Reinvesting in Your Credit Card Program
LA DOTD FCU ($86.8M in Baton Rouge, LA) put serious thought and consideration into selling their card portfolio. The key factor that drove them to consider this option was the growth of their card portfolio. "Growth had been non-existent for the last six or seven years," said Cary Anderson, President/CEO of LA DOTD. "Our balances remained almost constant, despite the fact that we had tried quite a few options related to promotion and pricing. We even rolled out a platinum card with little impact."
Despite their best efforts to drive growth into this component of their loan portfolio, LA DOTD still saw little change in their portfolio. Outstanding credit card balances remained at approximately $4.5 million, 8.5% of their total loan portfolio at the time, with minor fluctuations in the number of accounts. This drove the credit union to contact TNB Card Services, their card processor, about their options.
Reevaluating the Portfolio for More Accurate Pricing
In order to begin the process, TNB did a study of the card portfolio and where it might be improved. "They had a great amount of expertise," says Anderson, "They were able to show us what they would have done if they bought the portfolio."
Working with TNB, LA DOTD was able to see the options in front of them, as well as the implications or changes necessary for those options. Based on that information, LA DOTD decided that they wanted to keep their card portfolio and continue to invest in its growth. "They really didn't push us one way or another," says Anderson, "In the end, it was their experience that helped us decide to keep the program. We saw examples of other credit unions that had been in our situation and were able to reintroduce growth into their portfolios."
Once the decision was made to keep the portfolio, LA DOTD then began to work with TNB to reinvest in their card portfolio. "The first step was for us to adjust the portfolio to fit into a risk-based pricing structure. Working with TNB we were able to use 72 different factors to price the portfolio," says Anderson. Some of the factors looked at were card limit vs. card balance and FICO scores, as well as delinquency history and card utilization. "In the end we took our pricing by FICO and combined it with the debt ratio in order to better account for risk," says Anderson. "We actually found that we had a number of accounts with high FICO scores, but who were still priced into a third tier." The next step was for LA DOTD to inform their members of the pricing changes and the possible upgrade to a platinum card. Overall, member responses were much better than they had expected. "We had very few issues after informing our members. Only 4 members, out of a total of about 2800, opted out due to the risk-based pricing," says Anderson.
Profitability of Program Increases due to Reinvestment
When all was said and done, the decision for LA DOTD to keep their card program worked out well for both the credit union and its members. The credit union was able to maintain control over their card portfolio, which they believe to be a key relationship product for the members. From the member perspective, a renewed focus on the card program resulted in many seeing increases in their credit limit, a decrease in their rates, or both. This new pricing structure went live in April 2008, which will allow LA DOTD to use first-quarter 2008 data as a base in order to make quarterly comparisons throughout the year.
Looking back on the decision process, there are a few key things a credit union needs to understand before making a decision. "You need to be as informed as possible," says Anderson. "A comprehensive analysis of the portfolio and all available possibilities was crucial." Once the decision has been made, keeping up on the program is one of the most important steps for any credit union. "Information can get stale," says Anderson, "You need to make sure that you regularly re-run the analysis and re-price the portfolio to make sure your members get the benefits of the updated information."
For LA DOTD, analyzing their portfolio and understanding the options that were available to them was the first step. The ability to see other credit unions that had been in a similar situation and were able to turn their programs around proved that, for LA DOTD, reinvesting in their card portfolio was still a viable option.