Should I Sell my Card Portfolio? A CEO's Perspective on a Growing Credit Union Question
I have been intrigued by the recent press about large issuers offering to buy card portfolios at handsome premiums. We've all been stung by the downturn in the economy, increased competition from the large issuers, and rising delinquencies. I can definitely see how a cash infusion could be useful at our credit union. But at what cost? Am I willing to sacrifice long term member loyalty for a quick buck now? After all these years of competing with the "big boys", am I ready to recommend that we sell out to them? Why Do The Big Credit Card Companies Want It? First, I've got to ask myself why do they want our portfolio? The answer is simple. They see the potential. In an age when the cost of direct mail is increasing while the response rates have decreased to an all-time low of less than 1%, credit union portfolios represent an opportunity for the big credit card companies to cherry-pick established, profitable accounts at a much lower cost. (And don't kid yourself. They really are going to cherry-pick your portfolio, taking only your best accounts and leaving you with any account over 90 days delinquent, those with poor or slow payment history, and just in case they missed anyone, in most cases, require you to buy back any accounts that go bad up to six months after the sale.) In addition, credit union portfolios are typically under-penetrated and have lower activation and usage rates than the national averages. And credit union portfolios are usually a higher quality due to more conservative lending policies. Translation? They The big guys think they can issue more cards, increase incremental usage, and bolster outstanding balances with little risk. And you know what? They're right. They can do all these things. But so can we. Although historically many credit unions have not excelled at marketing despite a very loyal and low-risk membership, that doesn't mean it's time to give up and sell. Compared to the masses that are typically the recipients of direct mail offers, credit union members are gold. A pot of pre-qualified, brand loyal gold that perhaps may not have been offered a "competitive" card from their credit union in years. The big issuers continue to entice our best members with aggressive offers. It's tough to compete with 0% APRs, and credit lines exceeding $10,000. But these are the types of offers our best members are getting. Strategy of the Game Big credit card companies acquiring credit union portfolios are willing to take on more risk. They lower APRs, and then offset that with high penalty fees for late and overlimit behavior. Fees you, the seller, will have no control over setting once the portfolio sells. They will also increase credit limits for your A-Paper members without the fear of the unsecured loan looming over them. It's a calculated risk that they're willing to take. Sure, they'll make some mistakes. But it's a numbers game and they are ready to play. That doesn't mean you have to offer a 0% APR to get in the game. Just the contrary, most cardholders that pursue 0% offers are rate jumpers anyway. You need to do your homework and stay competitive with offers that appeal to all segments of your membership. "Balance Rollers" are rate conscious while your "Convenience Users" may be more concerned with a loyalty program than with the rate. Raddon Financial Group (RFG), a marketing research firm based in Oakbrook Terrace, Illinois, has found that specific cardholder segments differ in terms of household profitability, loyalty and product usage. The real value is not only in the card itself but also in the value of the relationship that these card households bring. Table 1 illustrates the differences in terms of the member relationship when you compare households with your credit card and households without your credit card. As the table Table 1 clearly illustrates, the number of services, deposits, loans, and profitability among households with cards is nearly double that of households without cards. Unfortunately, the big credit card issuers probably understand this relationship more than anyone, which is why they are pursuing credit union card portfolios. Table 1 shows the average number of deposit and loan services used by card households and non-card households. It also illustrates the differences between these groups in regard to household deposits, household loans, and household profitability. When considering the complete value of your credit card portfolio, it's important to understand the mix of your segments. Do you have a high percentage of convenience users? Lots of balance rollers? A small number of heavy users? What does your mix mean in terms of strengthening overall member relationships? Where is the potential to grow revenue? Table 2 shows the average contribution to household profit generated by each card segment. The Cross-Sale column shows the average amount of profit from cross-sale opportunities such as HELOCs, Consumer Loans, and checking products. The Household column shows the combined card and cross-sale profit. *This hit home with me even more when RFG isolated my credit union's portfolio for analysis: The typical household at Toledo Area Community Credit Union has average loan balances of $8,623. In contrast, the typical credit card household has average loans of $11,912. *Among all households at my credit union, 6.2% had a Real Estate Loan correlation (First Mortgage, Home Equity Loan or Line) compared with 9.0% of credit card users. *Share draft penetration is 39.3% among all households and 49.1% among credit card households. What this all boils down to is that cards diversify my overall loan portfolio and card households are more profitable. If I choose to sell, I must consider the opportunity cost of cross-selling other products in the future. As we strive to bring on new, younger members, whose first product at the credit union is often a credit card, will the lack of data captured from card transactions and payment behavior keep me from making good decisions about other product offers in the future? The big guys understand this. They are buying our relationships and our members' trust. That's what we have that is so elusive to them. That is what they want. That is what we're selling. How will our members feel if they go to our website to complete an application for a credit card and they are hot-linked to an MBNA site? Is this the message we want to send? Is this something we want to happen? If not, then it's time to do something. It's time to start focusing on your card portfolio. Start by setting goals in penetration or usage or activation for your portfolio. You may want to follow the industry averages as published by Card Services for Credit Unions (CSCU), the association for credit unions that processes their card transactions through Certegy Card Services - 35% penetration, three to five transactions per account per month, and 65% accounts with activity. Then dedicate some resources, human and financial, to your card program for a set period of time and see what happens. This is exactly what a buyer of your portfolio is going to do. They are going to try to find a card to fit EVERY ONE of your members. Year in and year out at our card association annual meeting we see credit unions, large and small, that considers credit cards as a core relationship product and commit the resources to it. The result - double digit increases in key growth measures, particularly card revenue. I know the big guys are not offering to pay a "premium" because they want to help our credit union. These are not friendly advisors trying to take a burden off of our shoulders. These are businesspeople intent on increasing their market share and stock prices. They are looking for the path of least resistance. Opening up new markets and expanding their reach. Just a few years ago, community banks were their target. Now they've moved on to credit unions. This too shall pass. Once some number of credit unions have sold their portfolios and the market is saturated, they'll move along to another segment. In the meantime, as a result, how many of us will lose those relationships and critical ties to our members? One thing is certain, not our credit union. Because we're not selling.