Four Credit Card Portfolio Lessons Learned
Credit card portfolio sales have always been a contentious topic. Some are 100% opposed at any time for any reason. Others are firmly convinced that most small issuers cannot possibly compete with the big banks and will inevitably sell off over time.
The experience of small and regional banks has largely supported the latter: only about 400 banks now issue their own credit cards. Yet thousands of credit unions still issue credit cards, showing it is possible to do so affordably and prudently (well, at least most of the time).
Still, offering credit cards through a third-party remains an option that some credit unions continue to explore. Their reasons typically include concerns with ever-escalating compliance risk, concerns about future performance, a need for income or capital, different strategic priorities or a lack of internal resources to manage the program. Whatever the reason a credit union is looking at portfolio sale, they need to be very careful and deliberate about how they proceed. Some of the lessons learned by others include:
1) Portfolio Brokers Can Be Very Expensive
All credit union issuers receive regular calls from a variety of firms offering credit card portfolio reviews. These can include stand-alone brokerage firms or already engaged advisors such as investment professionals. In many cases they position this as a "free" analysis- so what's the harm is seeing what your portfolio is worth?
Well, I hope it comes as no surprise that no one works for free. But it also should be no surprise that commission-based companies often don't want you to know what they get paid. In nearly every case these parties are paid by the buyers of card portfolios, and they are paid handsomely. We have heard of cases where the fees can exceed 3% of the portfolio balances. Even assuming a lower 2% fee, if a broker convinces you to sell a $10-million credit card portfolio they would earn a $200,000 payday. They may be perfectly nice people who have done some good work, but $200,000 is a lot of money. Buyers determine what they can pay based on their valuation models. Their models give a total purchase price, and what is paid to a broker is not coming to you.
2) Know Why You Are Considering a Portfolio Sale
It is important that each credit union be clear with themselves about their reasons for exploring this option before starting the process. If the primary reason is financial then the highest purchase price will obviously be a critical factor. On the other hand, if the reasons include a desire for more marketing resources or a more diverse product set for your members, other partner features are more important.
The process to evaluate a portfolio sale includes both a set of financial comparisons and softer "relationship" elements. Both need to be carefully prioritized and understood. Often the preferred partner with the program a credit union feels best about does not have the highest purchase offer. Understanding your priorities before you start the process is critical.
3) Involve Staff In The Process
No matter how good the offer and how strong the partner, sometimes these types of card programs under-perform because the credit union does not spend the time to prepare staff for the change. To succeed there has to be positive elements that the staff can feel good about and represent to your members. If front-line staff do not have a good idea of why the decision was made and has not been trained on the advantages of the decision they will have trouble supporting the partnership. Your members will feel that and results will disappoint.
4) Advisors Can Help, But Know The Deal
In addition to making sure that a broker is not taking more of the financial value than you are comfortable with, it is also critical to know who they are representing and what their incentives are. If you engage a broker paid by the portfolio buyer, make sure that you negotiate their compensation level at the beginning and get it in writing, and are comfortable that they will be paid by the buyers and therefore obligated to support their interests first and foremost.
As an alternative, it can be preferable to engage an experienced advisor yourself: you pay them, their interests are aligned with yours, their compensation is clear, and likely the credit union ends up with more money in its own pocket. Make sure such an advisor has the experience and technical skills to complete the analysis, sale negotiations, evaluation process and contract negotiations.
The third option is to run the process yourself without outside help. This is a valid option so long as you are prepared to dedicate the resources required and educate yourself before you start. Sometimes this can be supported by very limited use of an advisor, too, much like using an attorney on an hourly basis, with day-to-day work and administration handled in-house. This option, if handled well, can result in the credit union keeping the highest proportion of the potential sale price.
Whatever a credit union's reasons for exploring a credit card portfolio sale and establishing an ongoing issuing partnership, thinking these elements through before you start is critical. Initial missteps, like signing on with a broker without knowing their compensation arrangements, can be hard to reverse (it can be done, but it's not easy). But by proceeding with care and a specific plan, you can control the process and work toward the result you need, not one you are guided toward by someone else.
Timothy Kolk is owner of TRK Advisors and has worked with credit card issuers for more than 15 years and has analyzed hundreds of credit card programs, including advising on credit card portfolio sales. He can be reached at email@example.com.