A Q&A with Ondine Irving

Even as the credit card industry has become dominated by top banking brands, Ondine Irving sees a place in the wallets of consumers for card programs from small financial institutions. A veteran of the credit union industry for more than 25 years, Irving founded Card Analysis Solutions, a consultancy that helps credit unions understand the complexities of credit card program management.

She believes the anti-consumer behavior of many issuers over the past year has alienated millions of consumers, and is a passionate advocate for smaller financial institutions to offer "fair and ethical" card programs with no hidden costs, competitive rates and simple programs that generate profits while saving cardholders money.

In a recent interview, she shared her views on why smaller financial institutions must offer a credit card program and shared her insights into how these financial institutions can get the most out of a credit card program.

Q. With credit concerns, regulatory changes and uncertainty, why is now a good time for smaller players to be in the card business?

A. The games that have been played over the past year — with new fees being assessed, increasing minimum payments, increasing APRs and cutting credit lines and basically telling cardholders to go away — has opened the door for credit unions. For a credit union, the credit card is a great opportunity to get a member and then you can bring them other products. The way I look at it, it is a great time to be increasing membership and credit unions are looking for new ways to increase revenue. The credit card can have the highest return on assets versus other products. I'm hearing from credit unions which are seeing the demand from their members and are re-entering the card program business. Credit unions focus on the entire member relationship and not individual products. So although the credit card relationship may not be as profitable as those with banks, the credit union evaluates the profitability of all the products a member may have with them.

Q. Can a smaller financial institution compete?

A. A credit union can provide fair and ethical card programs for members. What really irritates me is the way the banks are behaving. They are punishing the consumer. And then there is the backlash we are seeing from consumers since the summer of 2009. They've been increasing rates up to 29 percent, cutting credit lines, and increasing fees. In the press, the banks are all saying that it is because of the Credit CARD Act. That is not so. A credit union can offer a fair and ethical program card that is still profitable.

Q. What kind of profitability can a credit union generate?

A. In the credit union world, making $100 a year in net income per credit card account is a good goal. Some are making two times or more than that and they are not taking big risks. First of all, credit unions offer lower credit lines. With a credit union, a typical credit line would be between $7,800 and $9,200. Historically, some banks wouldn't think twice about giving out a $20,000 credit line to someone regardless of income or credit quality. The big banks in the business have brands, but that is not the same as true loyalty. I think the advantage for smaller institutions is that their whole premise is based on relationships while the big bank brands have been about marketing products.

Q. What kind of success does a credit card have for a smaller financial institution?

A. How important the credit card is for a credit union can vary, but for most it is not the main reason for the relationship. The average penetration, the number of credit card accounts to credit union members, is pretty low, about 25 percent. If you have one in four members carrying your credit card, they think that is good. There are some that have up to 50 percent penetration. The opportunity is there. It is really a question of how you want to go after members. There are 7,800 credit unions. About 3,600 issue credit cards. You've got the 80/20 rule. Twenty percent are $150 million in assets and higher who are larger players. But I believe this is a product that every credit union should have. In America, a consumer cannot function without a credit card. You have to offer something for your members to round out the entire member relationship.

Q. But why did smaller financial institutions back away from the credit card business over the past decade?

A. They were scared of the risks. These were unsecured loans. They felt that credit cards were not their core competency. From an operational perspective, a lot of credit unions and probably community banks don't have someone with the expertise in card program management. Some run it out of operations. Some may have a marketing department oversee it. Some may run it out of lending. As a smaller player, they may have concern that they had to add headcount, which means additional costs. So you saw processors come along with options designed to make it easy for risk-averse credit unions.

Q. So if you had to generalize what works for most credit unions, what is your advice?

A. There is a temptation to make things complicated. To simplify the operational issues with the program, you will need to have a basic platinum card. You need to give the option of rewards and an interest rate option with no rewards. That way you have something to offer for those who respond to a balance transfer offer or who like to be rewarded for being a transactor. On the rewards side, I advise that they stay away from cash back because it can be really costly for a credit union. It is important that they watch their fees to be fair and ethical. For a small financial institution, the average late fee is $25 and it is the only fee. In the economics of the card program, 70 percent of the program revenue should come from the finance charge; 15 percent from interchange and 15 percent from fee income. Most credit unions don't exceed 10 percent on the fee income. They can still be more fair and ethical than the banks and have a good income mix.

Q. You've been working with celebrity finance guru Suze Orman. What have you learned about what the consumer needs?

A. Because of the economy, people are not using the cards as much. For the issuer, that drives down interchange. But the reality is there are billions of dollars of debt out there that generate good profits even with fair interest rates. Then you are also seeing more consumers using debit. I think consumers are looking for a fairer deal to refinance their credit card debt. Why not go after the balances? Credit unions, typically, do not charge balance transfer fees. Banks usually charge 3 to 4 percent of the typical balance as a transfer fee. While a bank may be charging zero or little interest for the first few months, credit unions can compete because if you are transferring $5,000, that upfront fee adds up for most consumers.

Q. So how does a smaller financial institution get started?

A. It is important to start with realistic goals of what you want the program to achieve and to be sure that your assumptions are accurate. The processors have the same basic pricing, but if they set goals and build assumptions around deeper penetration, then you can reduce your profitability and lead to disappointment. This is important because most processors have add-on services that can be expensive. You need to understand when these extras make sense and have a process for measuring success. The most important thing to most credit unions is to be sure that their members get good service. There can be many hidden costs, which may not be in the credit unions' best interest. Processors need to make pricing more transparent. If not, that is a red flag.

Q. What are the most common areas that hurt the profitability of a smaller institution's card program?

A. You don't always see contracts that pass along the benefits of technology. Technology has made it possible to drive down costs, but I've seen automatically renewed contracts that still charge for things that are now not proportional. So, if you want to offer online banking, the pricing may be from the days when it was still a new idea and not an offering with strong adoption. Pay for charges based on today's pricing. If record storage has decreased over time, your pricing should reflect that.

Q. So what's the answer?

A. Credit unions make the bulk of their money on loan balances, and the finance charge income generated from these balances. You need to base goals on your total portfolio. If total loan balances are $100 million, we might start with the idea that credit cards will be 10 percent of that. Then we'll work our way back to figure out how many cards you will need to issue to members to get to that $10 million. You get at that by taking the likely average balances and understanding that maybe 60 percent of those accounts will be actively used. That gives you a base in reality from the beginning. From there, you can have a processor relationship that makes money for both of you. In my opinion, pricing should be a transaction-based billing structure based on active accounts and transactional volume.

About the Author

A veteran of the credit union industry for more than 25 years, Ondine founded Card Analysis Solutions, a consultancy that helps credit unions understand the complexities of credit card program management. This advocacy has garnered attention from nationally known personal financial expert, Suze Orman, Forbes Magazine, CNN, Larry King Live, CBS Evening News and The Huffington Post's "Move Your Money" campaign.