Why Some Are Getting Back Into The Credit Card Game

DALLAS–Over the last 10 years, many credit unions were looking to cash in by selling off their credit card portfolios, but today some of those same credit unions are looking to get back into the credit card game.
Part of what drove the portfolio sell-off was the quick infusion of capital to be made off those sales–capital that could then be plowed into new technology and branches, for example.
The driving force behind wanting to get back into the credit card business: the credit card is the one financial instrument a member is likely to use nearly every day, representing a tangible, daily touchpoint with that member.
Mark Fenner, senior vice president of TNB Card Services, here, told the Credit Union Journal he definitely is seeing credit unions wanting to get back to owning their own portfolios, rather than maintaining an agent relationship.
“Especially with the larger credit unions,” he said. “Four or five years ago, credit unions were interested in selling because they had other areas where they wanted their money to go–they had active mortgage portfolios and auto loan portfolios. Also, they didn’t have the infrastructure to compete with national card issuers. They wanted to sell due to the complexity and resources it would take to manage their portfolio, especially at the marketing end. Plus, there was a fear of fraud that was greater then than it is now.”
Cyndie Martini, CEO of Member Access Pacific in Tukwila, Wash., agreed. “We have seen this trend. Member Access Pacific is not the primary contact, so we only see a small snapshot. But when we interact with credit unions on processing, many of the medium or smaller ones have sold their portfolios. We recommend they get a third-party, neutral examination. Brookwood Capital is an organization that is truly objective–if they believe a credit union should not sell its portfolio, they will say so,” she said.

What (Was) in Your Wallet?
The starting point for the selling trend may have been the launch of an advertising campaign that eventually made “What’s in Your Wallet?” a cultural catchphrase, TNB’s Fenner theorized.
“In 2002, Capital One started [its] big push on credit cards and began running ads,” he recalled. “Credit unions didn’t have the expertise or the processing infrastructure to deal with pricing. They figured, ‘Why own this asset when we can sell it?’ Autos and mortgages were going great guns back then. That drove a lot of credit unions to look favorably toward marketing their credit card portfolios.”
After sloughing off their credit card portfolios to third-party processors–in some cases, to banks–many credit unions experienced seller’s remorse. Especially when members began complaining.
Member Access Pacific’s Martini said she has observed a “lack of comfort” on the part of CUs, who are concerned the purchaser of their credit card portfolio does not handle member service correctly.
“Many credit unions feel the fee structure and management of the portfolio was not credit-union oriented,” she said. “Some credit union CEOs feel they are losing members because they can go to a competing credit union and get a credit card with a better rate or lower fee. It is difficult to balance the income the credit union makes on the sale of the portfolio versus the potential loss of members.”
TNB’s Fenner had a similar view. He said CUs feel as if they understand their members’ needs in a way other financial institutions do not.
“When someone calls in, they are a member, not a customer or a client. A credit union was formed to provide services for the membership, not make a return for shareholders. The sole reason for the existence of a credit union is to provide service; where the sole reason for existence of other financial institutions is to generate a profit.”

The Great Buy Back
“As credit unions come to the end of their term, they are looking to buy back that asset,” said TNB’s Fenner, who offered multiple reasons for CUs to regain control of their credit card portfolios. “One, relationships with existing providers, especially if they are banks, are less than satisfactory. Two, we are in a different economic cycle today. The returns of putting the money to work in other portfolios are down, so credit unions are looking for alternative sources of income. Credit card portfolios continue to be one of the highest-performing assets on the balance sheet.”
Sometimes, Fenner continued, credit unions have the option to buy back their credit card portfolios from the third party. Alternatively, other credit unions will have to start their own program from scratch.
“At the end of the relationship, the issuer no longer has the right to use the credit union’s name. They would have to reissue generic cards. Credit unions, instead of paying a premium to the issuer, can take that money and put it toward marketing dollars,” Fenner said.
Credit unions, have three options, he assessed: renew the existing agency agreement with the provider, buy the portfolio back and issue the cards themselves (or partner with an entity such as TNB for processing), or, start up a brand new program, in which case TNB could consult.
For Member Access Pacific’s Martini, fear plays a role in the equation. She said the largest factor for credit unions, especially the small- and medium-sized ones, is the feeling they cannot offer the loyalty programs that would make the credit union credit card the first-choice card in someone’s wallet.
“It takes a credit union with strong marketing and staff effort to come up with ways to make benefits for the card product,” she said. “The credit unions we’ve talked to have signed five- to six-year agreements, and they say when the agreements are up they will revisit the issue.”

What Can CUs Do After Buyback?
Martini described herself as “an advocate of keeping your portfolio.” She believes if credit unions market cards correctly and have a competitive fee structure, the majority of credit unions should have a profitable credit card portfolio.
“Of course there are regional employment issues, SEG issues and other things that happen that might make sense for a credit union to sell its portfolio. However, it usually is a matter of putting time into marketing, because credit card transactions make interchange income, in addition to finance charge income,” she said.
One of the challenges, Fenner acknowledged, is going up against the big boys, like MBNA, who would be only too happy to snap up a CU’s portfolio.
“We address being able to price against the national issuers,” he said. “We have taken our expertise in managing our own portfolio, which gives credit unions the confidence they can build their own product.”
And the potential pain involved is worth it, he suggested. “Credit unions feel they can utilize their credit card portfolio as a way to extend their credit union brand.”
Fenner said TNB still is in the process of analyzing the anecdotal trend of CUs buying back their credit card portfolios. He said it is still unclear how big this market segment might be.
In the meantime, TNB is getting out the word that credit unions can compete in the credit card arena.
“We are talking to credit unions, going to conferences and events, and making telephone calls,” Fenner said. “We’ve been around for a long time, so we know the credit union world is a small one. People know what we are doing, and we get a lot of referrals and credit unions seeking us out.
“I think there is an opportunity, and we see it by the leads and feedback we are getting,” he continued. “Credit unions have hope they can compete with the national issuers and have that high-performing asset on their balance sheet.”