Did your credit union sell its credit card portfolio in the last few years? Is your agent-issuing contract set to expire in the next 18 months? If so, it's time to start thinking about your next steps. By being proactive, you can navigate the best course for your credit union and members.
In the past decade, the majority of credit card agent-issuing contracts spanned a duration of five to seven years. Considering that card portfolio sales peaked in 2006, that means many of these contracts will be coming up for renewal in 2011. Don't assume that an auto-renewal is your best option. You may have more options than you realize.
Option 1, auto-renewal. Although this may be the path of least resistance, you have little to gain from letting your contract expire and automatically renew. Although there won't be any bumps in the road for your member cardholders, there's little upside for your credit union. Not only will you be passing up the opportunity to make changes to your partnership, you may see a substantial reduction in ongoing revenue sharing from your partner. Simply put, there's little upside to sitting on the sidelines when your contract expires.
Option 2, renegotiate your contract. If you are relatively happy with your agent-issuing partnership, this option allows you the opportunity to iron out any issues that have cropped up in the past few years as well as establish a new contract for revenue sharing.
Keep in mind that the credit card market is vastly different than it was five years ago due to the economic downturn and the enactment of the CARD Act. Contract terms are likely to be much less lucrative than in previous years. Regardless, the outcome of your negotiations will likely yield a better outcome for your credit union and members than simply allowing your contract to auto-renew.
Option 3, consider a new agent-issuer. The market for agent issuing has changed radically since the time you first sold your credit card portfolio. In fact, your current partner may not even be in the business of acquiring card portfolios any longer. Your partner might choose not to renew the contract at all, or it may even approach you about selling your portfolio back to you-an option that may be more affordable than you think.
Even if you are perfectly content with your partnership, you have nothing to lose by entertaining offers from competing issuers. This may provide you with valuable leverage in renegotiating your current contract, and you can always seek the expertise and assistance from various brokers and consultants in the market.
What happens if you s
ign on with a new agent-issuer? Most contracts forbid you or your new agent-issuer from soliciting card business from current cardholders for a period of 12 months following the expiration of the contract. Therefore, your new agent-issuer will build your program from the ground up as a de novo program. Although you may not be able to target existing cardholders specifically, you can, in general, solicit all members.
Existing cardholder accounts and balances will continue to be owned by your current agent- issuer. Depending on the terms of your contract, these existing accounts may see their cards converted to a generic credit card without your brand once they expire, although any changes to the terms and conditions will be governed by the conditions of the CARD Act.
If your contract includes a buy-back provision, you may have the opportunity to transfer ownership of existing accounts and balances from your current agent-issuer to the new credit card issuer or yourself. Even if your contract doesn't include a buy-back provision, your current issuer may be willing to entertain such an arrangement, particularly if it has stepped back from the agent-issuing business in recent years.
Option 4, return to the market as an issuer. Credit unions are increasingly turning to this option. According to our market analysis, more than a dozen credit unions chose to pursue this option in 2010.
There are a number of reasons why credit unions have chosen to begin issuing credit cards again. Although some may have been disappointed in their experience with agent-issuers, many cite internal reasons for making the change. For example, leadership may have changed hands in the past few years, and the decision to issue cards reflects a change in vision and strategy. In other cases, credit unions have merged with institutions that have credit card programs on the books. Returning to the market as a card issuer may be a better alternative than having fragmented contracts with various agent-issuers.
If you are interested in re-entering as a credit card issuer, you have the advantage of starting anew in an environment much less cluttered by card offers and issuers than when you were last active as an issuer. In addition, you will find that many credit card processors, associations and consultants now offer services designed to assist with the management of your credit card program, making it easier to identify and attain your growth and profitability goals. Similarly, you may be able to find a partner who will manage all aspects of your credit card portfolio while you retain the balances.
Timelines. Dust off your contract and find out when it is set to expire. Agent-issuing contracts vary in the amount of notice you must give for nonrenewal. Some issuers require just 90 days' notice, while others require notification 12 months in advance. By being proactive in considering your options, you'll be well positioned to make the most of this opportunity.
The bottom line? Take the time to consider your options and evaluate what makes the most sense for your credit union and members.
William C. Koo is CEO at AssetExchange.
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