If you sell your credit card portfolio there is a very good chance that the broker will make more money from that sale than you will. In today's market, with bid prices down and a limited set of buyers, a broker's commission can be more than one-half of the premium available and quickly gets into the hundreds of thousands of dollars. This is not in the interests of the credit union, the credit union's members or even the buyer of the portfolio. But the brokers love it.
How can this be? This happens because of how most credit unions start to look at a credit card portfolio sale. Typically, a salesperson for a portfolio broker contacts the credit union suggesting a "free" or unreasonably low price review of the card program. This will include a look at "market bids so you can see what it's worth." There is no obligation to sell your portfolio, so this sounds like a good idea. Who doesn't want something free? But like many things that are free, this can get very expensive.
Here is the reason: If you allow that salesperson to proceed you will give them information about your credit card business. They will take that information and share it with potential buyers of your portfolio. When they do this they have "claimed" your "deal" and will get paid by the buyer if you sell the portfolio. Much like a Realtor, once a portfolio is claimed all other brokers are locked out (buyers will only review a portfolio through one broker). Critically, the brokerage company where the salesperson works has a prearranged compensation schedule with each buyer and the buyer only pays if you sell the portfolio.
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Why is this a problem for credit unions? For several reasons.
These fees can run at 3% or more in the size of your portfolio. For a portfolio of even a few million dollars that can be a fee of more than $100,000 and for larger portfolios can exceed $1 million. Now you know why you are getting calls all the time offering a free analysis!
This approach guarantees that the broker works for the buyer, not for you. They may be perfectly nice people, but you have now inadvertently agreed to share all the information and analysis for this decision with the party representing the other side of the transaction!
The broker only gets paid if you sell the portfolio, which leads to only one place. On the last slide of the broker presentation you are pretty much guaranteed to hear, "It would be foolish to not take this offer!"
How did we get to this point? How did we come to accept a process completely misaligned with the interests of the credit unions and their members? There are a few historic reasons that led to this, but let's be frank: Credit unions have become accustomed to vendors giving them all sorts of things for free. Often that's a lunch or round of golf, but in this case it's the free analysis. In this case, because the broker can claim a deal and lock in a commission so early in a seemingly risk-free analysis, many credit unions fall into the trap without even knowing it.
What can a credit union do to avoid this trap? It's pretty simple. To make sure you get the best deal, pay only reasonable fees and ensure that everyone is working on your behalf.
Do not share information for a free or low cost analysis. Ever. There is no such thing as free analysis. When someone calls offering a free analysis move to step No. 2.
Negotiate the price you will pay up front and get it in writing. Not in an e-mail or over the phone?in a formal document executed by a senior manager.
Interview several potential advisers and include pricing in the selection process.
Be willing to pay the costs directly, rather than allow the portfolio buyer to pay. Once the buyer is paying you have no one working on your behalf.
Consider paying for the work performed and don't make it contingent on a portfolio sale. If the only way someone gets paid is if you sell your portfolio then it will be impossible for them to keep their recommendations objective.
How do you accomplish this? The clearest answer is also the simplest: Rather than the commission-based, sale-incented approach of the past (think Realtors or car salesmen) consider hiring a specialized adviser who will work on a fee-for-service basis (think attorney). Someone who works for you, perhaps gets paid by the hour and does not have an incentive to push you to sell. And, most critically, will not take perhaps half of the premium available for themselves.
The stresses of the CARD Act, still-escalating credit card charge-off levels and daily burdens of managing an ever-more-challenging credit card business will continue to push some credit unions to explore portfolio sale options. That is an individual decision that each institution is entitled to make based on their specific circumstances, and most past sellers (but not all) remain satisfied with that decision. But when choosing to start that evaluation, make sure to take control and do not allow someone else to pocket a large part of what should be your money.
Timothy Kolk is owner of TRK Advisors LLC. He can be reached at 603-924-4438 or [email protected]
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