Pacific Service Employees Credit Union is small by commercial banking standards, but it seems to be right up there when it comes to squeezing profits from a credit card operation.

The $439 million-asset institution said it was fully profitable in credit cards just a year and a half after the July 1992 launch of its program, and one year earlier than projected.

Income for the year ending June 30 topped $400,000, with 11,200 accounts and $15 million in outstanding loans. Further growth is expected of the program, which had startup costs of $1 1 0,000, said Thomas S. Smigielski, president and chief executive officer.

Sponsored by Pacific Gas Electric, PSECU is the 15th-largest credit union in California and 66th-largest in the country. From its headquarters in Concord and one branch in San Francisco, it serves 41,716 members -- from Bakersfield north to the Oregon border.

The credit union offers Visa gold and classic cards at a 12.9% fixed rate.

Even with a rising prime rate, PSECU can offer a low interest rate on credit cards because of an ambitious certificate of deposit program, which lowered its cost of funds and allowing it to take its time in adjusting loan pricing.

Mr. Smigielski joined the credit union in 1990 after five years as chief financial officer for Pacific Gas Transmission, a subsidiary of PG&E.

Aware of the profits attributed to credit cards but wary of jumping into a crowded market, Mr. Smigielski waited until he was approached by PG&E to start a corporate card program, before taking the plunge into a general purpose card.

To satisfy PG&E's request, the credit union hired a consultant, laid out financial pro-formas and confirmed that it could indeed establish a profitable credit card business.

Although the PG&E corporate card never materialized, Mr. Smigielski went ahead with plans for a Visa program for credit union members.

Initial response was enthusiastic, with 2,000 customers accepting the credit card from the first mailing of 15,000 pre-approved offers.

"I'm amazed at how it took off," said Mr. Smigielski, said of the unusually high 13% response rate.

The PSECU president attributes part of the program's success to a monthly inactivity fee. Rather than charge a flat rate per year, the credit union charges $2 per month for the classic accounts and $4 per month for gold, but waives the fee if the card is used or if there is an outstanding monthly balance.

"That inactivity fee moves [our] card up to the front of the list," said Mr. Smigielski. "If customers have a bunch of cards, they'll use ours."

"The usage fee makes good business sense," said credit card pricing expert Robert B. McKinley, president of RAM Research Corp. in Frederick, Md.

This type of policy could generate negative publicity for large issuers like Citibank, Mr. McKinley said, but for a credit union initiating its program, it could stimulate usage, eliminate deadbeat accounts, and increase profits.

He said it could be the beginning of a trend among smaller issuers looking to keep balances up and accounts active.

PSECU's Visa program encourages balance transfers from other bank programs as well as proprietary store card programs, where members could be paying much higher interest rates. The customers maintain average monthly balances of $1,978, almost 50% higher than the national credit card average, Mr. McKinley pointed out. Mr. Smigielski stressed that his marketing strategy doesn't rely on gimmicks. There are no introductory offers or variable rates. "We don't come at you with bells and whistles," he said. "From us, what [the members] see is what they're going to get."

With a narrower client base than a standard bank credit card issuer, Mr. Smigielski said, there is less credit risk. Delinquencies are under 1%

"Our strategy is to keep portfolio quality high, rates low and to get people with balances to get outstandings up," said Stephen R. Panch, vice president and chief operating officer.

Another aspect of PSECU's success is its efficient back office operations. "Automation is the hallmark of our organization," said Mr. Punch.

Data processing is outsourced through the Credit Union National Association's Card Services Group.

The relationship with CSG gives the California credit union access to Banc One Corp.'s data processing system, while allowing PSECU to maintain back office functions and all customer contact.

"They are very good marketers, which distinguishes them from other credit unions," said Roxane Helstrom, vice president of marketing for CSG. "They've had a lot of success with their card program."

The program is considered aggressive by credit union standards. PSECU's 11,200 accounts are double the average for credit unions in California. One larger program is that of Education Employees Credit Union in El Segundo, with 18,000 accounts.

PSECU's use of sophisticated prescreening and credit scoring techniques indicates that it is serious about its credit card program, Mr. McKinley said.

It also enjoys the low overhead for which credit unions are noted, which raises profits per account. With only two locations, the credit union maintains a small staff of 60 full-time employees. "It gives us a very low cost structure compared to most financial institutions," said Mr. Punch.

Most credit unions' expenses run 3% of assets, and PSECU's are half that, Mr. Punch said. Each account costs PSECU about $12 per month. Mr. Smigielski said there is still a lot of room for growth. The card program has been primarily focused on balance-carriers. With $40 million to $50 million in member balances outstanding on competitors' cards, he said, "we still have something to work on."

PSECU expects to top $36 million in outstandings by 1996, moving it up among the top 25 credit union card issuers.

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