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Have you had times when selling your credit union’s card portfolio looks like a good idea? In fact, maybe on the surface it looks like a great idea? Sure, you may have reasoned, it will probably negatively impact your members, but the premium from the sale looks very tempting. You may have considered the downside of selling: loss of control of the relationship with card members; loss of control over your marketing program; loss of the performance of the asset. You may have even asked yourself why the banks are willing to pay a premium for your portfolio. If you are willing to live with the negative impact on your members, the next step is to see how the numbers add up. You may even have an offer in your hands. It’s pretty easy to see how the plus side adds up in an economic model, but what about the costs? There are some other factors to consider that the potential buyer may not tell you. Here are some of the “hidden costs” of selling your card portfolio to consider. * Timing: Normally the purchase date of the portfolio is well in advance of the conversion to the buyer’s processing system-sometimes as long as six months. The interim processing and servicing fees, when done by a third party, are typically the responsibility of the seller. Prior to the sale, your interchange and interest income provide enough revenue to cover these expenses. Once the sale is completed, there is no revenue as the buyer assumes the income. You need to consider this on-going expense in your economic model. * De-Conversion Fees: The fees to de-convert the files are typically the contractual responsibility of the seller while the buyer is responsible for the inbound conversion costs to the buyer’s platform of choice. These fees can add up to a significant amount. You will want to have these costs estimated by your current processor and factored in to the equation. * Post Conversion Activity: After the conversion, there will be unexpired cards that will continue to be used. There will be chargebacks, disputes, and copy requests on activity that happened prior to conversion, as well as, payments that will continue to be presented at the old Lockbox or via electronic bill payments services. These activities and the processing costs will be the responsibility of the seller. You should consider the economics and required processes on your part to support these activities that may continue for 6 months or longer. In addition, larger buyers may not recognize other nuances of shared BINS used by many smaller issuers. * Interest Income: There are two items to consider related to interest income. Both deal with the fact that credit card systems only recognize and bill finance charges on cycle dates. Often credit unions have made a one-time accrual for half of the normal monthly finance charges. If this is the case, the seller must recognize the reversal of this in the month of the sale. The second issue is that in most purchases, the settlement amount is for the actual balances plus or minus a premium/discount. If the purchase date does not occur on the cycle date, the calculation ignores, usually to the seller’s disadvantage, the amount of the finance charges that would occur once the account cycles. This also could mean a negative financial impact of up to half of the month’s finance charges. Considering these two items, you may recognize a full month of lost finance charges in the month you sell the portfolio, while having the processing and expenses of funding the loans. * Sell Backs: In many instances, the seller maintains the risk of losses on sold accounts. An obvious instance is related to bankruptcies up to a certain number of days after the purchase date. Another variation could be related to fraud. Many buyers will require the seller to be responsible for fraudulent transactions that occurred prior to the sale date. With fraud, the risks to the seller may be unbilled transactions, balances currently in dispute, or balances that could be disputed up to six months later. You should consider these items in your economic model. * Retained Loans: Usually the buyer will exclude various accounts from the purchase. The seller has two alternatives to support the accounts: a) convert them manually to a loan on the credit union’s loan processing system; or b) continue to maintain them with the credit union’s card processor. Either option will cause an economic impact, as well as, require on-going human resource expense. * Re-Allocation of Resources: Since there are significant post sale and post de-conversion activities, internal resources will be required for a period of time. For example, since the buyer is not buying delinquent accounts, the number of collectors will not change, but the revenue has decreased. You should also consider these resources. * Amortization of the Premium: Another issue to consider is how the premium will be amortized over the life of the marketing agreement. You should consult with your accounting team regarding the accounting practice to be used to handle the premium. It may have to be amortized over the life of the marketing agreement while all the expense is booked up-front. * Re-Deployment of Asset: Once the sale occurs, the proceeds of the loan sale need to be re-deployed. Typically these funds are earmarked for longer-term assets such as new loans, investment portfolios, or branch expansion. These types of deployments take time, so a short-term alternative is needed. Normally these short-term investments will have a yield significantly lower than the portfolio is now earning. This drop in net interest margin needs to be recognized and planned for as you consider the economic model. There’s a lot to consider when you evaluate your options. Selling your card portfolio could be the right decision for your credit union, but only if you have factored in all the costs you will encounter as you de-convert from your current processor.

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