CUSO's innovative approach to buying CU card portfolios makes for an even more competitive market

<p>NAPERVILLE, Ill. – The ILCU Service Corporation, a CUSO funded by 50 Illinois credit unions, is poised to make an already hot market for credit unions’ credit card portfolios even hotter. The CUSO has launched an effort that will enable it to purchase credit unions’ credit card portfolios with money invested by other credit unions around the country. If the CUSO succeeds, the new program could bring resources from all over the credit union industry into the market for buying credit union credit card portfolios. Currently the market for credit union portfolios is dominated by two large banks, InfiCorp and MBNA, and two credit union card servicing alternatives, Town North Bank (TNB), which is credit union owned and National City Bank, which is partnered with Payment Services for Credit Unions (PSCU). Once it gets off the ground, the ILCU effort will be “the only totally credit union alternative,” said ILCU vice president Cathy Pettis. ILCU’s program will have two parts. Credit unions that are sure they want to sell their credit card portfolios will be able sell them to ILCU through a program called EZ Launch. Credit union investors, whether individual credit unions, corporate credit unions or credit union vendors like CUNA Mutual, who wish to invest in the credit card effort will be able to do so by purchasing debentures for the effort through the CURE (Credit Union Receivables Exchange) program. ILCU will in turn use the sale of the debentures to raise the capital necessary to buy, grow and manage the portfolios which will be housed at the CUSO’s Services Credit Union. The credit union will be able to hold a significant number of loan portfolios by retaining only a small portion of the loan participation and selling the rest to the CUSO’s CURE program, according to Pettis. The idea of buying portfolios arose out of ILCU’s existing program, called Apollo, through which ILCU helps small credit unions start credit card programs, according to ILCU CEO George Fiegle. “We anticipated having to confront the portfolio purchasing issue through working on Apollo,” Fiegle said. The CUSO was also encouraged to look into the possibility of starting to buy portfolios based on its experience managing 600 credit union portfolios, according to Pettis. “We have a dedicated, professional staff familiar with credit card marketing,” Pettis said. “We have an independent, experienced collections staff as well,” she added. Contrary to previously published reports, EZ Launch has not bid on any portfolios yet, but is evaluating four from within Illinois and three from outside the state for possible bids in the next few weeks, according to Fiegle. CURE has not yet sold any debentures, but has received inquiries about investing from several corporate credit unions and CUNA Mutual, according to Pettis. As has become the norm in such purchase contracts, ILCU will agree when it buys a portfolio not to cross-sell any of its other products to a credit union’s credit card base, according to Fiegle. He also said the EZ Launch program does not plan to hold to the five-year contracts that are the industry norm but will be willing to give the selling credit unions the opportunity to buy back their portfolios after as little as two years, should they see that ILCU has been able to manage them profitably and want them back. Predictably, banks which buy credit union card portfolios are skeptical of the ILCU effort, doubting that the CUSO can muster the capital or the economies of scale to become more than a niche player in a very large and competitive market. “Everybody wants a silver bullet in this [credit card] business but there aren’t any,” said Keith Floen, managing director of InfiCU, InfiCorp’s credit union card purchasing and managing business. Skeptics like Floen praised the CUSO’s intentions and efforts so far but questioned whether it would be able to muster the capital it would need to really be a player. They pointed out that if the CUSO’s effort was successful it might purchase, for example, $100 million in credit union credit card portfolios. That effort will take a minimum of $120 million, they argued, the $100 million to buy the portfolios and the additional $20 million to account of the premiums offered for the portfolios. Further they maintained that losses increase when an institution is trying to grow a portfolio and suggested that institutions with reputations for conservative investing, like corporate credit unions, would not be interested in investing in credit card debt, which is considered riskier. Steve Fuld, senior vice president of Kessler Financial, which acts as an agent for MBNA in card portfolio purchases, doubted that there are enough portfolios available for sale to provide the economies of scale needed in the credit card business. He pointed out that while roughly 5,000 credit unions in the U.S. offer credit cards, fewer than 500 of them have portfolios of more than $10 million and the majority of credit unions have portfolios of less than a million dollars. “In terms of size I see the credit union credit card market as a big pyramid with a relatively narrow group of credit unions with large portfolios resting on a very large base of institutions with relatively small portfolios,” Fuld said. “Credit unions are only figuring out what a lot of banks figured out in the 1980′s and 1990′s,” Fuld added. But Pettis countered the objections. She pointed out that the CUSO has the experience of managing the marketing and collections as well as other services for 600 credit unions already and that the CUSO already had a track record of growth in the portfolios they manage. Fiegle also pointed out that since it has no stockholders, the CUSO could be happier with smaller profit margins after the interest was paid on the debentures. Predictably in response to the Illinois move the St. Petersburg, Florida based Card Services for Credit Unions, (CSCU) the largest credit card processor for credit unions, maintained its position that credit unions should not sell their own portfolios. But CSCU admitted that it had difficulty commenting on the ILCU move since ILCU is one of CSCU’s members. Glen Lee, senior vice president with Dallas, Texas based TNB Card Services, admitted not being “thrilled” at the notion of increased competition but he praised the ILCU effort for bringing more credit union based interests into the market. He agreed with other sources that had commented that ILCU’s entry clearing indicated that some credit unions selling their card portfolios is definitely a trend and not a “flash in the pan.” “Which doesn’t mean selling is right for every credit union,” he said, “but sales are clearly not just a short term thing.” [email protected]</p>