Small CU Seeks Its Fortune in Cards by Forming New CUSO
ELKHART, Ind. -- The newest card issuing CUSO did not begin in a billion-dollar credit union or league but in the state-chartered $265 million Inova Federal Credit Union, headquartered in Elkhart, Ind.
The CUSO, Innovative Card Services, has two participating credit unions so far and offers or will offer the full suite of Visa's prepaid card products including payroll cards, gift cards, Visa Buxx cards, reloadable debit cards and travel money cards, according to Rebecca Kochvar, the CUSO's managing director and chief marketer.
"We believe the prepaid card industry represents the next big push in consumer cards," Kochvar said. "And we believe we can help credit unions meet that consumer demand."
So far, the two participating credit unions are the $430 million Farm Bureau Credit Union, headquartered in Goshen, Ind., which signed for payroll cards in February 2007, and the $55 million Kemba Credit Union, headquartered in Indianapolis, which did the same in early May.
"We are excited that Kemba Credit Union has chosen Innovative Card Services as their payroll card provider," said Kochvar. "Prepaid cards are becoming an important solution for credit unions and Kemba Credit Union is a progressive financial institution willing to stay ahead of the competition to help improve their members' financial well-being."
In addition, the CUSO will soon be a preferred partner, providing prepaid cards to Indiana credit unions via the Indiana Credit Union League, according to Inova CEO Dallas Bergl. Bergl said he and Inova's board declined to "take 'no' easily" regarding the establishment of the CUSO, a development that Bergl explained grew out of the CUs search for a more efficient way to issue cards.
Bergl explained that the CU's push into the card space began in the year 2000 when Inova began to examine how it could draw more profit from its card portfolio.
"We got the picture pretty well that cards were going to be where it's at in the future," Bergl said, "and we wanted to take a hard look at our card program and see if it was up to shape for the 21st century."
At the time, Inova processed its cards on the First Data Corporation Card Platform through a relationship with PSCU Financial Services. But during the course of the review, Bergl said he and the board were surprised at how much money they were leaving on the table in the card program because of how they processed cards.
He described the problem using the concept of a series of layers that stood between the credit union and the credit card transaction. When Inova processed with First Data and used PSCU, they were effectively four layers between the transaction and the credit union. When someone swiped their card, the transaction moved through Visa, through First Data, through PSCU and finally to Inova and by investigating a bit, Bergl found that Inova could do a lot better if it cut First Data and PSCU out of the picture and instead started processing with Visa Debit Processing Service, the proprietary data processing platform offered by the card brand.
"A direct relationship with Visa DPS provided access to the same sorts of customer service and fraud protection that we wanted, but the direct relationship cut the costs a great deal," Bergl said. "It also proved to offer us an easier portal to other Visa products."
For example, Bergl and the board soon started asking why it was so expensive to offer their members Visa gift cards, again through a third-party provider that specialized in the product.
"We discovered we could issue the cards ourselves at a lower cost to our members and increased profit for us," Bergl said, "and once we did that we discovered that we could offer the other products as well."
From there, Bergl said, it was a relatively short step to realize that the credit union had the processing capacity in its relationship with Visa DPS to offer similar products to other credit union and Innovative Card Services was born.
But Bergl reported that Inova's prepaid card innovation did not stop with founding ICS but has grown to include how CUs could use the cards, particularly payroll cards, as well.
Generally, payroll cards have been marketed to credit unions as a benefit they could offer SEGs or small business members. Payroll cards would allow the SEGs to cut costs by adding even their unbanked or underbanked employees to their direct deposit rolls rather than continuing to cut them paychecks every pay period.
But this approach also required that SEGs have a significant number of unbanked employees and there was a slight conflict of interest since, from the credit union's point of view, the most desirable product to offer a SEG's employee is a checking account, not a payroll card.
ICS soon realized that credit unions did not have to offer payroll cards to their SEGs, but could offer them to individuals and that this could be a powerful tool to help credit unions both attract new members and reach out to better serve underserved areas in their field of membership.
"We realized that credit unions didn't need a relationship with a SEG to offer payroll cards to their members," Bergl said. "All they needed was for the individual to have an employer who offered direct deposit and that is becoming more and more common."
This change in effect meant that credit unions could essentially offer an additional relationship even to individuals who would otherwise be prevented from opening checking accounts and perhaps would not have become credit union members.
Mike Dukehart, marketing manager with Kemba, explained that the CU found as many as 20% to 40% of the people who ask to open checking accounts are unable to do so because of hits on the checking security service the credit union uses or other reasons.
"Sometimes it's hits with Chex Systems, sometimes it's hits with credit bureaus, sometimes it's a pre-existing relationship with another financial institution that has gone sour and not been resolved," Dukehart explained. "For a variety of reasons, they aren't able to open checking accounts."
Previously, Kemba had no other solution for these individuals who would often not become credit union members because of the problem. But through ICS, Kemba could offer them a payroll card instead of a checking account and, if they used that responsibly, eventually might be able to offer them checking accounts.
Further, Dukehart pointed out, with an overall lower fee structure than check cashers or other prepaid cards, the payroll cards are a much better deal for the card holder.
Bergl said this approach to the payroll cards, which he acknowledged Visa called "orphan cards" in that the individuals are not signed up for the product in a group with one employer, had the possibility of steadily bringing credit union services to more people.
"Think of it, if 15% or 20%, on a weekly basis, of the people who walk through the doors of a credit unions can't qualify for a checking account, this is a way for the CU to dramatically increased the numbers of people it can serve and its possible impact on that community."