Risk And Rewards In Credit Card Affinity Programs

Potential rewards and risks in credit card affinity programs.


Credit unions posted 5.5% year-over-year growth in outstanding credit card balances in the third quarter of 2012, with total balances topping $38 billion. This growth is almost double the 2.8% annual growth in September 2011 and close to the 6.1% growth posted in September 2009. According to the Federal Reserve, credit union market share of credit card balances increased to 4.6% in the third quarter. This is up from last year’s third quarter market share of 4.4%.

Credit unions are implementing a variety of tactics to promote credit cards and reach their members, including partnering with similarly minded organizations, such as colleges or alumni organizations, to offer credit cards cobranded to both partners’ member bases. According to a 2011 Consumer Financial Protection Bureau report on college credit card agreements, seven credit unions had nearly 30,000 active accounts through collegiate affinity card agreements. Credit unions represented three of the top seven financial institutions in the largest number of new accounts opened during 2011. The University of Illinois Employees Credit Union (Champaign, IL; $275.4M) came in second with 3,452 accounts opened last year.

Affinity programs are not new in and of themselves, but the opportunity for credit unions to make progress in this area has never been better. Like any credit card program, though, credit unions should take care to avoid missteps that will lead to poor results, partnership difficulties, and unhappy members.

Why Now?

Large credit card issuers have traditionally dominated affinity programs. Without special divisions dedicated to finding and managing these opportunities, it had been difficult for small issuers, including credit unions, to establish more than a handful of affinity programs. Times have changed, however, and there is now room for small issuers to compete.

With a few notable exceptions, such as Capital One, many of the dominant issuers are stepping away from the affinity card niche and cancelling thousands of small programs when contracts expire. As a result, more groups are looking for issuing partners. Before jumping into this market, though, any small issuer that wants to build its own program needs to consider the reasons large banks are terminating their affinity relationships.

Things To Consider

Most large issuers are sophisticated and make few decisions casually. Assume they carefully considered their decision to walk away from an affinity program and then build your own expectations accordingly. The main reasons large issuers are leaving this field include:

Strength of affinity is fleeting.

The consumer and credit card markets have changed, and the consumer’s ability to obtain credit cards from a variety of sources and shop for the best deal is easier than it used to be. Consequently, affinity to a specific card has declined. What used to be special and valued has become commonplace.

Consumers want rewards and have a “what’s in it for me?” mentality.

In the past, consumers tended to take affinity cards without much in the way of personal rewards. Today, few consumers are willing to forsake rewards to help fund an affinity organization, and reward payments to the card holder plus royalties to the affinity group mount quickly.

Affinity group affiliation did not mitigate credit risk to the degree expected.

Affinity programs initially provided access to lower cost new account opportunities, and many affinity groups had demographics with better-than-average credit risk profiles. Although some affinity groups still provide both advantages, the recent economic downturn has dramatically decreased the latter advantage. In turn, programs’ returns have faltered and they no longer make economic sense.

The best affinity program for a small issuer is one that is in-market, based on existing relationships, and managed by local people.

Affinity programs require additional management, resources, and commitments.

It is difficult for large issuers to justify dedicating entire business units to wining and dining large numbers of small groups; so they’ve stopped. This is where smaller issuers have the largest advantage. The best affinity program for a small issuer is one that is in-market, based on existing relationships, and managed by local people.

Success As An Affinity Issuer

Credit cards are a risky business. Adding affinity programs increases those risks. Credit unions should not add another party to the relationship, create additional expenses, or increase operational and servicing complexity without first putting in their due diligence. There are many worthwhile affinity opportunities, so credit unions considering these programs should carefully evaluate:

Will this group help deliver less expensive, loyal new accounts?

Affinity programs increase operating expenses in a number of ways, but institutions can justify those expenses by lowering acquisition costs for new accounts. Credit unions won’t realize new account cost advantages if the group’s members are not highly bonded to the organization, and the program can easily lose money.

Does the group understand the world of the credit card issuer?

With average Return on Assets in the 1-3% range, there is not a lot of room for mistakes in card issuing. The layperson tends to look at credit card interest rates and assume issuers are making money hand over fist. That’s not the case. The credit union needs to educate the partner on how a 10% yield breaks even once the credit union accounts for charge-offs, fraud, processing and funding costs, and reward payments. Partners that don’t understand this won’t understand the limits on the available revenue to share, which is likely less than they received with their previous partner.

The best partners support issuers’ needs to make hard decisions, which include declining some members. This can cause uncomfortable moments, particularly among smaller groups with local connections. Avoid partners that challenge the way an issuer manages the program.

Issuers should plan to sign up to 2% of the membership over three years.

Is the group large enough to make it work?

Every group gets excited about the opportunity to offer its members credit cards; however, issuers need to harness expectations. Affinity groups typically overestimate member interest and rarely contemplate that issuers can’t approve as much of 50% of their members. An excited and engaged partner is critical for a successful program, and partners must provide marketing opportunities beyond direct mail. At the same time, issuers must take a critical look at the size of the membership to determine if the effort is worthwhile. Situations vary, but as a rough benchmark issuers can plan to sign up up to 2% of the membership over three years. If that is not enough accounts to make it worthwhile, rethink the partnership.

Are the appropriate reporting and control structures in place?

It is critical the issuer has a handle on program and reporting structures before proposing an affinity partnership. Does the issuer have a fully formed profit and loss statement in place? Can the issuer segregate and report separately on the affinity portfolio? Can the issuer separately assign marketing energy and expenses to the affinity program? These things are critical in determining the royalties available to the partner. The information also is important in communicating how the program is faring and laying out facts if or when issues arise.

There are productive affinity opportunities available for credit unions. For the first time ever, large issuers have provided an opening for cooperatives to move into the affinity space. With proper expectations and preparation, those who embrace this market segment and exercise appropriate management can succeed and grow prudently.