Credit Unions That Sold Card Portfolios Come Roaring Back Into Issuing
Both $123 million BestSource Credit Union, headquartered in Waterford, Mich., and $806 million Xceed Financial Credit Union in El Segundo, Calif., had sold their card portfolios to MBNA in 2001 but declined to renew their five-year contract with the bank and got back into issuing in the last couple years.
Bank of America acquired the primarily affinity-card issuing MBNA in 2005 for stock and cash estimated at over $35 billion. The company became the foundation for Bank of America's affinity card issuing subsidiary, FIA Card Services.
"I really can't speak to the details of the sales decision since I was not here when it was made," explained BestSource CEO John Normandeau. "I believe there may have been some balance sheet issues. I know there was a hefty premium as well."
Normandeau added that he had always considered the sale a mistake, calling the card a relationship product and saying the credit union ran into troubles with the agent relationship first with MBNA and then FIA Card Services.
"There were complaints from members about card disputes, and, of course, those ended coming back on us because in the members' mind it was still our card," Normandeau recounted.
"There were also problems with members applying for our card and not getting a response back from FIA for more than seven days. That came back on us as well," he said.
He said the credit union contacted FIA about the problems, and the company took steps to remedy them, "but in the end I think we just had our heart set on starting issuing again."
Normandeau explained that the credit union had come to see the credit card as one of its key products because it carried the credit union's name on it and because members were always using it to pay for things, reinforcing that link.
A spokesman for Bank of America, FIA Card Services' parent company, said the bank would not comment on "existing or former financial partners or relationships" and that the firm remained committed to providing "the strongest possible products and excellent customer service."
After deciding to get back into issuing, BestSource did not return to its previous processor but instead chose to go with Seattle-based Pemco Technologies.
"This key offering helps complete BestSource Credit Union's suite of services as we work to improve our members' financial lives," Tansley Stearns, vice president of sales and service, said at the time of the June 2007 launch. "As we searched for a business partner in this venture, Pemco brought a strong background and expertise that we feel will help us grow a successful portfolio."
But Normandeau acknowledged that this is a rough time to launch a credit card program. While BestSource still has a capital ratio of 9.59%, like many other CUs it has seen its income and return on assets plummet. The credit union's ROA hit negative 1.48% as of March 2009. Before the NCUA's corporate stabilization assessment, BestSource was running more than $200,000 in the red.
But that ROA compares with a negative 1.73% for BestSource's peers, and the credit card portfolio numbers track very strongly, with a 0.18% charge-off rate for the year as of March and an overall card delinquency of only 0.75%. The CU's membership comprises mostly retail employees from previous select employee groups and the residents of Oakland County, Mich., the fourth wealthiest county in the U.S. with populations of over one million, according to an August 2007 report from the county government that was based on U.S. census data.
Normandeau said he was pleased and a little surprised at members' enthusiasm for the card and the relative popularity of what he thought would be the less popular card option. The credit union offers two platinum cards, one with a rewards program and one without. Contrary to his expectations, Normandeau estimated that the nonrewards card has proven more popular, with about 80% of the CU's cardholders opting for that card.
"I think members are really happy to see their credit union have a card again," Normandeau said. The credit union's call reports affirm his observation. According to the call reports, the credit union has gone from having 335 cards with outstanding balances of about $602,000 as of September 2007 to almost 1,200 cards with outstanding balances of $2.74 million as of March of this year.
One thing the credit union has begun to investigate is whether to keep its cards as fixed-rate cards or move to variable rate.
Kathryn Davis, senior vice president for marketing at Xceed Financial, reported a similar experience. Like BestSource, Xceed Financial sold its card portfolio to MBNA in 2001 and has since decided to return to issuing.
Xceed Financial has shown strong performance, moving from 1,115 card accounts with roughly $1.7 million in outstanding balances in December 2007 to 3,513 accounts worth roughly $7.15 million in March of 2009.
"We did have a couple of mergers with credit unions, which brought their card programs with them when they came, but both of those were very small portfolios," explained Davis. "Most of the growth we have seen has been growth we have accomplished."
Xceed Financial had to wait a certain period after its contract with FIA expired to launch its new card, Davis said. In addition, as is common practice, Xceed was forbidden from directly marketing its new card to former cardholders but was permitted to market the card to its entire membership.
Davis reported that Xceed has grown the portfolio by aggressively cross selling as well as offering strong balance transfer programs since the CU started issuing the card in December 2008. Even without being able to target market the new card to its former cardholders, she said, FIA almost seemed to be aiding the marketing effort with the changes it made in the card accounts of the former Xceed Financial cardholders.
"When you have rate hikes and credit lines being cut, it makes offering your member an alternative easier," she noted.
She said Xceed, which formerly served Xerox employees, has a nationwide membership that has helped shield it from the full impact of California's economic downturn. Even so, NCUA's records show that Xceed had an overall card delinquency of 2.5% as of the end of March and a charge-off rate of 0.29%.