Complex Credit Card Portfolio Details Hide Both Devils and Angels
"It never fails to surprise me how many credit unions have card programs where they don't really understand what they are paying for and why," explained Ondine Irving, card consultant and founder of Chicago-based Card Analysis Solutions.
Behind her in a meeting room at Walt Disney World, credit union card executives purse their lips and pour over copies of invoices from their card processors, seeking to understand how their card operations could be streamlined to cut expenses.
"One thing you want to be aware of is how many of the accounts that you are being billed for are, in fact, status accounts," Irving encouraged the group. Status accounts are accounts that the credit union has closed, the member has closed, that have been blocked or that have been replaced or renewed or reissued. These can remain on your account with the processors, and you can keep paying fees for them, she explained.
This is the nuts and bolts work of card portfolio management-figuring out what the card portfolio is costing the credit union at the same time that members contribute to the credit union's income through finance charges and transaction interchange.
"What we have seen is that many credit unions really don't understand what they pay for in running their program," Irving said. "And they don't understand the things they can do to make their programs more efficient."
Irving explained that ideally a card program should generate a net income of $100 per account per year, that's $100 after the costs of processor services, charges from Visa and MasterCard, costs of a reward program, salaries and other charges.
"The thing to remember is that a card program has three separate income components that all need attention," Irving said. "Finance charges and interchange depend on card usage and are often impacted by rewards, but fee income is something that depends on what and how credit unions are setting the fees."
For example, Irving explained, many credit unions are too lenient in assessing late payment fees at 10 days rather than five days past due.
On the other hand, she explained, "You need to walk a fine line on fees. You don't want to leave money on the table, but you don't want to have fees like banks. There is just no need to have things like penalty rates, cash advance fees, plastic replacement fees or things like that. You aren't banks; you don't have to act like them."
Concerning card program income, Irving walked the card executives through figuring out how many actual active accounts they have, how many carry balances and what the average account balance is.
"Your average balance per account should be at least $2,500 per account," Irving said. "If it's not, there may be some things you need to look at, ranging from possible activation problems to maybe looking at what you have set up to drive card use."
Another problem can often be credit lines that are too tight or restricted. Average credit lines need to be at least $7,200 with an average line utilization ratio, which measures the amount of a credit line available for use, of at least 30%.
"If your lines are below $7,200, they may be too tight for your members to use, and if your ratio is less than 30% you might need to consider a credit line increase on your strong accounts," she said.
Irving walked the executives through how to calculate their net cardholder activity and stressed how important a metric it can be for measuring a program's vitality. A card program might be growing, but primarily through increased fees, and cardholders might actually be paying on their cards more than they are using them, she said.
Of course, one of the challenges credit union
card managers face is collecting on late paying or delinquent accounts, a problem that has always
existed but has begun to change in the current economic downturn.
Credit union card issuers must reinvent their collections procedures to match the current economic conditions or risk seeing their losses climb sharply, according to a collections executive and consultant who addressed the school's participants.
"The bottom line is that you will not be able to do collections the same way you did them 10 years ago, five years ago or last year," Karin Brown, vice president for collections for Lending Solutions Incorporated, a nationwide CU
Brown urged participants in the card management school offered by Card Analysis Solutions to work with their credit bureau processors to identify member behavior indicating financial trouble even when they are not late on any credit union cards.
"How many people in the room have had bankruptcies from members who have never been late on any of your payments?" Brown asked, as a number of hands shot up.
Brown advocated finding out early when a member is financially stressed so that the CU can step in with offers to help by restructuring loans, reorganizing payments and other measures before a member becomes even a little bit delinquent-and certainly if the member has actually started having late or missed payments.
"Collections is a sales position," Brown said. "Credit unions need to start seeing it as such."
Brown stressed that the vast majority of credit union members who were delinquent on their credit card payments usually wanted to make their payments but were looking to the CU for help, a strategy, to do so. "It's our job to make the sale on that strategy, close the deal," she said.
Irving and other consultants said they were surprised at how many credit unions still treated their card programs as almost orphaned loan products.
During these troubled economic times, credit unions should issue cards to help their members, but if they do, it pays to invest in learning how to manage them properly, according to Irving and Brown.
"Sometimes, credit unions during these times cut back on lending management training," said Brown. "They say they cannot afford to do it, but the truth is they cannot afford not to."
Proper card management, Irving and Brown insisted, is a matter of getting to know all about the portfolio-the parameters for how cards are processed, the details of how cards are underwritten, the approach to help cardholders handle card payment stress.
"It's a detail business," explained Irving. "Profitability will be in the details."