Sale of Credit Card Portfolios is Sell-out of Members' Best Interest

Although I retired as president and CEO of Suncoast Schools Federal Credit Union nearly eight years ago, I continue to follow developments in the credit union movement with interest and pride, but also on occasion, a sense of disappointment. As I continue to read stories reporting the sale of credit card portfolios to bank related groups, I find myself amazed, puzzled and disappointed since I believe such sales are clearly a sell-out of the best interests of credit union members. The premiums being paid for such sales, which are reported to average 19%, offer a significant windfall that is in the category of a short-term gain to a credit union, but a long-term loss and disservice to its members. When the organization that is now Visa International decided to allow credit unions to offer Visa credit card service almost 30 years ago, it was clear to me that there were several good reasons for Suncoast to offer credit card service as soon as possible. The primary reasons were to allow members to access line-of-credit loans in a very efficient and convenient way, to offer lower interest rates and fees than being charged by banks, and add a major service that would help reach a long-tern goal of being the primary financial institution for current and future members. Fortunately, I was acquainted with the president of a credit card processing company located in Tampa who helped me develop a plan for Suncoast and four other area credit unions to issue credit cards with his company handling the authorizations, statements, and other related services. Payment Systems for Credit Unions (PSCU), now PSCU Financial Services, was formed in order to negotiate the terms of a contract for the five initial credit unions in Tampa and any others that might choose to join the group. Over 800 other credit unions ultimately joined the group. About 10 years later when the directors of PSCU chose to switch to a processor located in Nebraska, I participated in the formation of Card Services for Credit Unions (CSCU) in order to continue to be served by Telecredit which is now Certergy. A tremendous amount of time and work was done and continues to be done by a large number of credit union volunteers who served and continue to serve as directors of both organizations, because of their strong belief that credit card service was and continues to be a very important service for credit union members. Consumers everywhere are now using credit and debit cards for most of their payments for goods and services. It is now more important than ever that credit unions continue to offer credit card service. A recent study done for CSCU by the research firm Raddon Financial Group concluded that many credit unions undervalue their card portfolios. Other findings of the study, a summary of which appeared in the November 19, 2003 issue of Credit Union Times, include the conclusion that credit union households that have Classic, Gold, and Platinum cards have substantially higher over-all loan balances. Credit cards are clearly extremely profitable in the banking industry. That’s why tens of millions of solicitations are mailed to households in America annually at great expense. A look at the fine print in the required disclosures in the mailers reveals fees that should shock credit union CEOs and directors. For example, late fees alone now average $30 with grace periods reduced to 0 days by many credit card companies, which has resulted in revenue from that source jumping to $7.3 billion in 2002 from $1.7 billion in 1996 according to a financial journal published by Charles Schwab. In addition, over-the-limit fees of $35 or more, 3% of the amount received for cash advances, and $30 fees for returned checks are common. Some agreements now allow already high interest rates to be increased to what is called a default rate that is much higher if a payment is late. I personally recently received a card offer that allows for a default rate of 29% to be imposed. Considering the rates and fees charged by the banking industry, it’s not difficult to see why such large premiums are being paid for credit union credit card portfolios. As existing agreements for accounts expire and are replaced with typical new bank agreements, premiums are soon recouped plus added profit. Profits are high enough that some credit unions are allowed to share in the interest and interchange income. The whole process leaves many credit union members with substantial outstanding card account balances left holding the bag or forced to find a new issuer if possible-all because their credit union’s management and directors couldn’t resist a windfall cash payment. I know from personal experience and studies that credit union credit card service can be profitable without gouging members with the high interest rates and the unconscionable fees typically charged by banks or bank related companies. It is essential, however, for the programs to be managed and marketed properly. Organizations such as CUSU and PSCU Financial Services provide marketing assistance and workshops designed to assist credit unions of all sizes when help is needed. Small credit unions that do not find it feasible to offer credit card service might want to consider seeking a partnership arrangement with a larger credit union that could administer the program for them rather than turn to a bank issuer willing to pay for a chance to provide the service with its interest rates and fees to apply. I learned very early in my 40-year credit union career that the best interest of credit union members should always be given priority over everything else if the noble vision established for the credit union movement by its founders and pioneers is to be honored. To me, for a credit union to sell its credit card portfolio to a bank or bank-like issuer, is almost like turning that service or any other lending opportunities over to what is now being called sub-prime and predatory lenders. The best interest of a credit union’s members, its owners, clearly is abandoned when such sales occur. As a credit union leader who was a strong advocate and believer in the philosophy of the credit union movement and one who sought to practice it from 1956 to 1996, I sincerely hope that current credit union leaders will not dishonor the trust and responsibility given to them by their credit union’s members by selling any type service opportunity to an outside group whose primary goals conflict with the universal “people helping people” goal of credit unions everywhere.