Prepping to Unite Credit Card Programs
Merging credit unions often have to contemplate combining credit card programs. Too often they tend to defer thinking this through until after the merger.
This can lead to performance problems in the combined program card program, including member dissatisfaction, impaired profitability and significant compliance risk. Making changes to a credit card program typically impacts about 20% of the members, including many of those with the highest value to the credit union. Getting it right is important.
A little planning before the merger is critical. A simple checklist can work wonders in getting a plan together: products, processing, and compliance. Granted, there are many pieces to each of these headline areas, but most all issues to be addressed can be assigned to one of these areas.
First, product set integration. It is tempting for the surviving credit union to assume that its program is the winner and that the merged program will end. This may be the correct decision, but it’s worth exploring whether the merged program might actually have some strengths. Sometimes, smaller program performance is actually better and good ideas and successful products can be lost by moving too quickly.
For example, we have seen high-end demographic portfolios, for instance with engineering SEG credit unions, merged into a larger, community-oriented program. The larger program was not designed for these cardholders and they were converted into products less suited to them. The portfolio shrank, member experiences were negative, profitability declined and relationships were impaired.
Second, processing decisions. Merged card programs will likely be on different operating systems. Cataloging all the related legal agreements, expiration dates, notice dates, termination requirements and potential penalties is critical. Typically, it is assumed that the surviving credit union will control these agreements and processing will convert to their platform. This usually makes sense, but there can be many wrinkles in that decision, including potentially delaying conversion to minimize exit penalties, preferring the merged program’s reward program, or even renegotiating entire agreements.
Third, compliance. The CARD Act’s requirements deeply impact merger considerations. We’re not talking about procedural elements such as notification periods for term changes but potentially destructive mistakes that will put a program out of compliance making the required remedies are a nightmare. Most importantly, the CARD Act created three account types, two explicitly and one if the credit union is not careful: variable, non-variable, and fixed. Merging in non-variable accounts may embed a new level of interest rate risk. Merging in a fixed rate program even more so because fixed rate accounts cannot ever have their rate changed.
When taking on a fixed rate portfolio, a credit union must contemplate an interest rate environment when it will be forced to decide whether to continue keeping money-losing fixed rate cards open or proactively close them with all the member disruption that creates. Once merged, there are no better choices. Better to prepare the organization for this issue before it becomes a nasty surprise or address it before the merger is completed, especially in regulator assisted mergers.
It is also critical that a credit union have documentation about past account repricing. If an account has been up-priced then account reviews are required semiannually. Further, if a merged program cannot verify that it has not repriced accounts then the merger survivor is obligated to assume that all merged accounts are subject to such semiannual reviews. This is at least an operational burden, and all-too-often a financial one as well.
We hope that this helps explain why credit card programs require a special type of attention before a merger. Getting it right will reduce financial and operational risk and, more importantly, ensure that this high impact product will remain poised to grow and thrive after the merger is complete.
Timothy Kolk is the owner of TRK Advisors LLC. He can be reached at 603-924-4438 or firstname.lastname@example.org.