6 Reasons Credit Unions Are Selling Their Credit Card Portfolios

In 2023, more credit unions than in any year since 2009 sold their credit card portfolios and issued credit cards to members under a third-party agent program. This is no surprise to me. In the past two years, I have received many calls to discuss this topic and have advised ever-larger numbers of clients on how to evaluate this option.

Clearly something is driving this interest, but what is it? In fact, there are several “somethings.”

1. This is a grindingly competitive business.

This is a fact every credit card issuer knows and feels every day. Although this always has been the case — at least in the 30 years I’ve been living in it — being a successful issuer today requires never-ending technology investment, data analysis proficiency, product management expertise, marketing acumen, cardholder servicing excellence across multiple channels, and a willingness to meet consistent calls for financial and other resources.

The baseline requirements for success are as burdensome as we’ve ever seen. Being a credit card issuer is hard — and it’s getting harder.

2. Growing a program is more difficult than ever.

From 2007 through 2018, credit union card portfolios grew at a faster rate than bank portfolios in 12 of those 13 years. This is true even if we exclude Navy FCU. That kind of performance is pretty good and a fine reason to believe credit unions could compete effectively. However, in three of the past five years, banks grew faster than credit unions. That’s not great. What’s more, in 2023, fully 86% of credit unions underperformed market growth rates — i.e., they fell behind competitively. That’s the highest level since I started tracking this stat approximately 20 years ago.

3. Credit risk levels have moved in two unsettling directions at once.

Losses have been escalating for credit card issuers across credit unions and banks alike. Overall charge-off rates increased from 2.0% in 2022 to 3.5% in 2023 and now to 4.7% in the first half of 2024. But a perhaps even more trouble dynamic is the performance of banks versus credit union programs.

Prior to 2022, charge-off rates at credit unions had always been lower than at banks, sometimes by hundreds of basis points. This was a significant, and rare, competitive advantage for credit unions. But things changed in 2022: Charge-off rates at credit unions exceeded those at banks. This worsened in 2023 and is continuing even more starkly in 2024.

The credit union gross charge-off rate for credit cards reached 5.7% in the first quarter of 2024 (second quarter data is not yet reported at the time of publishing). For a segment that often mentally benchmarks credit card charge-off rates in the 2-3% range, this is a sea change that requires fundamentally rethinking basic assumptions around product design and pricing. It is also leading some credit unions to rethink how deeply into their member base they are willing to approve accounts.

4. Regulatory burdens are real.

The move to risk-based capital has placed credit card balances in the highest-burden category, where banks have long recorded credit card balances. When deciding on how best to use capital, credit unions must take this dynamic into account.

Then there is modelling CECL loan loss allowance requirements. This has been a significant change for many credit unions, particularly in a time of steeply increasing credit losses. But at least all issuers have to deal with those elements together, even if some of this is new to credit unions.

5. Credit unions are competitively disadvantaged.

The NCUA has mandated a rate cap of 18% on credit card interest rates, which applies to the approximately 60% of all credit union credit card balances owned by federal credit unions. In a market where consumers very much prefer reward value proposition over lower interest rates, even if it’s not a mathematically rational preference, this constraint deeply disadvantages federal credit unions looking to compete in the reward card space — which roughly rounds to “all of them.”

Big bank credit cards generally have rates that start at prime plus 10%, which is higher than 18% on even their lowest risk applicants and go up to nearly 30%. Leaving aside any ethical questions, these higher rates enable market level reward propositions and promotional incentives for those applicants who prefer them. Which brings us too …

6. Consumers expect a lot because they can get a lot.

Although big bank rates are higher, their reward propositions (2% of purchase volume is widely available); up-front incentives ($200 in reward value, more than 12 months at 0%); variety of bells and whistles; and strong digital application, issuance, and servicing platforms are compelling to the market. This is particularly true of younger consumers, a segment critical to any credit union looking ahead more than a few years. Couple this with deep marketing and analytic skills — which are pretty darn good at delivering product offers tailored specifically to the recipient’s interests — and it can be daunting for modestly sized issuers.

Does this mean all credit unions should sell their portfolio and opt for an ongoing agent issuing (i.e., white label) option? Of course not. Approximately 65% of credit unions report issuing their own credit cards; that increases to more than 90% for the larger credit unions. By contrast, only 16% of banks issuer their own credit cards.

Deciding whether to pursue the agent issuing option requires deep analysis, considering factors such as financial outcome (which can vary), risk-profile impacts, product set options, member impacts, and the implications for strategic goals and resource prioritization. Getting this analysis right is complicated and has many potential missteps if taken too casually (i.e., “Sure, I’d love to get a bid … here’s all my data.”); how to do this correctly is a conversation for another day.

Make no mistake, though, most prudent, thoughtful, focused, invested credit unions can maintain a successful and sufficiently profitable credit card program. But it doesn’t happen by accident, and it requires more than just being in the market. Hopefully, this list of challenges can serve as a platform to think through your program’s performance and set a plan to compete effectively with eyes wide open. If not, an agent program could be worth a look.