Two factors have come together to create the perfect storm for credit card issuers, credit unions included. First, as we all know, we are in the midst of a seas change in understanding the riskiness of the American consumer at the same time as they fundamentally change their spending behavior. The credit card industry will contract (by as much as 30% according to some industry experts) and consumer spending is both declining overall and shifting toward debit and other payment vehicles. As such, credit card issuers must recalibrate their expectations for their card programs: growth cannot be the only goal or credit risk may increase to intolerable levels. Credit losses will not return to historic levels for quite some time (if ever) and programs will have difficulty generating the kinds of profits many came to rely on during happier times. In fact, second quarter data through the NCUA site shows that perhaps 1-in-7 credit unions today are losing money on their card programs (See Related Chart), with that number certain to increase as credit losses trends point to further increases and the impacts of the CARD Act are felt going forward.

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In the past decade approximately 450 credit unions sold their portfolios, with total card balances of $3.3 billion. While the sale of those portfolios generated strong feelings, it is only fair to acknowledge that those institutions by-and-large made a great financial decision. Credit card portfolio valuations, which had often generated 20% or greater premiums over book value, have dropped precipitously and today many portfolios cannot be sold at any price. Further, in addition to generating a financial windfall, those credit unions have avoided getting swept away in this raging river of consumer credit risk as well as avoiding all the expenses and complexities required of all issuers by the CARD Act. In short, those management teams that sold are in many ways looking like the smartest people in the room. But things have changed, and staying smart is no easy task.

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Affinity programs have been around for a long time but have traditionally been dominated by the largest credit card issuers. With special divisions dedicated to finding and managing these opportunities it has always been difficult for small issuers, including credit unions, to establish more than a handful of such programs. But things have changed and there is now more room for the small issuer to compete.

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When merging in a credit card program we urge all credit unions to think through the following issues carefully:

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Still, offering credit cards through a third-party remains and option that some credit unions continue to explore. Their reasons typically include concerns with ever-escalating compliance risk, concerns about future performance, a need for income or capital, different strategic priorities or a lack of internal resources to manage the program. Whatever the reason a credit union is looking at portfolio sale, they need to be very careful and deliberate about how they proceed. Some of the lessons learned by others include:

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In our many years in the industry, and analysis of hundreds of credit card programs, we often find that too few issuers have an accurate picture of their credit card program costs. With functions for many products blended together, some processing services outsourced, and ambiguity about what is overhead and how to account for it determining credit card program costs is indeed a tricky exercise. But knowing your expenses is critical; ignorance is the opposite of bliss.

In our work with issuers, we see some common errors in measuring credit card program profitability. These often include:

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So far the numbers of those who have reentered the business remain modest. Of the roughly 200 credit unions which sold more than five years ago (and can therefore be assumed to be contractually able to start issuing again) we have identified sixteen which have returned to issuing credit cards and have generated portfolios of at least $1 million. Another handful have restarted or announced plans to do so and are not yet at this size threshold. And we continue to receive inquiries from others who are examining this option. It all points to meaningful numbers of credit unions taking a serious look at become issuers again, especially as another 200+ past portfolio sellers will come to this same decision point over the next few years.

In an effort to help those working through this decision, we have analyzed the performance of those sixteen ‘rebooted’ card programs….

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How can this be? This happens because of how most credit unions begin to explore a credit card portfolio sale. Typically a salesperson for a portfolio broker contacts the credit union suggesting a ‘free’ or unreasonably low price review of the card program. This will include a look at ‘market bids so you can see what it’s worth.’ There is no obligation to sell your portfolio, so this sounds like a fine and risk-free idea. Who doesn’t want something free? But in this case free becomes very, very expensive.

Here is the reason:

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That’s the bad news. But in spite of these pressures we have a once-in-a-generation opportunity to make great strides in serving our members and becoming their preferred provider for this particular product. Credit unions have long struggled to make a mark in the credit card segment: we have controlled less than 5% of outstandings nationwide, the largest banks have successfully poached our members, and our scarce resources were often diverted to other products. But right now, believe it or not, it is exactly the right time to make more of our card programs. Our members will benefit and our bottom lines can be strengthened with the right mix of fairness, discipline and commitment.

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