of its rival's clients, and lost only one to the CUNA affiliate.

Price was a factor in several defections, and Mr. Bush said on an "apples-to-apples" basis Equifax can beat the card Services group's price tag for processing and back room services by as much as 20% to 50%.

Mr. Floen disputed the pricing contention, saying, "We're equal in price or less than the competition."

Sources said the enterprise is handicapped by some state leagues that use the Madison company's data processing but provide their own back-office services, often at a higher cost.

Four leagues no longer work with the group.

The Indiana Credit Union League recently switched to First Data Resources, the largest processor of bank MasterCard and Visa accounts. Sources said they were resistant to the idea of exporting their back-office functions to Wisconsin. The league has 120 customers and 200,000 accounts.

League president John McKenzie said money was a big factor in leaving the CUNA affiliate.

"Pricing was one of the major criteria," Mr. McKenzie said. "It amounted to hundreds of thousands of dollars of cost savings in aggregate" to contract with First Data Resources.

Many of the group's clients are up for renewal next month, and it is resigned to losing some of them. But Mr. Floen insists the outfit offers credit unions a good deal.

No matter what handicaps the card services group might suffer, competitors acknowledge its close affiliation with the industry gives it a tough-to-beat advantage.

"Their real strength is they have a real affinity with credit unions and most of the state leagues," Mr. Bush said. "Because of that affinity, they've always had a leg up on the competition in providing services to credit unions."

There have been whispers that if CUNA EFT takes off it might leave the CUNA service group orbit altogether and become independent.

Mr. Floen said it's conceivable that could happen in the future. He declined to comment further, except to add that the card services group - or CUNA EFT - will always strive to retain its focus.

"It's in the best interest of this corporation to stay as close to the credit union system as we can," Mr. Floen said. "It's gotten us where we are."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.