ARLINGTON, Va. – Credit unions with established card programs but not much card penetration with their total membership are potentially sitting on a gold mine. So far this year, two credit union-owned purchasers – TNB Card Services, which is a subsidiary of the credit union owned Town North Bank, and the ICUL Services Corporation, a subsidiary of the Illinois Credit Union League – have purchased almost as many credit union card portfolios as industry leader MBNA, and more than another major player, InfiCorp. TNB and ICULSC don't come close to MBNA and InfiCorp in terms of the portfolio sizes they are purchasing, but that may give them an edge in one respect – upside. "It's all about potential," said Robert Hammer, CEO of R.K. Hammer, a card evaluation and consulting firm based in Thousand Oaks, California. Small card portfolio purchasers will pay a premium for a small card portfolio on account of its relatively low penetration into the credit union's membership base, Hammer explained. The portfolio buyer has their eye less on what is in the existing portfolio, and more on the potential card growth. One of TNB's recent purchases highlights the potential a small portfolio might have. It bought a portfolio valued at just $16,000 from the $17 million Reed Credit Union based in Houston. A portfolio this small might not be on the radar screen of the MBNA's and InfiCorp's, but with NCUA data showing Reed's portfolio has only 22 accounts, the upside to grow this portfolio is dramatic given that the CU serves 2,100 members. The increased interest in the small card opportunity has a lot to do with the level of saturation facing other card marketing channels, Hammer added. Using direct mail to find new card customers routinely draws less than a 1% response and cannot guarantee a cardholder will not abandon an issuer's card for a better offer. A small portfolio with low penetration offers a platform to a potential cardholder base that might be an easier sell and yield more loyal cardholders. The Naperville, Illinois based ICULSC's nine purchases this year have also come from smaller portfolios, according to George Fiegle, ICULSC's COO. Fiegle reported that the largest purchase was valued at almost $2.5 million and the nine buys overall averaged $500,000. ICULSC reportedly paid healthy premiums for them although, like other portfolio purchasers, Fiegle declined to specify what exactly the premiums were. These small portfolios are likely under penetrated, again offering an upside a large portfolio may not. Traditionally, buying credit card portfolios has been about improving the management of an existing card portfolio, for example by increasing credit limits on existing cards and expanding the types and varieties of cards offered. But in small card portfolios, the focus is less on managing existing relationships than it is on taking advantage of relationships that the portfolio buyer hopes to create. Hammer explained that while each card portfolio purchase is unique, a portfolio's valuation frequently starts out as an exercise of simple math. A credit union with 100,000 members, only 5,000 of whom hold the credit union's card, means that the credit union has a penetration of only 5%. That's plenty of room to grow, Hammer explained. "This is in contrast to a larger portfolio which might have a greater number of accounts but which might also represent a penetration of 50%," he said. That 50% level could be the theoretical maximum for that large portfolio, he said. Once the room to grow is established, a card portfolio buyer will often ask whether it has the mix of products and product enhancements that the credit union's card-less members will want. The small portfolio is attractive because the CU usually has not had the skill or the resources to market the cards correctly. The buyer will only move forward if they think they have a mix of products and upgrades that the credit union members will want, Hammer explained. The third measure a card portfolio buyer might take will involve the demographics of the card portfolio's cardholders and potential cardholders. Sometimes demographic considerations can cover such obvious things as payment history and employment status, but they can also involve intangibles like whether a credit union's field of cardholders or potential cardholders comes from a demographic that the card purchaser already services, Hammer added. No matter the dynamic on the buyer's interest, industry sources report that credit unions with small card portfolios have only just begun to understand the value of their asset. Steven Fuld, SVP of Kessler Financial Services, the firm which acts as an agent for MBNA in many of its card purchases, said CUs with smaller portfolios are starting to test the waters to see what their portfolios are worth. Willie Koo, the CEO of Asset Exchange, the largest broker of credit union's card portfolios, recently echoed Fuld's observation and reported that his firm had seen activity pick up with smaller portfolios in the last month. Koo said getting a top-dollar premium seems to be the most important thing to the credit unions looking to sell their small portfolios. So What Are They Worth, Really? Details of premiums paid for portfolio purchases are notoriously hard to obtain, but Hammer said that one small credit union card portfolio has sold for a 26% premium, and sources say TNB was the buyer. TNB would not comment. TNB did say that it made the decision to purchase the tiny Reed portfolio, with only 22 card accounts, in part because the credit union was already processing with TNB and because of the opportunity the purchase represented. "Clearly we believed we could grow the account and manage it to be a profitable account," explained Jan Dailey, marketing manager. Given the size of the overall potential market and the steady competition among other card marketing efforts, it seems likely that the press for smaller credit union portfolios will continue. According to Asset Exchange and NCUA data, over 3,100 of the over 4,800 credit union card portfolios nationwide are under $1.5 million in outstanding accounts. Robert Hackney, CEO of Card Services for Credit Unions, the association of credit unions that process their card transactions with Certegy Card Systems, based in Alpharetta, Georgia, said that once credit unions figure out what they have in their potential cardholders, it will be up to the credit unions to take advantage of that reality. A credit union is going to do well with whatever products that gets its resources, Hackney said. Whether it.s car loans or home equity loans or credit cards, credit unions that figure out the value of their card assets and will invest in them can make money from them, he explained. "It's as simple as that." [email protected]