Credit Card Lending’s True Advantages

An analysis of credit unions with and without credit card portfolios shows key differences in financial returns and income.

Credit unions with credit card portfolios outperform credit unions that don’t have credit card portfolios in several financial metrics that Callahan & Associates analyzed, including return on assets, non-interest income to assets ratio, and delinquency.

Credit unions have offered credit cards to members since the 1970s and Americans have come to rely heavily on them. Members had 13.8 million credit cards at 3,850 credit unions as of the first quarter of 2012, up 3.3% from same quarter last year, according to Callahan & Associates’ Peer-to-Peer data. Credit union members outstanding credit card balances grew 4.7% to $36.6 billion during that time, with another $77.2 billion in available credit, up from $74.2 billion in available credit a year prior.

Prior to the recession, many credit unions sold their credit card portfolios to third parties, but that trend has reversed in recent years. Now credit unions are buying back their portfolios or starting new ones. Callahan & Associates compared several financial metrics from credit unions that have credit card portfolios to those that don’t to determine what effect credit card portfolios can have on financial performance.

A significant number of smaller credit unions do not have credit card programs while a significant number of larger credit unions do. So in this analysis, credit unions without credit cards were limited to those with more than $40 million in assets, to achieve a comparison of credit unions with similar average asset sizes and therefore a more accurate comparison of financial performance.

Credit unions with credit card portfolios posted a eturn on assets of 86 basis points, 13 basis points higher than their peers without credit cards. The higher number was driven primarily by stronger non-interest and interest income, despite higher provisions for loan losses. Overall loan growth of 3.0% was five times faster than 0.6% reported by credit unions that don’t have credit card portfolios. Despite this stronger growth, the average member relationship (excluding business loans) was nearly $200 higher at credit unions that don’t offer credit cards.

Within the non-interest income portfolio, the results were mixed. Credit unions with credit cards posted a smaller average amount of fee income, but they posted a higher average amount of other operating income. Since other operating income includes income from both debit and credit card interchange fees, it is likely that the additional income from credit card interchange helped to drive balances higher for credit unions with credit cards. This larger difference in other operating income led to credit unions with credit cards having a non-interest income to average assets ratio that was 16 basis points higher than credit unions without credit cards.

Credit card delinquency was 1.01% in the first quarter for credit unions that offer them. Delinquency for all loans, except credit cards, at these credit unions was 1.47%, and their overall delinquency rate was 1.44%. Overall delinquency at credit unions that don’t offer credit cards was 1.49%. Net charge offs for credit cards was 2.59% in the first quarter for credit unions that offer them, pushing their overall net charge off rate 10 basis points above their peers to reach 81 basis points.

As credit unions introduce credit card programs, they are able to improve service to members. Not only will members be able to get a credit card with the financial institution that they already trust, but the credit union will benefit from increased interchange income on credit cards. While credit cards are not the best fit for every credit union, they do have financial benefits for those that offer them.

May 28, 2014

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