JULY 2004

Credit Unions Are Selling Card Portfolios

Banks complain that credit unions do everything that banks do, but receive the benefit of freedom from corporate income taxation—a benefit banks clearly do not share. However, in at least one important category of consumer financial services, credit unions are ceding their business to banks. Many credit unions are recognizing that they can't invest the resources necessary to make their card product competitive in today's market, and are selling their credit card portfolios. R.K Hammer Investment Bankers told the American Banker that about 140 credit unions will put their portfolios on the auction block this year. About 400 credit unions shed their card portfolios over the past three years.

Credit unions that issue credit cards far outnumber banks that offer similar services. According to the Credit Union National Association, 51% of the approximately 9,600 U.S. credit unions marketed credit cards in the first quarter of 2004. Card-issuing credit unions outnumber card-issuing banks by 5 or 6 to one. However, credit unions hold just a small portion of total bank credit card receivables, with only $22 billion of revolving credit outstanding at the end of 2003, compared to over $243 billion held at banks. Total credit union receivables grew by only 3.8% in 2003, compared to 14% growth in bank-held portfolios. And, even among larger credit unions (those with more than $100 million in assets), the percentage that held credit card loans dropped to 89.1% at the end of the first quarter of 2004, compared to 95.9% at the end of 2000.

Robert Hammer (chairman of R.K. Hammer Investment Bankers) told the American Banker that credit unions typically find that their card portfolios grow stagnant because the institution doesn't have the financial resources or technical expertise to offer the range of services that cardholders see offered elsewhere in the marketplace. Also, credit union boards of directors are leery of the higher chargeoff risk posed by credit card accounts, especially as interest rates rise.

But most credit unions that sell card portfolios still want to offer their members a credit card. Consequently, the larger banks that specialize in credit card operations are acquiring credit union portfolios and servicing accounts that still display the credit unions' logo. Credit union members tend to be lower risk and have stronger brand loyalty, attributes that remain even after the portfolio is sold. U.S. Bankcorp's Elan Financial Services unit bought nine credit union portfolios in 2003 and has purchased 14 thus far in 2004. Dan Roads, the portfolios acquisitions manager for Elan, told the American Banker that the trend of credit unions selling portfolios is accelerating, driven mainly by “hefty premiums on the receivables and ongoing income generated by new customers.”