As an industry, credit unions account for just 2.9 percent of the U.S. credit card market. At the same time, economies of scale give the goliaths of the massive industry an edge for running a more efficient program, leaving credit unions and other small credit card retailers the challenge of attempting to grow. Consequently, many credit unions sold their credit card portfolios. But now a small number of credit unions that left the industry to concentrate on other areas are re-entering the market. For example, after a five-year hiatus, Eastern Financial Credit Union was ready to re-focus on credit cards to better serve its members.
Eastern Financial left the credit card market in 2000 because of a rigid vendor relationship and the lack of a suitable internal structure. The vendor relationship did not function well because the vendor was not serving members up to Eastern’s standards. The tight underwriting criteria of the vendor – a company called Midwest — left less than a 20 percent approval rate for applicants. In addition, Midwest, under Eastern’s name, instituted universal default. And Midwest’s program had high charge-offs. Because Eastern had sold the portfolio, such decisions were outside its control, yet members continued to hold Eastern responsible.
Eastern’s Comeback to the Credit Card Industry
Under Midwest’s stewardship the portfolio shrank 34%. During this time Eastern came to learn that credit cards were a core product for its members and a profitable one when managed appropriately.
To entice new card applicants, Eastern chose to introduce a Platinum card program. Members could choose either a rewards program or to a non-rewards program with a more attractive interest rate. In addition, the Platinum card offered competitive promotional rates, from 7.99 to 17.99 percent. The aggressive direct marketing solicitation was managed via mail, website and Eastern’s branch network.
In addition, Eastern felt that owing to previous experience, it needed a different overall approach. It centralized the operations of the credit card program by creating the Card Services department.
Member response has been excellent. In just over one year Eastern issued more than 10,000 new cards with outstandings of $28 million and lower than expected charge-offs. At a time when margins are thin, Eastern has a growing unsecured portfolio. Today, Eastern’s program is comparable to those of many other companies that offer rewards, Platinum cards, etc. But, true to its credit union mission, Eastern offers a fixed-rate product (the rates may change, but they only apply to new purchases). Eastern’s underwriting is not a credit score/debit income formula. “We spend the time to understand each member’s needs and ability to repay, and charge rates according to the risk,” says Eastern CEO and president Stephen McGill.
At the time of the credit card portfolio sale, Eastern felt it had made the right decision. But if given a second chance, Eastern would have held onto the portfolio, periodically reviewed the lines outstanding, introduced risk-based pricing sooner, hired a better card service partner, and offered members better card choices, all to make the program stronger.
Today, the biggest change in the program is the operations. This time around Eastern has credit cards managed in one central department, and decisions are made with a better knowledge of the industry. “We have brought in the talent that understands the unique operational challenges, risks and rewards a credit card portfolio brings,” McGill says.
Eastern plans to increase the usage of existing cards by offering various promotions. In addition, it will expand the product line to meet members’ needs, soon to be introducing share-secured, student and business credit cards.