Building a robust credit card portfolio is integral to credit union health and growth. Credit cards represent three out of every four loan accounts, outpacing other loan product acquisitions by nearly 56 percent.1 And once US cardholders accumulate a credit balance, they are likely to carry that debt over time – for 25 percent of cardholders, it can take nearly a year or more to pay off the balance.2 That means consistent, guaranteed interest income for credit unions.
In fact, according to Accenture, $500 billion in global incremental payment revenue is available to tap over the next five years.3 With payments representing 80 percent of a consumer’s interactions with their financial institution, the time has come for credit unions to make payments the center of the Primary Financial Relationship (PFR).4
While a high-performing credit card program can bolster revenue and help cement long-term member relationships, the active management of such a program offers its share of headaches. Card managers face multiple issues, questions and decisions daily – and increasingly feel the pressure to respond quickly. Executives must continually evaluate costs and returns on investment, project future trends, and identify, build or secure the resources needed to optimize the card program.
Research on consumer behavior shows that member expectations are evolving. Today’s consumers are looking to their PFRs to provide leading-edge card programs that are tailored to their specific wants and needs. According to a research study performed by EY and reported in the CU PaymentsOutlook white paper from CO-OP Financial Services, 7 out of 10 respondents owned at least one payment product. In addition, 50 percent would approach their PFR provider as the first place to shop for a new digital payment product.5 These members expect a digital-first experience, personalized offers and expert guidance from a financial institution that understands them as individuals.
Along with ongoing investment in time, talent and technology, many credit union executives find themselves giving thought to outsourcing the management of their credit portfolio. But the decision of whether to partner with a group of experts to help identify growth opportunities, or to sell off all or a portion of a card portfolio should not be taken lightly.
Partner with Experts, Or Sell Your Portfolio?
When evaluating the two options, it’s important to understand the potential benefits and shortfalls of each approach.
1. Upfront versus recurring revenue streams: When a credit union maintains ownership of its credit portfolio, it remains an earning asset for the financial institution.
Additionally, when owned, the credit portfolio provides credit unions with a steady stream of higher interest income compared to other consumer loan products such as mortgages and auto loans. A retained card program also diversifies the overall consumer portfolio, offsetting down cycles in origination volume in other portions of the portfolio. When managed well, a credit portfolio can be among the most lucrative assets on a credit union’s books.
Alternatively, if a credit union chooses to sell the portfolio to an agent bank, the agent retains the earning asset and the majority of the future income. The seller may collect an initial premium on the sale of the portfolio, but any recurring royalty payments will be dwarfed by the potential earnings from a retained portfolio.
2. Balancing risk and reward: The agent bank typically holds all the “cards” in the relationship (excuse the pun). Since the purchaser owns the rights to the portfolio, they set the contractual payment terms. For instance, the purchaser may (and often will) add a clause requiring the credit union to meet certain card origination thresholds to receive ongoing royalty payments. The moment those thresholds aren’t satisfied, payment often stops, reducing the credit union’s revenue stream on the sold portfolio to zero.
Underwriting is another concern when a portfolio is sold. In such cases, the credit union no longer is doing the underwriting for the unsecured credit; the issuer who now owns the portfolio is following their underwriting guidelines, to which the credit union is not privy. In the event a member applies for a credit card and does not meet the issuer’s criteria, they may be offered the option of “full recourse.” What this means to the credit union is that they are agreeing to all the risk of future losses. The credit union is on the hook for fees from cardholder delinquencies and charge-offs when they occur, further reducing overall revenue.
3. Maintaining the member experience: One key to delivering an exceptional member experience is ensuring every touchpoint is handled consistently. One benefit of selling a card portfolio is that the agent bank will handle everything – from underwriting and approvals to fraud response and disputes. However, this also means the agent will take control of service standards, branding and member relationships.
Since the agent bank handles all underwriting in accordance with their own standards, there is little room for exceptions based on the member relationship. This may result in permanent damage to some long-time relationships and the credit union’s reputation for service.
For credit unions focused on providing an outstanding member experience, maintaining ownership of their payments program ensures the integrity of the brand and the ability to continue providing best-in-class service to the cooperative’s members.
Optimize the Credit Portfolio with Richer Insights and Expertise
Managing a payment program is often a delicate balance between generating revenue and considering the members’ best interests. The right partner can help a credit union increase card usage and revenue while remaining member-centric.
CO-OP SmartGrowth Advisors can help card executives analyze their portfolio and develop strategies to enhance the member experience, all while allowing them to maintain control over their credit and debit card programs. And because CO-OP supports thousands of credit unions across the country, our predictive models benefit from access to a rich trove of member transactional data.
Credit union leaders can learn how to unlock the potential of their credit and debit portfolios through customized portfolio analysis, targeted campaigns and creative strategies that engage their members. To learn more, contact CO-OP SmartGrowth Advisors by visiting: https://www.co-opfs.org/Solutions/Consult/SmartGrowth-Consultation.
Deb Wieczorek is Vice President, Strategic Advisory and Portfolio Growth, for CO-OP Financial Services (www.coop.org), a payments and financial technology provider to credit unions.
1 Consumer Financial Protection Bureau: Payment Amount Furnishing and Consumer Reporting (2020).
2 Consumer Financial Protection Bureau: Credit Card Revolved (July 2019).
3 Accenture: “Global Payments Pulse Survey 2019: Two Ways to Win in Payments” (https://www.accenture.com/_acnmedia/pdf-108/accenture-global-payments-pulse-survey-2019.pdf).
4 McKinsey: “Global Payments Report 2019: Amid Sustained Growth, Accelerating Challenges Demand Bold Actions.”
5 EY Research Survey reported in CU PaymentsOutlook white paper (2021) (www.co-opfs.org/CU-PaymentsOutlook).