A new white paper offered by Card Services for Credit Unions urges CUs to review the way they process debit and credit card transactions with an eye toward both reducing costs on the debit side and increasing revenue on the credit side.
Card Services for Credit Unions is the association of credit unions that processes card transactions with FIS.
The paper, which CSCU commissioned from the First Annapolis financial consultancy, outlined three different approaches to card processing and laid out the costs and benefits of each. The three are full-service card processing, where the CU outsources most of the day- to-day work; self-administered card processing, where the CU and a processing vendor share responsibility for different parts of a program; and the pass-through option, where the CU handles almost all the responsibilities.
A key aspect of all three approaches is that many CUs rarely review or examine their processing approach. The authors of the paper attribute this phenomena to entropy–a situation where the CU has made a decision years ago about card processing and then never, or rarely, reexamined it.
The paper also urged credit unions to evaluate their card programs not only by how expensive they might be but also by how much control they allow. A full-service program might appear to carry a higher payment to an outside vendor, but that payment also needs to be compared against how many of the credit union's resources are tied up administering the program. While a card program that is processed and managed in house might take more resources, it also allows the CU to have more control to meet member card needs.
Bill Lehman, portfolio consultant for PSCU, reported that the majority of CSCU members use the full-service approach because they tended to be smaller and have fewer resources to devote to card portfolio management. But, he added, as they grew, they tended to move to the self-administered or pass-through approach since these tended to leave them with more control over card portfolio details.
“Under this [full-service] arrangement, the card program resides on the vendor’s platform where cardholder account information is maintained,” the paper said. “The processor settles transactions daily and performs daily balancing on behalf of the issuer. With limited exceptions, the processor also performs most ancillary services such as 24-hour cardholder member service, processing lockbox payments, handling lost/stolen reporting, dispute processing, fraud management and statement production. The primary advantage of this structure to a credit union is the ability to offer a competitive credit card program without making significant investments in internal resources and capabilities,” the paper said.
But Vivian Clough Sheely, card services manager for the 12,000 member Beach Municipal Federal Credit Union, disputed some of the report even as she said other parts of it matched the $104 million CU’s experience. She noted it was correct that the Norfolk, Va.-based credit union had not shifted off its essentially full service-model but disputed the idea that the CU never reconsidered or reexamined its processing decision.
“We check it every five years or so, when it comes time to renew our contract with our processor” she said.
Beach Municipal has a card portfolio of about 3,000 card accounts worth $6.7 million in balances, according to the CU's last report to the NCUA.
Sheely said the CU did all the underwriting for the card applications but that the fulfillment and new card activation was handled by the vendor, who also handled charge-backs for the CU and fraud protection. Beach Municipal handled its own collections, she added, since it was just as easy to integrate card collections into other collection efforts such as on auto loans.
Rose Gilliam, CEO of the 21,000- member Argent Federal Credit Union, which used to be Dupont Fiber FCU, said her CU's adventure with card processing dated back to soon after CUs started processing cards. At that time, credit unions that then processed card transactions with an early forerunner to FIS had split away from other CUs that had decided to move their card processing to First Data Corp. At the time, Gilliam reported that her CU had turned away from both camps in the dispute and gone with a third-party processor on a more or less pass-through program.
“What we wanted was more control of the portfolio decisions,” Gilliam said. When First Data purchased the processor the CU was using, Argent went ahead and migrated over to PSCU Financial Services, then maintaining its pass through approach. But over time, Gilliam explained the CU moved more to a self-administered program, giving up some of its aspects to PSCU because the CUSO could do them more efficiently but retaining others. Much of the regulatory compliance burden, keeping up with changing regulations and rules, for example, the CU let PSCU handle while it retained things like posting its members own payments.
“I know a lot of CUs use lockboxes and pay for them,” Gilliam said, “but a long time ago we figured out that we liked being able to post our members payments ourselves. When we post our own payments, if a member has a question about something we can get at the information more quickly and it gives our members more freedom like being able to make payments in the branch if they want,” Gilliam said.