By Ray Birch
PETERBOROUGH, N.H.—The ultra-high level of credit card competition may be getting too great for some credit union issuers, as talk of selling portfolios is on the rise, says one credit card expert.
And while sell-offs may not reach levels seen in the early 2000s, when many credit unions sold their portfolios in favor of an agent-bank relationship, another round of portfolio sales may take place for similar reasons.
Tim Kolk, principal at TRK Advisors, told CUToday.info he has seen a significant uptick in the number of credit unions considering selling their credit card portfolios and moving to an agent bank-relationship.
“Back in the early 2000s, many credit unions got away from owning and managing their card portfolios because competition from big banks was getting too great,” Kolk recalled. “The big banks were offering more attractive incentives, such as cash back and other rewards.”
Tough Competition
What concerns Kolk most about the competition from large issuers today—a topic CUToday.info has extensively covered—is that it’s competition small issuers can’t match.
“Back in the early 2000s, credit unions could make the decision to pay more and offer the rewards if it analyzed their programs closely and watched expenses,” explained Kolk, who also said an issue during the previous round of portfolio sales was processor-servicing capability. “But today the competition is at a much higher level. There has always been heavy competition in this space, so that hasn't changed. But what has changed is the type of competition. One thing for certain, the type of innovation from the big processors is getting harder and harder to match. It’s more tied to technology, such as the tech that’s baked into the Apple Card. It’s like Amazon having a card that loops back into their purchasing ecosystem—those kinds of things are pretty close to impossible to compete against if you’re a credit union. It’s that type of competition that is making people nervous.”
Kolk said it would be premature to predict a big selloff in credit union card portfolios similar to that of almost 20 years ago.
“But I am hearing a lot of talk among the credit union community and I am getting a lot of calls from credit unions about this, so it caught my eye,” said Kolk. “The first half of 2019 was as active as I’ve seen in a while.”
Smaller CUs
Kolk said the interest is generally from smaller credit unions, noting that the average CU card portfolio ($20 million) is not large in comparison to big banks.
“But I have seen interest from a couple credit unions that are not small, and big enough that if they decided to make such a move it would be headline-grabbing,” Kolk said.
Increasing market risk may also be prompting some CUs to consider moving to an agent bank relationship—where they receive an upfront premium and some ongoing revenue based on the performance of the program, and keep their name on the card while walking away from all the credit risk, marketing expenses and operational expenses, said Kolk.
Kolk talked about recession concerns and rising defaults as consumers reach record levels of debt.
“Some credit unions may want to exit this market before things get a little tough on the portfolio performance side,” he said.
The CECL Factor
There is also another factor in credit union decision-making–the new current expected credit loss (CECL) standard and risk-based capital, added Kolk.
“Credit unions are talking about this. Risk-based capital is going to require you to increase the amount of capital needed to be held against card assets, and CECL could lead to significant increases in loan loss reserves, which can cause all kinds of bottom-line issues,” Kolk noted.
Moreover, some credit unions may simply want to put what is becoming a labor-intensive program on autopilot and focus on other lines of business, he suggested.
Tim Kolk, TRK Advisors
“This would allow them to put more attention into other things, like auto lending and mortgages,” Kolk said.
Kolk contends an agent-bank relationship allows a CU to remain in the credit card game by having greater scale that allows for more attractive card benefits.
“If a credit union is too distracted to give their card program 100% attention, or (doesn’t have) the scale to compete, these agent banks have the scale to offer more as they operate at a lower cost,” he said.
Servicing Concerns
But in making the handoff credit unions are often concerned how their members will be treated by a third party, and not the CU’s own staff, an issue that arose when CUs previously sold their portfolios.
“Before making a decision, do your due-diligence and research a vendor’s program, look at their track record to make sure you're comfortable with them,” Kolk advised. “But we should not consider all credit unions are doing a great job with card service today. Because even as the overall credit card market is growing, credit unions’ collective card portfolio is getting smaller. That means the membership is being failed somewhere—so maybe it's the technology, maybe it’s the expertise in the call center, or it might be the way the reward redemption is handled and card earnings posted.”
Kolk cautioned credit union card managers who were around in the early 2000s to not expect the same type of portfolio sales environment today.
“There are not as many buyers out there now, so don’t expect you will get six bids on your portfolio,” said Kolk. “And if a recession arrives, they likely won’t be buying anymore.”