Selling a credit card portfolio remains an emotional and controversial topic. Although approximately 90% of regional and community banks have sold their card programs, only about 20% of card-issuing credit unions have sold off card balances greater than $1 million. A combination of reasons contributes to the dearth of sales among credit unions versus banks, including differing strategic purposes, differing priorities, and less focus on the bottom line.
More than 400 credit unions have sold their card programs, and it remains a viable option for some. Yet, sales volume is not expected to ever again reach the highs seen from 2004 to 2006. More than 60 credit unions sold their portfolios each year during that time, and annual balances sold exceeded $400 million. Going forward, a more modest level of annual card portfolio sales is expected.
This year’s results are not yet final, but fewer than 10 portfolios may sell. A significant number of credit unions are still exploring this option, and anecdotal evidence suggests between 75 and 100 credit unions have tried to get purchase prices for their portfolios this year. Few sales have taken place because some portfolios cannot generate an offer in the current climate. For those that can, they are sometimes surprised by what has happened to purchase prices.
The pressures of the CARD Act and the current economic environment have combined to reduce the profitability of card programs. Card issuers feel pressure from the increased expenses required to manage programs, CARD Act constraints on repricing and revenue generation options, and the elevated credit risk experienced by the industry. These factors have lowered ROA and earnings. Portfolio buyers have experienced the same pressures, so it is no surprise they expect to make less from purchased portfolios, which has driven prices down.
Card portfolio sales make sense for some, but issuers pursuing this option need to be careful. A casual approach is sure to diminish purchase price and increase the odds of an unpleasant result. Consider these elements when deciding whether to sell a card portfolio:
- Strategic purpose: Why is this decision being considered? Is it financially driven? Is there a desire to reduce credit risk or to focus on other products or initiatives? Is there a lack of internal marketing and management resources required for the program? Unless the motives are clear, it is nearly impossible to objectively analyze proposals by potential issuing partners.
- Financial comparisons: Selling a card portfolio generates both upfront revenue (in the form of a premium) and ongoing partnership revenue. In addition, the credit union has the ability to reinvest the proceeds into other assets. How does this combination of revenue and risk profile before and after the sale compare to the bottom line of the card program if retained?
- Know what you gain, know what you lose: Properly structured, a card portfolio sale can yield advantages for the credit union and its members. But there are tradeoffs. Each credit union must carefully evaluate the balance between these elements. If choosing to sell, it is critical the credit union educate its staff, management, Board, and members about the motives. Without an explanation, those who weren’t involved might focus on elements for which they don’t care.
- Overpaying for advice: There are companies that will offer to help you through this process or even claim they will do so for free. Before embarking on this analysis, it is critical to understand how and how much each party in the process is getting paid. Many “free” portfolio brokers actually get paid handsomely by the portfolio buyer. This structure can put them in a conflicted position if you expect them to represent your interests.
- Exit terms: If you decide to sell your portfolio, it is critical to understand how long you will be in the agent partnership with your partner and what will happen if you wish to exit that relationship. Although the vast majority of credit unions that sell remain in agent relationships, a few have decided to terminate the relationship. Never agree to a sale and agent partnership without knowing how a termination will be structured and any limits it places on you afterward.
Properly structured and negotiated, a card portfolio sale can be a positive experience. But embarking on the analysis requires careful thinking and a plan before requesting proposals. A causal approach is certain to leave everyone frustrated with the outcome.