How profitable are credit card portfolios for credit unions? Well, you’ve got to love a product that can still make money when the economy turns sour.

“It is our most profitable product that we sell at the credit union, as a yield,” says Kent Logan, VP/electronic and card services at $4 billion Alaska USA Federal Credit Union, Anchorage, Ala. “I will tell you that the yields were obviously higher in 2008. In 2009, with the economic recession and the provision for loan losses and the charge-offs, the yields have declined about two to three percent on our book of business, which right now is about $108 million in revolvings. The good news is the revolvings continue to grow, and charge-off losses peaked in ’09 and are starting to stabilize now.”

In fact, almost all CUs find that their credit card portfolios are their highest-earning asset. Obviously those portfolios do better when they are closely scrutinized, managed and marketed; but unlike most products, they still earn their keep when they are utterly ignored.

So why, until recently, were many consultants advising credit unions to dump those portfolios? Why were some CUs unloading them?

“Maybe three, four or five years ago, credit unions were selling their credit card portfolios because, strategically, they felt that they couldn’t compete against really large issuers on different products, rewards, etc.,” says Willie Koo, president of Asset Exchange, a CU card consultancy and card portfolio broker based in Portland, Ore. “And they were also getting huge premiums—in excess of 20 percent was pretty common back then. If you look at a huge premium you can make on selling your portfolio, vs. making maybe two, three, or four percent per year, it’s pretty compelling.”

As VP/portfolio consulting at Card Services for Credit Unions, a CUES Supplier member based in Clearwater, Fla., Bill Lehman says his tendency is to advise credit unions to retain their card business. But even he says there are times when they need to sell.

“Honestly, it is probably one of the easiest ways for a credit union to get some additional capital,” he says. “Especially in this economy, and especially after the NCUA hits these credit unions with the stabilization and they’re seeing a huge decrease in their return and therefore their capital, there are credit unions who might see a reason to sell their portfolio. Again, I strongly discourage it. But at the same time, if I was a CEO of a credit union and had to make a choice of whether to close my doors or sell my card program, I guess I’d sell my card program.”

But that’s exactly what the big banks that used to buy those portfolios are afraid of. They’re worried the CUs they buy from are in serious trouble and won’t survive, leaving them with a bunch of new cardholders with zero brand loyalty. At the same time, the CARD Act has limited the banks’ ability to re-price cards; they’re mostly stuck with whatever interest rates the CUs set on existing balances. So premiums have dropped into the single digits. Except in the most dire circumstances, selling a credit card portfolio really isn’t worth it anymore.

“Yes, it does take time, effort, money and resources to manage the program and manage it profitably,” Lehman says. “But again, we can illustrate that even those card programs that have sat on the shelf for a number of years, where credit unions haven’t managed them, are still their most profitable loan product. So if you give that up to another entity so they can actually take that program, accelerate it, manage it, market it, and make sure it’s competitive, you’re giving them really a free ticket to grow that portfolio and make a lot of money off of your members.”

You’d also be giving them permission to conduct your member service, when you could probably do it better.

“My card services staff has a vested interest in providing the best member service possible,” points out Logan. “We handle all fraud disputes. We take care of our members; we don’t leave it to somebody at a card processing outfit that may or may not be providing the best member service possible. If credit unions self-administer their portfolios, they have an advantage, because their own people are talking to their members.”

One Size Does Not Fit All

Assuming, then, that credit unions want to hang onto their credit card portfolios, how can they make them as profitable as possible? First and foremost, says Lehman, be strategic. And that starts with measuring the strengths and weaknesses of the program regularly.

“From my experience, I would say a majority of our credit unions are not measuring the profitability of their program to the extent they really should be,” he says. “All of us processors have analytical tools that will help credit unions do it quite easily. Here at CSCU, for example, we have the Virtual Card Consultant, which is a system where they can go in and, on a month-to-month basis, check the profitability of their program in a point-and-click environment.”

Lehman says few CUs know where their credit card programs are performing well and where they are languishing. Some might be strongly penetrated into the membership, yet have cardholders who never actually use their cards.

“Well, you have to know that,” he stresses. “You have to be looking at the metrics to understand what’s driving your profitability, and where are the opportunities to increase that revenue.”

“Some credit unions will just issue the cards and let them sit out there and not pay attention,” says Corinne Sherman, VP/card services at the Pennsylvania Credit Union Association, Mount Holly Springs, Pa. “Other credit unions set up different marketing techniques and different programs depending on the kinds of members. If you look at your membership, there are different reasons why they carry the card. You have your convenience users, you have the people who roll over their balances, you have the people that pretty much just have used your program to take care of a balance transfer. I think the credit unions who segment their portfolio and look at the segments individually are the ones you’re going to find are the most profitable. Because one size does not fit all.”

Lehman advises laying out a 12-month strategy for the program and concentrating on some of the basics of portfolio growth: penetration, activation and usage. Make sure you’re using all your marketing channels to hit on those three components. At the same time, he says, now is not a good time to forget about risk: CUs should keep closer track than ever of collections, pricing and fraud prevention.

“A lot of credit unions don’t have the proper collection techniques in place to protect the credit union’s interest,” he says. “There are so many tools and resources out there from processors or third parties. There are collection companies that can help you. There are people who can analyze risk in your portfolio. Credit unions can also utilize a lot of their processors’ analytical tools to reduce losses on the fraud front. I think a phone call to your processor is in order, to say, ‘Come on in and tell me what you have that can help me protect my credit union from these losses.’ You’d be surprised what’s out there.”

Koo agrees. With the credit crunch, there’s been no shortage of enthusiastic card-seekers. The biggest impact on profitability has been the increase in delinquencies that followed on the heels of the downturn. If you can cut those losses by one percent, it makes a huge impact on the profitability of your program.

“Right now I wouldn’t necessarily loosen up my underwriting criteria,” adds Logan. “What do we do right now? We work within our existing card base. We have 53,000 credit cards. We focus on getting more transactions, more usage. We try and get people already in our credit card portfolio to elevate it to their No. 1 position in the wallet. Once we come out of the economic meltdown and we figure out what regulatory reform is going to do to us, then we’ll start advertising and [issuing] more new plastic.”

Use it, Don’t Abuse it

Sherman says one of the biggest existential questions CUs face is how to market credit cards. Traditionally, many CUs didn’t want to encourage consumers to incur a lot of credit card debt. It was antithetical to what the movement stood for. In light of that, many still feel efforts to improve credit card portfolio profitability should not center on charging higher fees and getting members to carry a high balance.

But then, what’s a CU to do? Sherman says credit unions can still manage portfolios with their traditional values in mind.

“Credit unions are not ones to want to encourage debt, but they’re also realistic in knowing that many of the consumers are incurring credit card debt,” she says. “If they’re going to do that, they may as well incur it with the credit union as opposed to another issuer [that will charge high] penalty fees. It’s one of those things where they don’t want to do it, but they also have the knowledge that over the course of time, they could offer the consumers a much better deal. As a responsible lender, they can work with the members on managing the debt and keeping it at a lower rate.”

Many banks raise credit limits as soon as customers near their current limits. It’s a way of making sure the spending continues. But it also can lead to unmanageable levels of debt. Instead, Sherman advises encouraging a use-and-pay-down cycle by instituting a rewards program.

“Credit unions can allow people to earn bonus points based upon every dollar spent,” she says. “They can monitor typical usage of the program, and maybe offer double points during times when the card isn’t used as much. [The points could be redeemable for merchandise or discounts on products or services in the community], but they could also be used for discounts on other services at the credit union, such as a lower rate on a car loan.”

If you want members to use the card often, you need to figure out what’s important to them, she says. For example, a primarily Mennonite CU in Pennsylvania donates a percentage of interchange fees to mission programs. Because members value this, they use the card enthusiastically. The program has doubled the CU’s card volume.

Some members will even use a well-thought-out rewards program as an integral part of their household financial strategy.

“We have a girl who works here who does that,” Sherman says. “They put all of their groceries, every bill they pay, on their credit card. Every year in the fall, they get a full expense-paid trip off their bonus points. For those types of people, if you don’t have some type of points program for them, they’ll never look at having your card.”

A loyalty program doesn’t have to be complex, Logan says, and you don’t have to administer it yourself. Alaska USA FCU uses the Scorecard Rewards program from CUES Supplier member Fidelity Information Services, Jacksonville, Fla., in which points can be redeemed for travel and merchandise.

“When members log on, it says it costs you x points to fly with one stop, but if you’d like to go two or three stops, it’s going to cost you fewer points,” he explains. “It pings the airlines every four minutes, so it always gives you the most up-to-date point cost to go to that destination. So it gives the members a lot of options. The main thing is, it gets them to use the card [so they accrue the points]. We want them using it, and we want them using it frequently.”

Koo says many members carry a particular card solely because it’s the card that has their rewards program on it. In the past, many consumers carried credit cards with loyalty programs, but didn’t redeem the points very often, if at all. Those days are gone. If you want to make sure cardholders activate their cards right away and keep using them regularly, you’re going to have to differentiate your card with rewards they really care about. Their loyalty to the card will translate not only into better profitability, but also into increased loyalty to the credit union.

If the Balance Shifts

Even before the Durbin Amendment to the 2010 Financial Reform Bill limited swipe fees for debit cards, credit cards had a profitability edge on debit cards because credit cards create multiple revenue streams: interchange income, interest and fees. But what if the Durbin Amendment is a harbinger of things to come? What if interchange income on credit card usage is the next target?

Sherman says she hopes CUs don’t view interchange income as a big profit center. It should primarily function to reimburse the institution for the cost of processing transactions, she says. But if Congress does place limits on credit card swipe fees, it will nevertheless affect portfolio profitability, because that reimbursement will shrink.

Logan believes it’s a safe assumption that credit card interchange income will be targeted next. Credit card interchange fees are about double current debit interchange fees, he says, but the impact on CUs won’t be double, because debit card transactions hugely outnumber credit card transactions.

“Debit card transactions at our institution are running about three to four times that of credit card transactions,” he says. “I know on credit card interchange income, we get more per dollar spent. But we don’t do near the volume as we do on the debit side.”

Still, if it happens, CUs will have to make up that income somewhere. “I do think it’s going to impact us, and certainly there are going to be some changes to the way we have to do business,” Lehman muses. “It might not be just card-related. It might be more total package-related. For example, would a debit card annual fee be appropriate? I don’t know, probably not. But maybe we’d have to start charging for checks like we used to in the past. Maybe there’s a way we could make up some of that lost interchange revenue through other products and services, such as charging for POS transactions. I think ... our programs are going to be impacted, and I do think they are going to have to be altered a little bit.”

But let’s not get ahead of ourselves, he counsels. He says it’s a bit too early to predict the ramifications of such a law, because no one in government or in the financial industry seems able to give an accurate estimate of what kind of hit credit unions would take.

“I just got back from a conference in Las Vegas where I heard one economist say CUs might see an average loss of 25 percent of [credit card] interchange revenue,” he says. “Then I heard others saying as high as 75 percent. What’s the number? We can’t predict how many basis points we might have to make up when we don’t yet know that number.”

One thing is nearly certain: The equation might change, but the answer will probably still be the same. Credit cards will continue to be one of the most profitable products CUs can offer, and will be all the more so if CUs tailor them to the wants and needs of their members.

Jamie Swedberg is a free-lance writer based in Georgia.