Five Questions to Stress Test Your Credit Union’s Credit Card Strategy
By Nicole Volpe, Contributor at The Financial Brand
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Need to Know
- Since 2000, credit unions’ average return on assets has fallen from 1.0% to 0.6%, a 40% decline; on a per-member basis, average expenses have grown faster than fee and margin income combined. Credit card programs are a focus for many institutions seeking better margins.
- Moving in-house cards to an outsourced provider can seem like an eat-our-cake-and-have-it-too option — balance-sheet exposure is swapped for stable fee income and operating efficiency while retaining branding and member engagement.
- But five critical questions should be asked before any institution elects to move its card program out-of-house.
As margins tighten and balance-sheet pressure builds, more credit unions are weighing whether to continue issuing credit cards on their own or to sell their portfolio and partner with an agent issuer. Entering an agent relationship can give the institution and its cardholders access to program features and operating advantages typically reserved for the industry’s largest players. But there are tradeoffs. The question is, how does an institution know when, or if, to make a change?
- Credit union strategists recognize that credit cards can be strong drivers of member value and revenue. They put the institution’s brand at the center of an account-holder’s daily spending, helping cement primacy; and they’re a source of recurring lending and fee income.
But running a card portfolio can also be expensive, capital-, and risk-intensive, and requires expertise many small and midsized institutions either don’t have or can’t sustain.
For credit unions, the issue plays out amid steadily more challenging industry economics. Since 2000, even with significant consolidation, average return on assets has fallen from 1.0% to 0.6%, a 40% decline. Today’s institutions may on average be much larger than they were 25 years or so ago, based on membership and assets, but they’re also more costly to run: On a per-member basis, average expenses have grown faster than fee and margin income combined.
As a result, many credit unions are seeking greater overall efficiency. And moving cards from in-house to agent programs may seem like an eat-our-cake-and-have-it-too option — one in which balance-sheet exposure is swapped for stable fee income and operating efficiency while retaining branding and member engagement. But the shift does not come without trade-offs, including loss of in-house control, which is a shift in decision-making authority.
Here are five questions credit unions can ask themselves as they assess the pros and cons of making a change.
Want more insights like this? Check out Elan’s content portal: Credit Card Issuance: Strategies & Solutions
Checking the Foundation
1. When did we last conduct a thorough review of our card processor?
A thorough processor review, ideally a year or more before contract renewal, can surface hidden costs, reveal capability gaps, and give leaders time to evaluate strategic alternatives, including agent partnerships. But the truth is, many credit unions haven’t revisited their processor relationships in years.
A credit union’s processor is the foundation of its card program’s profitability and resilience when the market changes. It’s hard for the portfolio to perform well if the processor is falling behind. Consolidation and fast technology change — consider compliance and security issues, for example — have made running a card platform more complex and expensive. How is your processor doing, both in financial and service terms? Is the relationship aligned with your goals for the business line, and for your institution as a whole?
“Start from your own strategy,” advises Mitch Pangretic, SVP at Elan Credit Card, an outsourced credit card solutions provider. “The exercise should reflect your institution’s goals and constraints rather than focusing on short-term earnouts or assumed deal incentives.”
Doing the Math
2. Can we sustain profitable card growth for the next five years?
Credit unions can start by assessing whether their self-issued program can deliver growth in both balances and margins over a medium-term horizon of three to five years, without undue impact on capital. This analysis should account for all of the card business’s core financials: balances and return on assets (ROA), interchange and fee income, rewards expenses, and servicing/processing costs. And it should layer in other platform expenses, including marketing and the technology cost of keeping product features and user experience up to date, as well as maintaining servicing and dispute / collection operations.
- It’s critical to assess the impact of risk-based capital requirements, which weigh more heavily on credit card debt.
Analysis should include the expense implications of charge-offs, fraud losses, current expected credit loss (CECL) volatility, and market and interest-rate risk. It should include the opportunity cost of capital, which could be deployed to greater benefit elsewhere. And it should weigh any broader issues that come with having a lower ROA, such as increased investor or regulatory scrutiny and possible loss of strategic flexibility.
Cost of capital analysis is essential, Pangretic said. “Moving assets off the balance sheet frees up capital for other uses, and capital ratios may improve, which brings other strategic advantages.”
With a baseline analysis in hand, consider what would change under an agent structure. The portfolio would move from the credit union’s balance sheet to the agent’s, taking with it the lion’s share of related expenses. The agent also assumes charge-offs, fraud losses, regulatory/compliance obligations, and most market and interest-rate risk. What had been a mix of interest margin and fee revenues becomes fully fee-based, and paid by the agent as a share of interchange. While this fee structure has the advantage of stability, it can amount to lower revenue overall and less opportunity to maximize upside, especially in changing economic conditions or credit cycles where more ownership would be an advantage.
Finally, the scenario comparison should look at cash implications of the portfolio sale itself, including the benefit of reinvesting or repurposing the sale proceeds. Your approach — especially in the absence of specific deal terms — should be to treat this as a strategic scenario modeling exercise, maintaining awareness of variables and tradeoffs.
Keeping Up With the Card Champions
3. What features and functionality will members expect from our program next?
The idea here is to look, candidly, at a) how satisfied your members are and b) what improvements they’ll demand in future. If you don’t have market research of your own (which may itself be a signal of your existing depth of commitment), you can use industry benchmarks and data. A good rule-of-thumb to start with: Are your institution’s balances and purchases growing at market rates?
Looking into the future is a critical part of this exercise — what trends and features will drive demand and growth? The reality is that, with competition and product innovation accelerating, the table stakes in both payments and unsecured lending are shifting fast:
- The mobile-wallet experience has become the baseline: members expect cards to “just work” in any context, including seamless add-to-wallet and dependable tap-to-pay functionality.
- Pay-over-time features have moved well beyond free-standing BNPL brands; consumers now expect installment options tied to their credit card account and built directly into a full range of checkout experiences.
- Personalized rewards and offers are becoming essential — especially for younger segments — as issuers use first-party spending data to power everyday earning and quick, low-friction redemptions that reinforce ongoing engagement.
Under most agent relationships, the responsibility to chase these trends moves from the credit union to the third-party. The agent maintains digital and mobile touchpoints, introducing new products as expectations change, and keeping terms current. This includes rewards and security, as well as servicing and marketing.
The credit union’s role in the go-to-market narrows significantly, focused mainly on supporting and guiding the program’s deployment across its own channels and touchpoints and providing member lists for campaigns. As a result, the institution must be comfortable with giving up much of the control — depending on the terms they negotiate with a potential agent. It’s possible your institution has a differentiated view of the trends that matter most to its customer base, and wants to build from that perspective.
Powering the People
4. Do we have the expertise to manage profitability?
To ensure profitability and growth, self-issuing credit unions must maintain expertise in specialized disciplines like program management, risk analytics, and portfolio marketing, among others. But institutions of all sizes are finding it harder to recruit and retain professionals and leaders with the right skills and experience. (The same issues also impact their processors.)
- In one recent study of financial institutions, two-thirds of respondents reported difficulty filling key roles, with annual turnover near 25% and positions often staying open for months. Many are leaving traditional banking for fintech firms that offer better compensation and environments they see as more innovative.
Meanwhile, as institutions chase growth, the problem can multiply, because some subdisciplines gain little benefit from scale economies. Dispute management, for example, can be labor-intensive: U.S. issuers typically need about one FTE for every $13,000–$14,000 in annual dispute volume, which for midsize programs can translate into sizable teams.
Those who would stay the course with a self-managed credit card business should understand how they will solve for the talent problem and be willing to shoulder the burden for the long haul. Elan’s Mitch Pangretic frames the question this way: “Do we have the internal capabilities to stay good at this? Do we have the commitment as an organization to continually keep these products evergreen and update them as needed?”
Gut Check
5. Do we understand the long-term (5–10 year) risks of managing a card program?
Institution executives and boards must take a candid look in the mirror. Is your institution willing to take on the full extent of what it means to risk-manage a card portfolio? This includes managing the portfolio itself, but more than that, it means embracing a diverse range of other risks as an enterprise, and carrying it through five to ten years of hard-to-predict change in the business environment. Such risks include interest rate and economic cycles, regulatory policy shifts, and advances in technology.
While such forces impact your entire institution, consumer card operations have elevated sensitivity. Compared to many other lending and banking business lines, their rate and fee structures are more dynamic (more variable, with revolving debt models that lead to fluctuating delinquency and charge-off rates) — so issuers must constantly adapt risk management and collection strategies. They’re also subject to sharper regulatory scrutiny. And credit card products are highly tech-intensive, and must hold their own in the broader world of payments, one of fintech’s most innovative segments.
Moment of Truth
The decision to move to an agent relationship demands that an institution take an honest look at market dynamics, as well as its own capabilities and risk appetite. Card portfolios can be powerful engines of engagement and income, but only if the institution has the capacity to keep them performing at market level.
Whether your institution ultimately decides to retain, sell, or partner, the process of answering these questions brings clarity about where your card program fits in your overall growth strategy — and what it will take to keep it there in the decade ahead.
