Credit Unions That Sold Portfolios Face Day of Reckoning
The market for credit union credit card portfolios has slowed down. More credit unions preferring to manage their own card programs and more selective card portfolios buyers have both made CU card portfolio sales relatively rare.
But the roughly 430 credit unions that sold their credit card portfolios since 2001, many in 2006-2007, face a process remarkably similar to the one they used or should have used to sell their card portfolios in the first place, according to CU card consultants and brokers.
The CUs face a similar decision process because most of the card portfolio sale and agent issuing agreements they signed had a duration of five years and thus come up for renewal in 2011 and 2012. According to analysis of NCUA data conducted by CU card consultant and brokerage firms, roughly 120 credit unions have to decide whether to keep letting their current partner issue their cards, change issuing partners or get back into direct card issuing. And many of those CUs may not be ready for the decision, consultants said.
"A credit union with an agent-issuing card agreement should not begin considering whether it wants to renew that agreement one month before it rolls over," said Willie Koo, CEO of Asset Exchange, a CU credit card brokerage and consultancy that is a subsidiary of card processor FIS. "Instead they should begin taking stock of that program and what their options might be well before," he added.
Koo and other consultants said the first step is for a credit union with an agent-issuing agreement to find out when that agreement rolls over and how much of a notification period it has. A notification period is the length of time that a credit union has to communicate to the issuer that it is not prepared to renew the existing contract. For some, the period might be as long as 180 days, for others it could be as short as 90 days, the consultants said. And in all cases, the card issuer will probably not remind the credit union that the renewal date is approaching, the consultants agreed.
"I think it's very important for a credit union to bring that contract down from the shelf where it might have been gathering dust or out from a file folder to find out what is said about notification periods," said Ondine Irving, the card consultant founder of Card Analysis Solutions, a Chicago-based card consultancy. Irving said that it is never too early for a CU to look into the procedures for renegotiating the contract, moving to another agent-issuing partner or start to issue cards again themselves.
And Irving emphasized how important it is to get the card data from an issuing partner.
"Many credit unions that sold their programs have little knowledge of how that program is performing," Irving noted. "When I assist credit unions re-enter the credit card market, it is very apparent the agent issuer provides very little information to the credit union. It is critical to get basic portfolio performance information before any decision making takes place. Credit unions should be taking an active interest in the program and request from the issuer a performance analysis. This analysis should include all the basics-total accounts, active accounts, credit lines, loans outstandings, sales activity, delinquency and charge-off information," she added.
She also said it was very important to examine what members are getting with the card. Are there high balance transfer fees, higher than justified interest rates, higher late fees and reduced grace periods, she asked. "I often shudder at what some of these bank issuers do to the credit union image. A simple step is to survey your members-both the cardholders and noncardholders about their cards and how much they like them."
Deciding whether or not to renew an agent-issuing agreement and what to do if it does not renew takes time because many credit unions have to re-examine what they want from their credit card program and then evaluate their current program against those desires, explained Tim Kolk, a CU card consultant, broker and founder of TRK Advisors.
The first step, after finding out when the notification period starts, is to determine what an acceptable agent issuing agreement would look like and then to ask how well the existing relationship matches that ideal, he explained.
"Every credit card program is going to have weaknesses," Kolk said. "The credit union has to determine where those weaknesses are and whether they can be fixed with the current agent partner," he added.
Even if a credit union is pretty sure it wants to remain with its current agent partner, it is often worthwhile for the CU to let the partner know that its willing to walk away, Kolk said. "It's the only way to move into a negotiation, you have to be willing to walk away," he said.
Sometimes, a credit union can also find out its current issuing partner feels somewhat tepid about the partnership. This happened recently to Franklin Mint Federal Credit Union, which switched its agent issuing program to Elan after the then partner, Bank of America's FIA Card Services, said it would not pick up a 1,700-card portfolio from one of Franklin Mint's merger partners. To the credit union, the unwillingness to add the accounts to a portfolio of about 9,000 spoke clearly about how FIA considered the relationship, an FMFCU executive explained.
Another reason credit unions should take time with this decision is that it's not be made lightly, the consultants said. If a credit union has a mediocre to bad agent issuing partner, it could wind up saddled with that relationship for another year or two years (program renewals are rarely in five-year increments). But if a credit unions wants to change agent-issuing partners or start issuing again on its own, it will also face a significant challenge.
Even if it is just changing issuing partners, the credit union will still have to more or less start a new card program from scratch and may be restricted from marketing its new card to some degree to the members who held the card its old agent issued. It will also have members who held the old card who will have to go through a card change and may also face different credit card terms than they had when the CU still used that issuer.
But Kolk noted that sometimes starting a new card program without the burden of existing portfolio of delinquent or defaulted loans can be comparatively easy, and careful underwriting that is in tune with members and the current economic environment can be successful. Irving took the position that going back into issuing again is almost always better for a credit union and its members. "Credit unions exist to make loans, particularly now," she said. "Credit card loans at this time are among the most important kinds of lending that credit unions can do," she added.