The past two years have been difficult for credit unions. Operating earnings are under pressure, special assessments have been substantial, and the credit quality of our members – although better than the banking industry – has not been as strong as we hoped. In this environment, it is no surprise many credit union credit card programs are also underperforming.
On a positive note, however, over the past few years the credit union industry has reversed some long-term declining trends in its card business. Specifically, total accounts showed modest growth and total balances substantial growth.
This growth was driven more by increasing balance per account (up almost 30% since 2005 to more than $2,500 today) than by adding new accounts (up only 5% over the same period). Rather than signing up new card holders, the industry has been getting existing card holders to use it for more of their borrowing.
Critically, this growth came during a period when credit risks escalated and, at least in the past year or two, when large banks pulled back and issued less credit. Examining credit quality in these programs illuminates cause for some concern.
Charge-offs have increased throughout the industry. As any meaningful improvement is contingent upon a reversal of unemployment rates and not expected until 2011, it does not seem to be the time for optimism in industry forecasts. Aside from the obvious – that credit unions exist within the larger economy – this also raises the more strategic question of whether any specific credit union has a good handle on its program's profitability and the management protocols in place to manage its portfolio proactively.
Based on NCUA data and related benchmarks, an estimated 15% of 4,000 credit union credit card programs are losing money.
On top of this, the CARD Act is expected to further drag down future period profitability. With its near-elimination of overlimit fees, constraints of repricing (especially fixed rate products), additional compliance burdens, and increasing expenses, the CARD Act is expected to reduce card ROA by another 1-2% of balances. That alone could push 1-in-3 (or more) card programs into losing money. Is there a credit union that feels its overall earnings picture has room for a money-losing card program?
Credit unions must strengthen their card program management practices. The management team and operational staff need to spend the time to understand the changing landscape for this product, put in place the scorecards necessary to track their programs regularly, and ensure they have realistic expectations for these programs over the next few years. Growing a credit card program is easy in this environment; growing it prudently and profitably is more challenging.