Keep Your Card Portfolio for the Right Reasons

Robert R. Hackney III
January 1, 2007

The trend continues: Credit unions are selling their credit card portfolios, often to the big banks that threaten their very existence. But a card program helps anchor member relationships and is a high-yield product that boosts your bottom line. Before you sell, consider the power of card relationships.

Remember why you started offering credit and debit cards in the first place? Your members needed convenient ways to make payments, and more of them wanted to use plastic. And unlike cash or check payments, every card transaction generates revenue for your credit union.

This is truer than ever today. Debit cards generate significant interchange (per-transaction) income, and credit cards typically yield the highest return on assets (ROA) of any payment vehicle a credit union can offer.

Still, credit unions continue to sell their credit card portfolios, and those portfolios get smaller each year. In many cases these credit unions see cards as an ancillary product rather than as a core strategic product.

Such credit unions may not market their card programs aggressively or adjust their value propositions to stay competitive as the market evolves. Big banks make more attractive offers to their best cardholders, often through compelling direct-mail balance-transfer solicitations. As banks siphon off these income-generating accounts, unmanaged credit union portfolios stagnate.

Credit unions also may fear escalating fraud, not realizing there are many tools and industry experts available to help them keep it in check. They sometimes throw up their hands, saying “I’d better sell today because the portfolio’s worth more than it will be tomorrow or next year.”

ROA/ROI potential

Credit unions need to look at the ROA and ROI (return on investment) potential. Recent research from Raddon Financial Group, Oakbrook Terrace, Illinois, shows that credit cards are the credit union industry’s highest-earning asset, with an average ROA of 1.83% vs. 1.23% for home equity loans, 0.7% for mortgages, and 0.32% for auto loans.

Credit cards can make a far greater contribution to a loan portfolio’s revenues and net income than their percentage of overall loans would suggest. At Toledo Area Community Credit Union, Sylvania, Ohio, for example, credit cards constitute 9% of loans but cards account for 40% of total loan income, and the card program ROI is 3.1%. Its mortgage program, which accounts for 46% of loans but only 26% of loan income, has an ROI of 0.4%.

Two Quick Steps to Success

Credit unions need to look at cards as a strategic, income-boosting, relationship-building product, as well as one that attracts new members and presents cross-sell opportunities. Two important steps can increase chances for success:

1. Converting classic and gold cards to platinum. If your credit union offers a classic card and another financial institution sends you an attractive offer for a platinum card, it makes you feel important and valued, even if the interest rate is the same. You’re likely to move your account.

And platinum accounts are more profitable. Across Card Services for Credit Unions’ (CSCU) 3,400 member credit unions’ portfolios, active platinum cards earn 81% more revenue than classic cards. In 2005:

• The average annual finance charge revenue was 80% higher for a platinum card than for a classic card
• The interchange income was 98% higher for platinum than for classic
• More platinum cards stayed active and revolved balances
• Average outstandingbalances were 135% higher for platinum than for classic.

Despite 35% platinum growth in 2004, credit unions’ share of the platinum market still is very low, so the opportunity is huge.

2. Attracting balance transfers . Over the years, banks have bombarded your members with attractive balance-transfer solicitations, hoping to capture their credit card business then cross-sell other products and services. You have that same opportunity.

Make sure your product is competitive and send qualified members your own balance-transfer offer. Bring their business back from the banks and start earning finance charge revenues immediately.

Card relationships hold tremendous power and potential—that’s why big issuers want to buy yours. Isn’t it worth holding on to your portfolio and your members’ trust?

Robert R. Hackney III is president of Card Services for Credit Unions (CSCU), Clearwater, Fla., and a member of Visa USA Inc.’s board of directors. This story appeared in Credit Union Magazine at www.creditunionmagazine.com and is reprinted with permission.