Economy Suggests It’s Time to Issue Credit Cards
Somewhat counterintuitively, CU card industry experts say that two conflicting trends in the economy make 2012 a good year for a credit union that had foregone credit card issuing in the past to get back into the business.
First, the economy is improving, bringing higher employment and tapping into pent-up consumer demand for goods, services and credit. Second, enough consumers have seen their credit lines shut down and credit cards withdrawn that they need a source of consumer credit they can rely upon and trust. These two trends gives credit unions a strong opportunity for their card programs, according to card experts.
According these industry experts, about 425 existing credit unions sold their credit card portfolios to card-issuing banks between 2000 and 2010 and entered in agent-issuing programs with those banks. Of those, about 375 remain in business today, the balance either closed or merged with other credit unions.
Tim Kolk, the owner of TRK Advisors, a New Hampshire-based consultancy, estimates that about 40 of the credit unions that sold their card portfolios and started issuing with someone else either bought their card portfolios back or started completely new card programs.
Kolk included in his figure only credit unions that had grown their new programs to have at least $1 million in assets and did not include credit unions that had merely announced they were going to start issuing but had not yet gotten their new programs up and running.
“It’s a good time to get back in on the ground floor because of the cautiously optimistic comments being made by economists,” said Caroline Lane, a senior vice president at CO‑OP Financial Services, in a white paper the CUSO has prepared on the topic. “There are signs that things are sparking back to life and when consumer confidence returns, consumers use their credit cards. So now is a good time because consumers aren’t receiving a flood of competing card offers yet.”
Lane also pointed out that credit unions generally and credit union card programs have been recognized as significantly better deals for consumers, and this also should help credit unions market them.
But as Kolk, Lane and other experts made the case for credit unions getting back into card issuing, they also stressed that credit unions need to carefully structure new card programs and keep their expectations in check.
For example, Kolk reported that credit unions launching credit card programs start with only 2% of their membership at the beginning. In addition, as a unsecured product, Kolk noted that it is a riskier product in the beginning, with higher than average charge-offs, but that it will stabilize over time.
“It can be a great decision to get back in but don’t expect to have a quick turnaround to profit here,” Kolk said. “Credit unions need to have a rigorous business plan to succeed, with realistic expectations about the time, energy and costs required to invest to build that long-term value.”
The most important aspect is a well thought out and flexible business plan, Kolk stressed, noting that there are examples of credit unions without such plans seeing very high charge-off rates.
“This remains a tough economy for prudent lending, particularly unsecured credit. The economy doesn’t care if you make a mistake,” Kolk stated. “Credit unions need to have a well-developed and reviewed plan and staff their card management with data-driven professionals. Only then will they be able to track performance to plan and correct course early on when issues arise.”
Lane agreed, noting that these loans are unsecured and thus are often the first thing to go when consumers wind up in economic trouble. She also noted another paradox that makes getting back into card issuing difficult. Right at the time that the pool of members who could qualify for a credit card is smaller, many of those members have cut back on their use of credit.
“People are much more cautious now about carrying debt or just having balance rollers on their cards,” she explained. “Credit unions can’t depend on that income anymore; they’ll have to depend on transactions and get creative in managing their risk.”