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Cards Are All Right, The

Dernovsek, Darla

Behind-the-scenes technology boosts card program returns.

Relying solely on appearance and function to revitalize your plastic card program is like serving a bufFet on a card table. Your expectations outweigh the supporting elements.

Credit unions can find stronger support for their credit card programs from technology that refines processing and promotion. These technology tools and tactics sustain growth in both cardholders and card balances.

Credit unions can achieve immediate benefits from technology enhancing database marketing, risk management, and card pricing. Whether these benefits are available to credit unions often depends on their relationships with processors or networks. Even credit unions that have sold their portfolios but continue to generate income through an agent-issuer arrangement might find technology can improve their revenue stream.

Credit unions' card strategy should enable them to respond as innovations are introduced, says Sarah Phelps, senior consultant at First Annapolis Consulting, Lithicum, Md. "Credit unions can gain access to new technology by ensuring that contract language with processing vendors or [agent-issuer] program providers gives them that right. Credit unions that process in-house must consider the cost of building the technology. Even the payment association or debit network they align with can expand or limit access to new technologies."

Paul Grill, a partner with First Annapolis, says payment industry conditions are ripe for product innovation. These conditions include:

* Stagnating receivables;

* Rising merchant influence;

* Increasing competition from foreign banks willing to invest in new products to gain a foothold in the U.S. market;

* Escalating fraud;

* Increasing Internet use; and

* Growing electronic payment alternatives to credit and debit cards.

Improve returns

Opportunities for credit unions likely will arise from innovations that improve operations, manage risk, and improve revenue, says Mike Gulledge, director of credit services for PSCU Financial Services, St. Petersburg, FIa.

Gulledge says the TRIAD system developed by Fair Isaac Corp., Minneapolis, and packaged by PSCU as part of its Adaptive Control System ereates a risk score that's updated monthly to predict cardholder behavior. This may flag the account for additional risk-monitoring based on high expenditures or for special marketing offers based on inactivity. "It automates the process and can lead to a significant improvement in productivity," Gulledge says.

Tools enabling risk-based pricing permit credit unions to offer credit cards to high-risk members and to create rewards that retain creditworthy members. When flexible pricing is an option, front-line employees easily can present a counteroffer to members planning to accept a competitor's offer and shift their balance. Credit unions also can use pricing to move delinquent accounts to higher interest rates, if desired.

Similar tools enable credit unions to use promotional-based pricing such as 0% offers to attract new cardholders or to inspire cardholders to make additional card purchases.

"There's a perception that credit unions can't compete with the larger card issuers, and I take exception to that," Gulledge says. "With these technologies immediately available, credit unions can have the same capability, functionality, and revenue streams as any other issuer in the country."

A balance-transfer program offered by Certegy Card Services, St. Petersburg, FIa., shows the impact of technology tools. Participating credit unions can offer members a low promotional rate on balances transferred from another credit card issuer. The credit union performs the transfer online by entering the account number of the card affected by the balance transfer, the transfer amount, and the account number of the credit union's credit card account. The program launched in October 2004.

By March 2005, the average Certegy client had used the program for four months, created more than 500 balance transfers, booked nearly $1.4 million in new credit card loan balances, and increased its portfolio more than $2,600 per balance transfer.

"This is a direct response to credit unions asking us how to stay competitive," says Tim Kaliban, assistant vice president, product management.

Grow the portfolio

Patelco Credit Union, San Francisco, uses promotional offers and other tools to grow its card portfolio each year. The credit union, with $3.5 billion in assets and 205,000 members, had $139 million in outstanding credit card balances and 79,977 cards in March 2005, up from $121 million and 76,205 cards at the beginning of 2004.

"We're deliberately aggressive," says Chris Oldag, senior vice president of lending. Patelco views its credit card program as a vital element in its relationship with members. "If your business name isn't riding around in your member-owners' pockets, you give up a lot."

Patelco builds card balances by allowing members to use its home banking system and automated telephone system to transfer checking account overdrafts to credit card accounts. That option is available because Patelco's card processor, Certegy, sends transactions through its core processing system. Oldag says there's no compliance issue because the credit card transaction is handled as an automatic cash advance triggered when the overdraft hits the account.

Oldag says rewards are an essential element of credit card programs, an opinion others in the card industry share. A study by Synergistics Research Corp., Atlanta, shows reward program cardholders use their cards for purchases an average of 12.6 times per month, compared with an average of 5.2 times per month for other cardholders. "If you don't offer rewards or mileage points or a rebate card, you'll really be left in the dust," Oldag maintains.

Promotional offers can help credit unions leverage their marketing advantage as a trusted source of financial information, while offering the same value as national card issuers.

"Consumers are indicating that rate isn't the only driver" in selecting a credit card offer, says Glen Lee, first senior vice president for TNB Card Services, Dallas. "Today they're asking, 'Who can I trust to avoid predatory practices?' They're also looking for value such as rewards or rebate programs."

These factors should cause credit unions to pause when deciding whether to sell their portfolio and work with an agent issuer, Lee says. Credit unions willing to invest in credit card services and assign executive talent to actively market and manage credit cards will create and maintain a long-term revenue stream. But if the credit union is unwilling to devote resources to its credit card program, it may benefit from selling the portfolio. In that scenario, the credit union still retains some income while offering a competitive product to members, he notes.

Develop debit strategies

Debit card transactions are "exploding," according to Bill McCracken, CEO of Synergistics. He describes the transition to electronic payments, including card payments, as "the coming tsunami."

Debit card use at the point of sale surpasses all other forms of payment. The PaymentDynamics 2004 study conducted by Edgar, Dunn & Co., New York, shows 40% of Americans prefer to use their debit card at the point of sale and 36% prefer their standard credit card. Respondents preferring credit cards dropped from 57% in Edgar, Dunn & Co.'s 1999 study, which excluded debit cards because of limited use at that time.

"If you're looking 20 to 40 years into the future, cash and check-like tools pretty much will be a thing of the past," McCracken says. "In the past, you could expect cash to be exchanged if your transactions were under $20. Debit is now the tool of preference until you get into the single [dollar] digits." Debit's dominance declines at amounts of $40 and higher, when the credit card takes over.

When weighing the cost and return of debit programs, include the costs of paper check processing, which likely increase as volume declines, Lee points out.

"Credit unions need to look at driving and promoting their debit card because they'll be much better off to have that debit transaction take place than a check transaction," he says.

Lee and others recommend issuing cards combining debit and automated teller machine functionality whenever possible. Also, identify members who don't activate their debit cards, and create incentives to encourage regular use.

Real-time settlement of debit transactions will be essential as consumers use checking accounts to fund a variety of electronic transactions, says Ron Silvia, director of debit and prepaid services at PSCU Financial Services. PSCU also is creating Internet access to card data to make it easier for credit unions to generate reports and update member information.

To build use, Silvia advises credit unions to educate members upon issuing the card. For example, many members may not realize debit cards carry the same cardholder protections as credit cards.

Introduce 'contactless'

The industry also might see changes in the format of debit and credit cards, although opinions differ on the adoption timeline. Industry observers predict the U.S. market will bypass smart cards, once touted as "the next big thing" because they contain a computer chip that can store information and conduct financial transactions.

Instead, it's said the market eventually will move ahead with contactless credit and debit cards, also known as radio frequency identity (RFID) cards, on a timeline driven by merchant installation of contactless readers.

Contactless solutions use tiny computer chips and wireless antennae to transmit account information. Although chips may be embedded in a standard plastic card, contactless solutions often are in a format such as key fobs, which allow consumers to leave their wallets at home.

Visa and MasterCard have tested contactless solutions. McCracken says pilots and studies show contactless debit transactions could replace cash for small purchases at locations such as fast-food restaurants, convenience stores, gas stations, and movie theaters.

Another technology with the potential to replace plastic cards is subscriber identity module (SIM) cards inserted into mobile telephones to transmit account data and enable purchases.

Before consumers will accept RFID or SIM devices, issuers must reassure them the devices are secure and accepted by a wide range of merchants, according to Brad Campbell, sales manager at PEMCO Technology Services Inc., Seattle.

In the meantime, PEMCO is experimenting with card formats by offering the Visa minicard to credit unions. The 1.5-inch by 2.5-inch cards carry magnetic stripes and signature panels on stronger-than-normal plastic, which consumers can swipe through card readers. Minicards can be issued for either debit or credit accounts. The minicards have a hole in one corner to fit on a key ring.

PEMCO encourages credit unions to use the keychain friendly minicards to appeal to niche markets such as teen or young adult members, Campbell says. Bowdoinham (Maine) Federal Credit Union offers PEMCO's minicards. The $17 million asset credit union, which has 3,500 members, uses its debit minicard to appeal to potential members age 15 to 24, according to Heidi Small, vice president of marketing and business development.

Small says the minicard is a vital element of the credit union's Xplay program for young members. The credit union has issued minicards to 212 of 437 eligible members.

"The word is out that the minicards are a really cool thing to have," Small says. "A lot of young members are accustomed to just grabbing their keys and going into the store because it's so convenient." Members' only negative feedback was the lack of card acceptance at some smaller stores. Members who receive a minicard also receive a standard-size card.

Anticipate change

While contactless cards and other options may accelerate credit and debit use in some settings, the transition to electronic payment methods could have a broader long-term impact on credit unions.

"It all leads to a significant reduction of cash and checks in our economy," says Synergistics' McCracken. Credit unions must monitor these trends even as they embrace noncash payment methods. In that environment, strong credit and debit card programs will be essential to retain a share of members' spending.

For more credit and debit card information, visit

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RESOURCES

* Certegy Card Services, St. Petersburg, FIa.: 800-215-6280 or certegy.com.

* First Annapolis Consulting, Lithicum, Md.: 410-855-8500 or firstannapolis. com.

* PEMCO Technology Services Inc., Seattle: 800-881-7488 or pemcotech. com.

* PSCU Financial Services, St. Petersburg, FIa: 800-443-7728 or pscufs.com.

* TNB Card Services, Dallas: 888-742-0260 or tnbcard.com.

Copyright Credit Union National Association, Inc. Jun 2005
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