A new opportunity has surfaced for credit union credit card issuers: the chance to offer affinity-branded credit cards. To be fair, this type of program is not new, but the marketplace has changed enough to make it a reasonable path for credit unions to consider for the first time. And with loan growth hard to come by, any chance to grow the highest yielding asset on the balance sheet is worthy of further thought.
The reason these opportunities are more available now than in the past is that the largest issuers have largely abandoned this space. Before the recession several large banks competed very aggressively for this business. But this business proved more expensive, risky and difficult to manage than the large issuers now desire, and as a result, most of the existing affinity relationships are not being renewed.
This leads to both the opportunity (groups looking for homes) and the risks (how can a credit union make something work that a sophisticated issuer could not?) of such programs for credit unions. Critically, a common reason that the large issuers have lost interest is the relatively small size of most of these opportunities. This is great news because these partnerships can be profitable, and if reasonable sizing expectations are in place, they can be satisfying to the issuer. The typical credit union does not need these programs to be huge for them to make sense.
That said, an opportunity is only that until a careful plan is put in place and care is taken to understand the programs potential, risks and costs before signing on to such a program. While there are certainly hundreds of hours of work that need to go into analyzing, negotiating and launching such a program, in the space provided here, we can offer a few thoughts on where a little focus will pay large dividends.
First, determine if the group is consistent with your core mission. If it’s a college program and you are that college’s affiliated credit union that’s an obvious one. Or if it’s a charitable organization and your membership overlaps with that charity’s mission that too is an obvious one. But when a group comes to you with no obvious connection to your credit union, it is possible that the efforts to understand the group, its members and how they fit with you will simply be too great to make it worthwhile. Further, most groups overestimate how many of their members will really be interested in the card product or what percent you should be willing to approve. That kind of mismatch must be avoided at all costs.
Second, understand the math. It’s an easy mistake to assume that because your card program is profitable, the new one will be similarly profitable. But the dynamics of an endorsed card program are entirely different. Most obviously, there is a third party looking to take part of the programs revenue out of the bottom line. This can take many forms but is always material. It is also important to expect that the new, affinity-sourced members will behave differently than your current program.
Third, expect operational changes. You will almost certainly have to segregate the program within your operational reporting and BIN structures. It should also be expected that some combination of specialized websites, customized rewards options, servicing approaches and marketing efforts will be required.
Fourth, be open and honest with your partner. Most partners do not understand why these programs did not work with the largest issuers, and they tend to blame the issuers. But the reality is that the failures are more likely due to unreasonable expectations on both sides. The large banks overestimated how many group members would seek the credit card due to the affinity and the affinity groups tended to underestimate how engaged they needed to be to make the most of the program. Up-front conversations about program profitability, what you need from your partner, what could challenge program success and how the members will be underwritten and serviced are important understandings before legal agreement is reached.
Any credit union seriously considering initiating an affinity program should prepare to treat this as a new business initiative and resource the project accordingly. Careful forecasting, performance analytics, operational impact reviews and marketing resource planning are important to nail down early in the process. Reaching agreement with the affinity group is easy. Reaching a workable long-term agreement is considerably more difficult. But it is certainly possible and credit unions occupy a unique position to serve a market increasingly abandoned by the large banks. These opportunities do not come along very often.
Timothy Kolk is the owner of TRK Advisors.
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