Selling card portfolio may look good now, but what happens down the road?

WEST PALM BEACH, Fla. – With more credit unions selling their credit card portfolios for what they say are business reasons, and players such as mega banking giant MBNA – the world’s largest credit card issuer – getting into the CU card portfolio acquisition game, CU card professionals are questioning whether CUs are inadvertently stepping into long-term dangers, for short-term gains. “It’s a huge mistake to sell because credit cards are the lifeline of credit unions,” said A. Rex Johnson, Lending Solutions, Inc. president. “To the members, every time they pull out and use that CU credit card it is a continuous reminder of their credit union. It makes no sense to sell that portfolio. What they are doing is sending a bad message to members that the CU is not really a full-service financial institution.” For Payment Systems for Credit Unions President/CEO Dave Serlo the selling wave is still a relatively new activity and it will take years to see what the long-term repercussions will be for the credit union movement. “Even a year ago, most people wouldn’t believe this would be taking place,” said Serlo. “As people get into it and experience it for longer periods of time I’m sure we’ll hear more about how well the purchaser did in meeting its obligations in terms of promises being made.” Serlo identified four risks credit unions should be aware of before selling a credit card portfolio: *Understand what is happening. CUs need to be clear that where the huge premium being offered is coming from and that the member is paying for it. The bank is of the mindset that the credit card portfolio is just under managed and there is a significant growth and up sale opportunity- otherwise the bank wouldn’t be buying it. So where is premium coming from? The credit union’s membership-they will get higher credit lines and pay higher fees. The bank is only advancing the money upfront. If a credit union does have a cash need then selling an asset may be good thing but it must understand what it is really selling; *Once the credit card portfolio is purchased the member may be exposed to a more “thoroughbred” type collector whose practices may differ from how the member was used to being treated before; *The member is being repositioned to have some exposure to the new owner of the loan. So if a cardholder accesses information over the Internet they may be linked to that bank’s Web site – now there may be a potential to cross-sell or see the bank services. *From an operational standpoint there is also the risk of de-conversion to the bank system purchasing the credit card portfolio. So the cost of de-conversion must also be considered. “Again I think if it is part of a business plan, then the credit union should know the costs and if the CU needs liquidity then selling the asset may be right, but CUs need to validate not only the costs but if they are in fact losing money,” said Serlo. “I have a hard time believing that a credit card portfolio is not profitable with credit cards yielding 12%,” said Johnson. TNB Senior Vice President of Sales and Marketing Glen Lee, who has been on both sides of the fence with over 25 years experience as a commercial banker, including going after financials’ card portfolios in a position at mega credit card issuer First USA, couldn’t agree more. “If the bank was not certain that they could make a profit they would not be buying it,” said Lee. “The true downside is that credit unions are signing away their members’ rights. No matter how the contract is worded you cannot tell the purchaser how to market to your members – the only way to control marketing tactics is to own the portfolio.” Lee said CUs that are being lured away for the short-term gain of upfront revenue from the sale, better take a look at the long-time dangers of putting their members’ card servicing in the hands of aggressive credit card firms that may not give members the service they’re accustomed too. Lee said CU board members, who are presented these sales by management, need to get educated about the dangers. After more than six years of offering credit cards, Colorado Springs, Colorado-based Ent Federal Credit Union recently became the latest member of MBNA’s growing family of CU credit card portfolios. The $1.3 billion credit union has sold off its $35 million credit card portfolio, and MBNA will service and market to the credit union’s approximately 27,000 cardholder accounts. For Ent FCU it was a difficult move that was made ultimately for the best interest of the members. “We were getting lots of requests from members about all the offers they were getting from the competition, such as a platinum card or a MasterCard, and this partnership was a way for us to meet those members’ needs and still be competitive,” said James Moore, vice president of corporate development for Ent FCU. While Ent FCU members kept telling the CU that they liked the teaser rates and the idea of doing lower balance transfers, the credit union didn’t feel they could or should be doing that. “All those people who say they can’t do it, let them work for a bank,” said Johnson. “We can do anything a bank does. Credit unions are just missing the right mentality- start looking at what you can make. Members like credit cards and credit unions should be going full steam ahead. There is a huge opportunity in the subprime market. Capital One and Providian are controlling that market. CUs have just given up on that business -guaranteed Capital One and Providian are not doing it because they like people but because they are making money. CUs are too quick to say they can’t do it.” According to Johnson, in a national study the average credit card yield is 13-14% compared to 4.5% for investments and 7-8% for auto loans. It is not impossible for credit unions to develop their portfolios. For too long the CU credit card has been no frills when it should be tied to frequent flyer programs or offering the best members the best rate and if members want reward programs then charge accordingly. He adds that some cards should even have annual fees – just charge less than banks. Johnson waves away those critics who say these types of tactics go against the very heart of the credit union philosophy of “people helping people.” It’s a business decision, not a philosophical decision, says Johnson. “When they sell these credit card portfolios, credit unions are not giving their members another credit card option,” said Johnson. “So don’t preach about the credit union philosophy when the other option is rape by a bank. It is just nuts!” [email protected]