In the early 2000s, Ball State Federal Credit Union ($91.6M, Muncie, IN) and Financial Partners Credit Union ($822M, Downey, CA) sold their credit card portfolios to third parties. After being out of the market for years, both credit unions decided it was time to test the waters and re-launch a credit card program. In this Q&A, Randy Glassburn, CEO of Ball State, and Lori Reeves, vice president of operations and eServices of Financial Partners, explore why their credit unions initially sold the portfolios and the factors that led them back into the credit card business.
Why did your credit union originally decide to sell its credit card portfolio?
Randy Glassburn: We had a credit card portfolio that had become stagnant. It was a program we just couldn’t grow back then. This was pre-bankruptcy reform, so when we had an offer to sell it and increase revenue for the credit union, we took it. The third party we sold it to was able to offer more frills, including a rewards program.
Lori Reeves: We sold our portfolio in January of 2003 for a few reasons. First of all, the credit union got a good premium on the sale. At that time, our expenses and our losses were high. By selling it and taking the premium, we felt we could offer more to our members. Additionally we were hearing from members that they wanted rewards and other features we weren’t able to offer at the time.
What were the driving factors behind re-launching it?
RG: We waited for our contract’s non-compete agreement to expire and for bankruptcy reform legislation to pass before the credit union decided to re-launch our own program. The third party we sold to initially was acquired by a larger entity that raised rates and fees over time. Our members, who were now their cardholders, became increasingly disgruntled because of that. The credit union re-entered on different terms that were more favorable. We offered members a nice, low-rate and promised not to fee the fire out of them.
LR: Right after we sold our portfolio we saw a big decrease in credit card balances on the sold portfolio — the total balances declined in just a few months from $31 million to $24 million. Our members noticed a difference in the service they were receiving from the new provider versus their credit union. Members also had a high degree of loyalty for the card because of the affinity card branding we had. When our new CEO, Nader Moghaddam, came onboard in 2005, he focused on the value of having our own credit card, and we started planning what was needed to get back into the credit card business.
Even though someone else owned our portfolio, we still owned the reputation. That became a big driver for us. And because our debit cards were a bigger part of our overall card portfolio, we still carried most of the expense structure. For example, the credit union still needed staff to handle card processing, fraud, etc. but now had a smaller base of cards — debit only — to spread those expenses over. As soon as our contract came up, we re-launched our own credit cards. It just made sense from a reputation and member service standpoint.
What type of credit cards do you offer through your new program?
RG: We launched two different card programs. One has a low-rate and one offers reward points. If you want points, you have to pay a higher rate. The credit union essentially earns the same on both products and the members can choose which type of card they prefer. Our 9.9%, no frills platinum card is the most popular. However, if you are the type of person who pays off your balance every month and wants rewards, you can benefit from our 11.9% rewards card. We’re also getting ready to launch two additional card programs. One is a credit starter card for those who don’t have a lot of credit history or who want to build their credit. This will feature a lower line of credit and a 17.9% classic card rate. We will also introduce an elite card with an even lower rate than our current platinum card. It will have a $25 annual fee, so in essence you are buying the rate down from our standard platinum’s 9.9% to 7.9%.
LR: We merged with a credit union that had its own small portfolio in 2008, so we started by servicing that and then fully launched our new portfolio in June of 2009. We didn’t want to repeat past mistakes. We were selective about our portfolio and began by introducing a competitive rate offering that targeted A and A+ paper. We have since broadened our offering and now have a rewards card. We also just started offering business cards and have a standard platinum and rewards option on that side as well.
We elected to run the program on a pass-through basis as opposed to having someone else fully manage it. We do it that way so members can manage their credit cards just as they do any other credit union account with access in online banking, mobile banking, etc. This benefits the credit union on the expense side, plus we’ve combined both credit and debit to achieve economies of scale.
What have the results been since the re-launch?
RG: We built up $1 million in the portfolio in the past year-and-a-half to two years, so I think we’ve done pretty well. It was $4 million when we sold it and had been at that point for years — it wasn’t that it wasn’t profitable, but it was something we couldn’t grow in the old structure.
LR: As of January 20, 2014, we were at $16.6 million in outstanding balances and have 8,800 cards. We offer balance transfer promotions and perform credit reviews with members to see how much money they can save by switching to a Financial Partners card. The hardest thing is getting people to bring in what they are paying on their credit cards versus what they think they are paying. There is often a big discrepancy between perceived value and actual value from other card providers.
Were there any challenges or surprises you found when re-launching? Any advice you'd give other credit unions considering a re-launch?
RG: When we decided to start it again, we knew enough to not make the same mistakes. The re-launch was under our terms and we were able to create a much better program. The advice I would give other credit unions considering a re-launch is: I would absolutely do it.
I’m an old-fashioned credit union person, and I believe our business is to offer competitive and useful deposit programs and to make loans. That is our mission and credit cards are a key lending product.
LR: The best advice I can give is to be clear about what you want your value proposition to be so you develop the right product line for your members. In order to be successful in this competitive and highly regulated market, you need to keep your cost structure as low as possible. Combining your credit and debit cards is one way to negotiate a lower price. I also recommend keeping your contracts short — three to five years — so you can re-negotiate as things change. You can also take advantage of new tools and extras your processor may have available when you renegotiate.
Lastly, evaluate collection strategies. Because credit card balances are typically lower, they might not get the same level of attention as other types of loans or might require a different type of collections strategy. For example, we’ve implemented e-alerts to remind members when their credit card payment is due to help those who simply forget to make their payment. We also try to set up as many accounts on automatic payment as possible. Looking for alternative ways to collect or prevent credit card delinquency can make a big difference in your program.
Credit unions as an industry need to have a competency in the credit card area. Generally, credit unions are good at the loan part of the card but might not fully embrace the other facets of cards: fraud strategies, spend and usage analytics, acceptance rates, etc. The credit card is extremely important from a relationship aspect and is a natural cross-sell for nearly all of a credit union’s other products.