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ARLINGTON, Va. – The pace of credit unions deciding to get out of the direct credit card issuing business appears to be accelerating as more and more take hard looks at their priorities and costs in capital and other resources of maintaining a credit card program on their own. Almost double the number of credit unions sold their credit card portfolios to banks or to other card management firms in 2003 than in 2002, according to Kessler Financial Services, the business development arm of MBNA, one of the nation’s largest, if not the largest, credit card issuer. By the firm’s count of sales which are made public and its knowledge of deals in which it was a participant of some sort, 81 credit unions sold their portfolios to a card issuing partner in 2003 compared to 2002, according to Steven Fuld, Senior Vice President of the Boston-based company. Total credit card loans outstanding from these 81 new relationships were over $450 million compared to $290 million in 2002. Kessler developed 38 of these new partnerships for a total of nearly $300 million in assets – representing approximately two-thirds of the market, the firm said. MBNA, Elan (a subsidiary of US Bank), and InfiCorp (a subsidiary of the First National Bank of Omaha) accounted for 90% of the known portfolio sales, the company added. The other 10% of the market went to smaller portfolio buyers, Fuld said, whether those included credit union owned purchasers like TNB Card Services, based in Dallas, or a card investment and purchasing effort sponsored by the Illinois Credit Union League Service Corporation. Fuld defended the accuracy of the 81 credit union figure, however, saying that that number had been checked against NCUA’s data which reflected when credit unions zeroed out or almost zeroed out there credit card portfolios. Other card brokerage and purchase firms have had lower figures but did not challenge the Kessler numbers. Asset Exchange, the card portfolios brokerage firm based in Portland, Oregon, and InfiCorp, based in Atlanta, both carried a figure in the range of 60 credit union sales, but each added that they had only included sales of portfolios with outstanding balances above $1 million. Frank Selker, President of Asset Exchange pointed out that in their case, even though the number of credit unions differed from Kessler’s, the total number of assets represented in the sales remained roughly the same indicating substantial agreement. Increased portfolio sales were not the norm across the market, however, even if they did proceed at a brisk pace in other places. PSCU Financial Services, the card processing cooperative serving over 500 credit unions that process their card transactions with First Data Corporation, saw 22 of its member credit unions sell their credit card portfolios to banks since 2001, according to Brian Crawford, Chief Marketing Officer for the Card CUSO. Crawford said that 12 of the credit unions had sold their portfolios in 2002 and 10 in 2003. Of the 12 in 2002, nine made their sales though in-house deals effectively brokered by the CUSO with National City Bank, its bank partner in the sales. Three of the sales went to other banks. In 2003, all 10 of the sales went to other banks, a fact Crawford attributed to National City not being as aggressive about buying smaller portfolios as it had been in 2002. The 2002 sales represented 39,000 card accounts, Crawford said, while the 2003 sales represented 50,000 accounts, or roughly 1.5% of the CUSO’s total card portfolio. In each of the years, Crawford said, almost all the credit unions which sold had portfolios in the range of 3,000-5,000 accounts. But Crawford also noted that his firm had a pretty good idea of what was coming down the pike and, so far, only six members had told PSCU they intended to sell in 2004. PSCU has a six-month notification requirement for credit unions intending to convert their processing from First Data and that generally allows the firm to have a good idea on what might be coming down the pike, Crawford explained. What Do the Sales Say? While every credit union differs in its reasons for selling or keeping its card portfolios, industry executives from all perspectives agreed that the increased sales, upon which everyone more or less agreed, pointed to both the changing nature of the institutions’ relationships with their card portfolios and hinted at the changing nature of the credit card industry itself. “We looked at what it was going to cost us to offer cards which met our members’ expectations for the bells and whistles they were seeing other places and decided we were better off putting our resources somewhere else,” said Blake Strickland, CEO of the Tennessee Valley FCU, a $420 million credit union based in Chattanooga, Tennessee. The credit union issued both VISA and MasterCard and had basic and Gold products in both lines. The portfolio was worth $21 million and had roughly 7,000 accounts and the credit union felt it had come to a crossroads with it. “We wanted to be top of the wallet,” Strickland said, “and we had to consider what it was going to take to make our card top of the wallet.” Since they only sold to MBNA in Mid-November, Strickland said they hadn’t really had too much experience working with the card issuing giant, but remained confident that they had made the right decision. “We are actually looking forward to developing our small business card program with the help of MBNA,” he said, adding that the credit union hadn’t felt like it had the resources to really develop that business previously. Hudson Lee, the Chief Financial Officer of the $900 million Meriwest Credit Union, based in San Jose, California, said his credit union was selling MBNA its $42 million portfolio in a two-part deal stretching over December 2003 and January 2004. The credit union portfolio had 21,500 VISA accounts spread across Classic, Gold and Platinum product platforms. He said that the credit union had decided to sell after adding a Platinum product in 2001 and not getting the lift they had wanted from it. “The portfolio really wasn’t losing money, but it was stagnating,” Lee said. Meriwest decided that it was going to take too many resources to invest in a product where it was getting ever harder for an individual financial institution, whether a bank or credit union, to distinguish itself from what was becoming a commodity industry. Keith Floen, Managing Director at InfiCorp, agreed that the increasing commoditization of the card industry was making it harder for smaller card issuers to stand out. Credit unions in particular, he noted, even if they were interested in going into cards in a big way, would have to face the fact that unsecured card debt is one of the riskiest products in the financial services industry. “Their own asset and liability management guidelines might prevent them from taking as aggressive a stand as they might like to have,” he explained. Credit unions seem a lot more apt to explore a possible sale than in years past. “We have noticed that there is a lot of interest from credit unions in learning about selling their portfolios,” said Karen Fry, Assistant Vice President with Card Services for Credit Unions, the card servicing association for credit unions that process their accounts with Certegy. “In December, we had a Webinar that focused on why not to sell, which included the fact that households with credit cards are more profitable to the credit union than those without credit cards. We also discuss this topic in our Card Growth Workshops and during our Annual Meeting.” Most attendees decided to keep their portfolios said Fry, and some are showing their board that there must be a reason firms are willing to pay big bucks for their card portfolios. “In fact a couple even said that they ask `suitors’ in to check out their portfolio with the express purpose of saying to the board, `If they are willing to pay X, think about the money we’re leaving on the table,’ ” she added, by selling off the portfolio. [email protected]

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