Your credit card portfolio: build it or sell it?
We're living in a new world that is changing at a record pace. Business plans that were strategically aligned with the marketplace just a few years ago may now be largely obsolete. Products that once made good business sense to offer are now being challenged by fierce competition and intense margin pressures. One such product is credit cards. Over the last several years the credit union movement has been witness to a new phenomenon - the divesture of credit card portfolios. It is no surprise that as a product reaches maturity it becomes more difficult to find innovative ways to market and sell it. No longer are credit cards selling themselves and the days of reaping the low hanging fruit are long gone. However, this does not mean that there is no more fruit to reap - it just takes a fresh approach to get to it. In other words, before a credit union gives serious energy to selling the credit card portfolio, a few points should be considered. As with any product, defining the goal (or desired result) of the product offering is critical to measuring its success. What is your credit union's objective of offering credit cards? Are you solely looking for sources of revenue and a way to contribute to your financial cooperative's bottom line? Is the goal to build a full-service relationship with your members, using the credit card as a springboard? With the right product management both goals can certainly be achieved. It is conceivable that to some credit unions the everyday burden of managing their credit card portfolio may seem like a daunting task, and it may even be feared that the effort outweighs the potential benefits. Perhaps the solution is partnering to build your credit card portfolio's potential, rather than partnering to sell the portfolio and lose control over this strategic relationship with your members. By fully developing and managing the card portfolio, even in their maturity, credit cards have a proven record of profitability and will remain a strong contributor to the credit union's revenue streams. For instance, profitability for the credit card industry continued its high levels in 2000, with an estimated average net return on assets (ROA) before taxes of 3.6%, up from 3.1% in 1999. Platinum cards continued to lead the way with a pretax ROA of 4.0%, followed by gold cards at 3.4% and standard/classic cards coming in at 2.6%. All card types were up from the prior year. The average card industry portfolio in 2000 had a total income yield (defined as the sum of interest income, interchange income and ancillary fees) of 18.4%, up from 17.9% in 1999. Returns aside, many factors will go into a credit union's decision to sell its card portfolio. For credit unions seriously exploring this option, here are a few things to keep in mind: * Re-pricing - If the portfolio is being purchased from another bank, the buyer probably has less "tweaking" to do regarding the price. However, if purchasing from a credit union, and depending on the credit union's pricing structure, the pricing changes may be drastic. Bottom line, if a credit union's card portfolio is sold, credit union members should expect the interest rate and ancillary fees to increase. * Attrition Risk - With the anticipated increase in the rate and fee structure, a buyer of a credit union portfolio faces the difficult task of gauging the attrition rate. Will your members be satisfied long term with not being able to get the personalized service they have come to expect from their credit union? If not, attrition may be high. * Growth Opportunity - How quickly can the relationship grow beyond credit cards? Many potential buyers state that it's hands off to the other credit union products. However, credit unions should not be lulled into a false sense of security believing that their other member relationships are not at risk at some point. * It's important to remember that it's your ability to deliver benefit or value to your member that should ultimately be driving the decision of what products your credit union offers. With this said, the question has to be asked, "Who can best serve your members?" I would venture to say, it's you! Before giving up your control of the credit card relationship and selling your portfolio, consideration should be given to partnering with an experienced provider who can help you cultivate your card portfolio for maximum benefit - to both your members and your credit union. Have your credit union's card be the card of choice for your members by offering them the benefits that they truly value. Differentiate your card from the competition and help build your card portfolios by providing your members with add-on products such as rewards programs, checks with statements, promotional pricing plans just to name a few. So what if the decision has been made that your members are best served by selling the credit union's card portfolio, is your only option turning to a large national bank provider? No, credit union industry solutions are now available for those who choose to sell their card portfolios but want to work with a buyer who understands both credit unions and their motivating philosophy of "people helping people." Regardless of which path your credit union selects, you should seek help from an experienced provider to make the right, fully informed decision.