A new white paper offered by Card Services for Credit Unionsurges CUs to review the way they process debit and credit cardtransactions with an eye toward both reducing costs on the debitside and increasing revenue on the credit side.

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Card Services for Credit Unions is the association of creditunions that processes card transactions with FIS.

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The paper, which CSCU commissioned from the First Annapolisfinancial consultancy, outlined three different approaches to cardprocessing and laid out the costs and benefits of each. The threeare full-service card processing, where the CU outsources most ofthe day- to-day work; self-administered card processing, where theCU and a processing vendor share responsibility for different partsof a program; and the pass-through option, where the CU handlesalmost all the  responsibilities.

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A key aspect of all three approaches is that many CUs rarelyreview or examine their processing approach. The authors of thepaper attribute this phenomena to entropy–a situation where the CUhas made a decision years ago about card processing and then never,or rarely, reexamined it.

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The paper also urged credit unions to evaluate their cardprograms not only by how expensive they might be but also by howmuch control they allow. A full-service program might appear tocarry a higher payment to an outside vendor, but that payment alsoneeds to be compared against how many of the credit union'sresources are tied up administering the program. While a cardprogram that is processed and managed in house might take moreresources, it also allows the CU to have more control to meetmember card needs.

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Bill Lehman, portfolio consultant for PSCU, reported that themajority of CSCU members use the full-service approach because theytended to be smaller and have fewer resources to devote to cardportfolio management. But, he added, as they grew, they tended tomove to the self-administered or pass-through approach since thesetended to leave them with more control over card portfoliodetails.

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“Under this [full-service] arrangement, the card program resideson the vendor's platform where cardholder account information ismaintained,” the paper said. “The processor settles transactionsdaily and performs daily balancing on behalf of the issuer. Withlimited exceptions, the processor also performs most ancillaryservices such as 24-hour cardholder member service, processinglockbox payments, handling lost/stolen reporting, disputeprocessing, fraud management and statement production. The primaryadvantage of this structure to a credit union is the ability tooffer a competitive credit card program without making significantinvestments in internal resources and capabilities,” the papersaid.

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But Vivian Clough Sheely, card services manager for the 12,000member Beach Municipal Federal Credit Union, disputed some of thereport even as she said other parts of it matched the $104 millionCU's experience. She noted it was correct that the Norfolk,Va.-based credit union had not shifted off its essentially fullservice-model but disputed the idea that the CU never reconsideredor reexamined its processing decision.

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“We check it every five years or so, when it comes time to renewour contract with our processor” she said.

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Beach Municipal has a card portfolio of about 3,000 cardaccounts worth $6.7 million in balances, according to the CU's lastreport to the NCUA.

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Sheely said the CU did all the underwriting for the cardapplications but that the fulfillment and new card activation washandled by the vendor, who also handled charge-backs for the CU andfraud protection. Beach Municipal handled its own collections, sheadded, since it was just as easy to integrate card collections intoother collection efforts such as on auto loans.

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Rose Gilliam, CEO of the 21,000- member Argent Federal CreditUnion, which used to be Dupont Fiber FCU, said her CU's adventurewith card processing dated back to soon after CUs startedprocessing cards. At that time, credit unions that then processedcard transactions with an early forerunner to FIS had split awayfrom other CUs that had decided to move their card processing toFirst Data Corp. At the time, Gilliam reported that her CU hadturned away from both camps in the dispute and gone with athird-party processor on a more or less pass-through program.

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“What we wanted was more control of the portfolio decisions,”Gilliam said. When First Data purchased the processor the CU wasusing, Argent went ahead and migrated over to PSCU FinancialServices, then maintaining its pass through approach. But overtime, Gilliam explained the CU moved more to a self-administeredprogram, giving up some of its aspects to PSCU because the CUSOcould do them more efficiently but retaining others. Much of theregulatory compliance burden, keeping up with changing regulationsand rules, for example, the CU let PSCU handle while it retainedthings like posting its members own payments.

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“I know a lot of CUs use lockboxes and pay for them,” Gilliamsaid, “but a long time ago we figured out that we liked being ableto post our members payments ourselves. When we post our ownpayments, if a member has a question about something we can get atthe information more quickly and it gives our members more freedomlike being able to make payments in the branch if they want,”Gilliam said.

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