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Credit card portfolio options

Amato, Charlie

Southwest Business Corp.

In the past, credit card issuers didn't consider buying a credit union card program an attractive option. Times have changed.

Now, large credit card players aggressively seek credit union partners willing to enter into agent relationships. But selling isn't always the best option, especially when independent service companies can manage card programs and offer increased revenue, brand penetration, and member retention.

Credit unions have three basic choices for their credit card portfolio: Sell it; keep it and do nothing; or keep it and commit to making it successful.

Credit unions must weigh the risks related to selling a card portfolio. What they're selling isn't just the card balance. It's control over the relationship with the card member, the marketing program, and the asset's performance.

Maintaining a card program can involve stiff competition, high expenses, and lack of portfolio growth. It also could hinder expansion in other areas, such as auto loans and mortgages. Yet, if this product can't be profitable, why are so many banks willing to pay a premium for it?

"Credit card households have significantly more services, higher deposit balances, and higher loan balances than noncard households," explains Mark Riddle, senior research analyst, Raddon Financial Group, Oakbrook Terrace, Ill. "Profit is three times greater for card households than non-card households."

When credit unions sell their credit card portfolios, they often offer banks the opportunity to cross-sell products and services to their members. Many credit unions relinquish their card program before trying to market the service with platinum cards or bonus points. "Typically, within a few years, agent issuers reach a point of diminishing returns on marketing dollars," says John Anderson, director of TermNet Merchant Services, Atlanta, an independent merchant servicing company providing noncash payment services to merchant agent banks nationwide. "In an agent relationship where you have no control over marketing, you can't ensure the issuer will continue to invest in marketing your program."

Pen Air Federal Credit Union, Pensacola, Fla., found many members opening second checking accounts for small-business use. By introducing merchant card services, the credit union could offer a "real" business checking account, along with check verification and credit card processing.

Pen Air Federal, with assets of more than $583 million, began working with TermNet three years ago to manage its merchant checking and card services. "We didn't implement the TermNet service as a fee income source but as an added benefit to our members who wanted their credit union to have their business checking accounts. It got them out from under the thumb of bankers who were charging high fees for the same service," says John Davis, credit union president/CEO.

By outsourcing merchant services, credit unions can offer greater benefits to members and build better relationships without additional staff. Independent merchant servicing companies offer services such as electronic credit and debit card processing, check authorization and conversion, gift and loyalty card programs, in-house charge-backs, and business development.

Merchant service programs increase revenue by extending brand penetration through marketing strategies, provide portfolio analysis, broaden product selection, improve member retention, and stimulate cross-sales. "A merchant program can offer financial institutions a competitive advantage to build and maintain relationships," says Anderson.

Beyond servicing tools, merchant services can increase revenue through potential surcharges such as merchant statements, imprinter rental, point-of-sale terminal rental, and fees for administration, authorization, merchant charge-back, and debit card transactions.

"Our merchant program allows us to have true business checking accounts at the most reasonable cost to our members so they never have to do business with a bank again," adds Davis.

CHARLIE AMATO is chairman of Southwest Business Corp., San Antonio, and of the Children's Miracle Network.

Contact Charlie Amato at 800-527-0066 or at camato@swbc.com.

Copyright Credit Union National Association, Inc. Sep 2003
Provided by ProQuest Information and Learning Company. All rights Reserved