For Two Credit Unions, Card Penetration Was Not Enough to Stop Them From Selling Portfolios

ARLINGTON, Va. – One of the key benchmarks of credit union credit card performance is often card penetration, how many of the credit union’s members hold a credit card from their credit union. But sometimes even good penetration is not enough to manage a program well. Among some of the latest credit unions to bow out of the card issuing business recently were two who, on paper, would appear to have been doing pretty well issuing cards. Members First Credit Union, headquartered in Manchester, New Hampshire, is a $116 million credit union with just under 23,000 members whose card portfolio stood at 6,083 accounts in December 2003, with outstanding balances of $8.5 million, according to NCUA. Golden Bay FCU, headquartered in Moffett Field, California, is a $200 million credit union with just over 16,000 members whose card portfolio had just over 4,000 accounts and outstanding balances of $8.2 million in December 2003, NCUA data said. That gave the Members First card program a penetration rate of 26.4% and Golden Bay a penetration rate of 25%. Yet InfiCorp, the Atlanta based card issuing bank which buys a significant number of credit union’s card portfolio’s each year, purchased both these portfolios. What happened to lead the credit unions to sell? “What the portfolio on paper doesn’t show is that our portfolio had been $11 million just a few months before,” said Robert Nadeau, the CEO of Members First. “We were losing ground because, while our penetration was good, we couldn’t hold our best members who were going elsewhere for a better rate,” he added. Nadeau reported that the credit union had offered a Classic, Gold and Platinum VISA card in an attempt to tailor the card program as much as possible to the individual member needs. The card programs had rewards benefits on them to try to drive transactions, but Nadeau said that the low rates being offered by competing cards kept taking away the members with the best credit. “We couldn’t compete with the 1.9% and 2.9% rate offers that we were seeing,” Nadeau said. “We tried everything but it just didn’t make sense to our members with the highest credit ratings to remain with a card that didn’t give them the interest rates they wanted,” he explained. Cardholders with the highest credit ratings, he explained, were also fairly immune from the arguments that their credit union could be trusted not to hike their rate if they were, for example, late with a payment because they were never late with a payment, he explained. “The card portfolio was growing skewed,” he said, “as we began to have a preponderance of cardholders of higher risk. We started having charge-offs in the portfolio, where we really hadn’t had them before.” So the credit union decided to sell the portfolio while it still had as much value as it did. So far, he said, Members First hasn’t decided where it will put the money it made from the portfolio sale. The credit union’s loan-to-share ratio is 84.86, a good deal above its peers so Nadeau said the loss of the loans from the balance sheet shouldn’t affect the credit union’s lending ratios too much. For Golden Bay, the problem was more of having a program that had been strong from the beginning but which would require a significant addition of resources to keep going, according to Rick Leas, CEO of the credit union. “We are really not very big in this market and didn’t believe we had the resources to do the necessary things to keep our cards competitive,” Leas said. Located very near Mountain View and San Jose, California, Leas explained that his credit union had to compete with the overall San Francisco Bay area and that, without a rewards program and offering only a Classic and Platinum card, the credit union believed it would not be able to compete in cards. So they sold the portfolio, and Leas explained that the credit union looked forward to investing the proceeds in some lending programs in which the credit union could be more aggressive and where Golden Bay could fill more of a niche. “We are still going to offer cards and still make some money from the card program,” he said. “But we are going to focus our expertise on the areas in which we can really outshine the competition,” he said. -