Passive management of card portfolios no longer an option for credit unions

ARLINGTON, Va. – Whether a credit union decides to sell its portfolio to a bank or contract its portfolio management out to a credit union-based provider or take steps to manage the portfolio more effectively and aggressively themselves, the era when credit unions could be content to merely offer members a credit card and be done with it has passed. That is the con-sensus of voices on both sides of the ongoing discussion of how credit unions should best include credit cards as part of their products and services. “I think a lot of credit unions got into cards without necessarily thinking about where the portfolio would fit in to their overall strategy,” said Frank Selker, the president of the Oregon-based AssetExchange. AssetExchange brokers negotiate between credit unions that wish to sell their portfolios and banks interested in buying them. In this regard Asset Exchange contends that credit unions serve members best when they view their portfolios primarily, but not exclusively, as an investment. He contends that some, but not all, credit unions that have poorly performing card portfolios should consider selling them. In a recent analysis of card portfolios as an investment, AssetExchange found that returns on credit card portfolio assets can range from between 2% and 6% and the ROA usually increased with portfolio size. Neither of which is particularly new, but Selker added that AssetExchange advised credit unions making more than a 6% return on their card portfolios to keep them. Selker also said that it had inaugurated a program, tentatively called the Card Management program, to help credit unions that wanted to better their portfolio’s performance rather than sell it. Selker maintained that a credit union selling a portfolio made sense primarily when, as in now, a credit union could attract a good premium for the portfolio and when the proceeds from the sale could be invested in another investment vehicle, such as auto loans, bonds or mortgage lending or in another benefit to members, like a new branch. For example, in its analysis, AssetExchange said that a credit union earning a net 3.5% on a credit card portfolio of $5 million could make an additional $20,000 over seven years if it sold the portfolio for a 15% premium and invested the money in auto loans earning a net 2.5%. But Selker also pointed out that if a credit union managed to increase its portfolio by 5% per year, which he admitted could be a high target, it could make $380,000 more over seven years by keeping the portfolio than by selling it. Likewise, if the credit union managed to reduce its portfolio costs by as little as 1%, it could make $290,000 more over the seven years by keeping rather than selling. But Glen Lee, senior vice president of sales and marketing for TNB card services, said that while he agreed credit unions needed to be more pro-active in their management of card portfolios, looking at them primarily as an investment underestimated their value as a relationship vehicle between the credit union and the credit union member. Even if the credit union’s credit card is not the only card in the member’s wallet, Lee said, the credit union can make it the member’s card of choice. “I have to ask myself about the arguments some people make that credit cards are more investments than relationship vehicles,” Lee pointed out. “If a credit union’s card is just one card among many and is not a relationship vehicle to its members, why are the [portfolio] buyers willing to pay such a premium for them?” The bottom line, Lee said, is that we see card portfolios as a core part of a credit union’s relationship with its members. Lee admitted he had a conflict in seeming to advise credit unions not to sell their portfolios in all cases since TNB is in the market for them as well. However, Lee reiterated his previous advice that credit unions pay close attention to the details of the credit portfolio purchase deals they may have. In addition to concerns over changing processors and timing, that credit unions which have sold their portfolios have generally not described as being a problem, Lee also pointed out that portfolio buyers often do not buy all the card accounts but leave the ones that are in default or are often delinquent. The selling credit union then still has to deal with those accounts and those members. Selker admitted that this can be the case but added that the issue of just which accounts are being purchased can be handled in negotiations. He also added that when a buyer does purchase all the accounts that this can lower the premium on the portfolio since the buyer had to collect from the bad accounts. Steve Railey, an executive director for PSCU Financial Services who manages the firm’s card acquisitions in partnership with National City Bank, said that credit unions should see their card portfolios as both an investment and as a relationship building opportunity. “A well managed credit card product can and does yield strong net returns,” Railey said. “Returns that are in many cases stronger than net returns from other retail products lines. It is for the same investment value opportunities that a credit union should very carefully consider whether or not selling their credit card asset is their best solution.” “Viewing the credit union credit card product only as a high yield investment instrument is one dimensional,” Railey argued. “There is equally strong relationship value,” he said, contending that, properly managed, no other credit union vehicle can give a credit union as many opportunities to interact with its members and to sell other credit union products and services. “A solid credit union card program does stimulate membership growth, deposit growth, other product line growth; strengthens the member/credit union relationship; and strengthens the credit union’s community presence.” And he agreed with Lee and Selker, the marketplace now is too competitive for a credit union to treat its credit card portfolio passively. Whether selling or improving card performance through outsourcing or making in-house changes, credit unions need to recognize that, if they offer credit cards, those cards need to be part of their overall strategy of service to their members, he added. [email protected]