Research Firm Says Many CUs Undervalue Their Card Portfolios; CUs Shouldn't Give Up Without a Fight

OAK BROOK TERRACE, Ill. – While his firm refuses to come out against credit unions selling their credit card portfolios, Robert Lawhead, CEO of Raddon Financial Group, maintains that too few credit unions have a real grip on what their card portfolios are really worth. “We have credit union CEOs who call us and say, `oh, our card portfolio is flat, we’re going to sell it,’ ” Lawhead said, “ but too few really understand the value of what it is they are thinking of selling.” Lawhead will reveal some of the research that he believes too few credit union executives have in a December 2 Webcast sponsored by Card Services for Credit Unions, the association for credit unions that processes their card transactions with Certegy. The Webcast is open to more than just CSCU member executives, but CSCU spokeswoman Sue Chrzan said the enrollment is limited. Lawhead emphasized that Raddon does not specialize in cards but specializes in helping credit unions and other financial institution executives make the best strategic decisions they can. He said that the firm’s research into the value of cards is not meant to come down decisively on one side or the other in the card portfolio sale debate, but instead to help credit union executives better understand the value of their product, whether or not they decide to sell. “It seemed to us that in too many situations only one party to a potential transaction really understood what the portfolio is worth,” Lawhead said, adding, “and that’s never a good thing.” Raddon’s research helps put some numbers to what can seem a primarily philosophical argument about whether a credit union should sell its portfolio. For example, it’s axiomatic for some card portfolio discussions to contain the line “but why would a credit union want to sell that relationship?” But Raddon’s research puts some figures to those relationships. According to Raddon’s study of the topic, credit union households which do not have a credit union card keep an average of just over $7,700 in loans. But credit union households that have a Classic card have an average of $11,000 in loan balances; Gold card households have an average of over $16,000 and Platinum average over $23,000. Similar data can be seen when it comes to deposits, Lawhead said. Households without cards have an average of just under $10,000 in deposits while households with cards have higher deposits averaging from just under $12,000 to just over $19,000. “The point is that credit card products are not just a relationship product in theory,” Lawhead said, “but result in higher loan balances and deposits across the board.” Lawhead explained another mistake many credit unions make is in failing to view their credit card portfolios by segments which, he said, represent a spectrum of credit union cardholders. At the one end of the spectrum are credit union cardholders that are inactive with their cards and “may not even know where their cards are,” Lawhead said. At the other end of the spectrum are the heavy card users who not only use their cards frequently, but also use them for larger purchase items like appliances and other big ticket items. In the middle there are two big categories of card users that credit unions need to better understand, Lawhead added: convenience cardholders and balance roller cardholders. Convenience cardholders, which make up an average of 22% of credit union cardholders, use their cards often and tend to keep their finance charges down by paying off all or part of their bill frequently, Lawhead explained. Their use of the card benefits the credit union primarily through the interchange their purchases make for the issuing credit union, he added. Convenience cardholders are the most open to offering a rewards program for the use of the cards, but the application of such a program can result in a reduction of their profitability to the institution, he added. Raddon’s research did show however that convenience cardholders, on average, still show a profitability of $204 per cardholder. Balance roller cardholders don’t necessarily use their cards that heavily but do carry balances and are sensitive to finance charges, Lawhead explained. They make up 14% of credit union cardholders and are the most vulnerable to the siren calls from other issuers that might offer very low balance transfer rates. Credit unions with the technical ability to do so might benefit from being able to counter such offers to these cardholders on a case-by-case basis, Lawhead explained. Dealing on rates is probably worthwhile because, on average, balance roller cardholders represent just over $450 in total profitability from cards and other products, he added. But the real cream of a credit union card portfolio is the heavy card user, Lawhead said. These 8% of credit union cardholders are worth just over $600 in card profits and profit from other products, he said, and credit unions have more of them from a percentage standpoint. “Other card issuers have between 3-4% heavy card users,” Lawhead said, “while credit unions have 8%. More credit unions need to ask themselves why that is and what value that might have to firms wishing to buy their card portfolios.” Once credit unions get to better understand the two broad categories of cardholders, they can take steps to better market card usage to their moderate cardholders and to get the inactive users to either begin to use their cards or give them up. “The only thing credit unions should ask is if a member has its card, they should use it,” he said. He suggested more credit unions adopt an inactivity fee as a way of prompting more of their inactive cardholder to start using their cards. [email protected]