Category: Consulting

Computing Credit Card Portfolio
Sale Transaction Value

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Financial adjustments after a sale can make a difference from what the portfolio seller originally expected to receive.

After the due diligence has been completed, final bids compared, and the winning bidder for the credit card portfolio selected, the selling organization usually breathes a collective sigh of relief. The process, however, is far from over. There are a number of items which are not typically included in the Letter of Intent, and some not even in the final Definitive Agreement, which nevertheless must be forecast by the seller.

Most of the discussion (indeed, most of the financial impact) centers on the premium paid for the current card assets. Also included in the agreement are discount values for the following categories: delinquent balances (and the contractual definition of exactly what is considered delinquent), closed accounts and values for other “Statused” accounts (lost/stolen, revoked, bankrupt and other charge offs).

An initial premium of 20% for current/open balances, for example, might be reduced by as much as 5% or so by the discounted balances, creating a Gross Transaction Value of 15%. From this amount, the seller must computer other adjustments, which will impact what is ultimately booked into income. The following listed is not intended to be all inclusive, but does cover major adjustments to the premium you might expect as a Seller.

1) Deconversion Expense. The cost you incur to transfer the sold accounts to the buyer’s system
can be large. Many portfolio sellers have no prior experience divesting, and therefore limited working knowledge of the deconversion costs involved. In addition to the financial exposure (which can run into the hundreds of thousands), there will be an extraordinary “time drain” which will occupy your best data processing people’s time…time which could have been spent on normal production work, required regulatory system changes, and other day-to-day operating matters. To minimize the dollars or time required to successfully deconvert puts you at risk. For portfolio sellers who use an outside, third-party processor, there still may be termination penalties which need to be taken into account as well.

2) Operating Write Offs. There will also be a number of related assets which must be written off when you sell your credit card portfolio, items no longer needed. Forms, plastics and certain supplies are examples of those write offs. Assuming you didn’t have a large lead time when the decision to sell was first made, you may be surprised at the amount of stock you have on hand. When supplies are originally purchased, in anticipation of remaining in the business, your people would naturally have taken advantage of quantity buying and put one or two years’ worth into inventory. Since the buyer cannot assume the use of those items (with the card issuing owner’s name on the forms and at least on the reverse of the plastics), their value will be zero. You will even have to pay to have them destroyed. You should prepare for, and estimate, the financial adjustment required for this category.

3) Legal Counsel. Whether you use outside counsel, or allocate the cost of internal counsel, you should forecast the expected cost, and deduct that amount together with other adjustments from Gross Transaction Value. It is not uncommon for several weeks to as much as many months work to be involved in the Definitive Agreement and post-closing Interim Servicing phases of your negotiations. The complexity of each deal is different, and therefore the time involved varies.

4) Unamortized Premiums. If the selling organization previously acquired other credit card
portfolios, there will probably be premium expense incurred during those purchases which have not yet been fully amortized. The remaining unamortized premiums must be applied against the gain when you sell.

5) Escrow Fees. While not every deal involves use of an escrow agent, for those which do, this
expense must also be calculated in advance and included in adjustments.

6) Intermediary Fees. If an investment banker, broker, or other middleman was used, their
advisory fee needs to be included when computing transaction value.

7) Reserve Pulldown. On a positive note, the excess reserve can be pulled into income, and can
serve to offset some of the selling expenses, based upon the excess available.

8) Post-Closing Settlement. In most Definitive Agreements, there will be a period of time following the close of the transaction during which the seller will be responsible for certain expenses. Often limited to three to six months, this period covers items such as: charge backs, charge offs, bankruptcies and other sundry losses which should have been taken by the seller before the closing, but weren’t identified until after the closing. If your collection area lags in the charge off reporting process, there could be a considerable “hit” taken in this category, with bankruptcies and charge offs not showing up until a month or two later, for which the seller can be responsible.

9) Severance and Retention Pay. These two areas can be quite large, and should be carefully determined well in advance. As the result of the sale, and as with any volume-driven business, certain employees will inevitably be dislocated. The cost of severance and bonus for retaining those employees through to a successful deconversion is sometimes split between buyer and seller, based upon negotiation prior to the closing.

10) Liability Accruals. In a credit card divestiture, there may be a mix of certificates and others funding vehicles at various maturities which can now be terminated. Any penalties incurred as a result of early termination would also need to be taken into account when adjusting the Gross Transaction Value.

The total of all adjustments are then netted against Gross Transaction Value to identify the Pre-tax Net Value of the deal. After a deal is done, every seller ultimately identifies these various costs: however, the key is to identify and prepare for expected costs prior to the closing. In this manner, what management and the Board may be expecting, in terms of ultimate P/L impact, will be closer to the actual than if costs are identified “as incurred” during the post-closing period.

Credit Card Portfolio Services

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What happens when our credit card portfolio services provide only the highest card member satisfaction?  Nothing but good things.  For example, when we have better service levels and remember we are in the “Yes We Can” business, our card members become and remain more loyal to our enterprises.

What can that mean?  It can mean lower card member attrition and higher active rates and higher credit utilization rates.  All of these translate into higher ROA/ROE.  It is always less expensive to do right by our card members and provide a highly satisfying set of experiences than it is to find and approve a new card account.  We should test for this satisfaction index by online surveys, polling and focus groups. What’s a good response rate for these card member satisfaction testing tools?  Remember, though, on the front end of the consumer credit life-cycle process:

Only about 0.25% – 0.50% (on a good day) of new card applicant solicitations result in a completed application; pretty dismal by historic card industry standards…  

Back to surveys.  We once sent out a card member feedback survey, randomly sampled from our portfolio, and got a 45% response rate.  We sent those surveys to a subset of card members who had any direct communication with us in the past 30 days (customer service, collections, fraud, etc.); to make sure we were doing right by them, treating them with respect, and giving the best credit card portfolio services level possible.  What we learned from their responses in this survey and other sentiment testing tools was then put into action in our business model going forward.  Nice results, so we thought at the time.

The second example of customer satisfaction testing comes to us from another industry with and even better feedback response rate.  There is a local grocery chain we routinely shop at. Their parent company asks every customer at check out to complete an online survey, with the simple instructions how to do so on every sales slip.  Next, every time you check out, all of the checkers at this store personally ask their customers to complete the online form telling them how they are doing, and circles the simple store feedback process on your sales slip. In addition there is a drawing from among the customers who complete the 5-minute online survey, and the monthly winner receives a cash reward.  So, they are doing at least three things to call you to action.   Pretty savvy.

Credit Card Portfolio Services Results

The results: last month this particular store received positive survey feedback from 90% of their customers.

The lesson for us in the credit card portfolio services business is very important.  First, they actively seek the customer’s feedback, not just buried in the fine print on their transaction slips. Next, they take action on what the customer is saying (read, adjust their business model as needed, in the customer’s eyes).  Then, they reward the customer with only the highest service levels, in every department.  Moreover, they do all this every day with every customer.  That’s a true “commitment to excellence” (importantly, defined by their customers).

Contrast that with our experience at other local markets, who all also have sales slip information for online surveys.  Not one other store in our area actively seeks the shopper’s feedback.  That, as opposed to the local market described above with stellar results; never once have their checkers failed to ask us to complete the survey.  Never once.  It’s the polar opposite of every other market in town.  No surprise that this enterprise is always #1 in their market area, and in their loyal customers’ eyes.

Check Your Own Card Member Sentiment Feedback Process

So, if you think your card member feedback produces impressive results, good for you. Your P/L earnings probably reflect that. For a suggestion on how to improve no matter how high a result you may presently get:  I would put two of the newest MBA ”fast track” employees on the case and have them develop a higher responding online card member feedback tool we can use to see how we are doing.

Why someone new to the company?  Because they just don’t yet know what can’t be done; they come to work every day “thinking outside the proverbial box they have yet to get to know.”

I’d give them (and their assigned mentor in the company) the authority to talk to anyone in any department of the company whose works touches card members directly, and give them 60 days to come up with a better feedback plan of action for us to pursue, presented to the Managing Committee, with weekly progress reports during the two month project to their mentor.

This is a pretty fair new employee training tool, as well, to familiarize them with the various operations in our card company.  See of it might produce better results for you, too.  Any other ideas out there?

Bob Hammer is Founder and CEO of R.K. Hammer and Card Knowledge Factory®

Bank Card Consulting

Bank Card Consulting

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It took over twenty-five years and still counting to create a bank card consulting practice with clients from over 50 countries on six continents. Maybe you would like to do the same.  Some of those clients took years to cultivate and develop earlier, though, as is often the case.  Business decisions with bank card clients abroad tend to be based on relationships, rarely first meetings, and good long term relationships simply take time.

Prepare yourself to invest a lot more time burn cost abroad than perhaps you do in the U.S.  It’s an investment in time and energy that I always welcome.

Bank Card Consulting client locations?

In Asia/Pacific:  Hong Kong, Australia, New Zealand, Philippines, Malaysia, China, Taiwan, Thailand, India, Indonesia, Bali, and Singapore.

In Europe: United Kingdom, Ireland, Germany, France, Portugal, and Spain.

In the Caribbean: Antigua, Puerto Rico, and the Dominican Republic.

In Latin America: Mexico, Columbia, Brazil, Ecuador, Chile, Costa Rica, Paraguay, Uruguay, Honduras, and Argentina.

In North America: virtually all the Major card issuers in the U.S. “Top 20”.

Here are ten of the important lessons learned from all those regions of the world, and what it may mean for your enterprise international expansion hopes, if you are inclined to do so.

First, get an experienced local host in each area we would visit for the first time or in which we would attempt to get clients. One never has to do everything for yourself.  Why would you, when someone there can show you the local ropes and customs?  Break a custom or known rule in a new culture and you have probably just equally broken your chances at getting any new business there.

Second, we always had a real curiosity about other lands, other people, other customs and other cultures.  If you aren’t truly interested in learning about other cultures and places, you may not like expanding abroad.

Third, abroad your ways are not necessarily or even often their ways.  One has to be prepared to adapt and learn new ways of doing things.  When in Rome…

Fourth, as communications with bank card clients and friends now transmit at the speed of light (or thought, as you wish), can be in many countries in the same day.  Even half way around the world is easy to accommodate – just as long as you are prepared to get up early or stay up late, with all the time zones between you and the recipient of your scheduled call.  With e-mail and text, it’s even easier.  The back and forth is rarely a problem.  Thanks again, to high tech.  LinkedIn included.

Fifth, if you have a true curiosity about other cultures, you will most likely really enjoy the experience.  We have very fond memories of being with new friends from across the oceans.  If one doesn’t really care or have such curiosity, stay home, as this may not be for you.  The language barrier? Very rarely a problem.  English is spoken virtually everywhere, and we found most international clients like to use it.

Sixth, fully prepare your itinerary, and pack accordingly.  We once spent two weeks going 24,000 miles all around the globe visiting many bank card consulting clients and countries in the process, and only had to have one carry on to do so.  Travel experience will come back to help – or haunt – you.  Travel can be gruesome these days.

Most of your fellow airline travelers are like that; very interesting people who love sharing what they have learned or know about the location you may be both going to.  That has been my experience in dozens of business trips around the globe.   If you enjoy listening to other points of view, you may just do well internationally.  Trouble is, we sometimes talk when we should be listening.

Seventh, Set your watch and become mentally and physically prepared to be on my client’s time zone the moment we step foot on the outbound plane, long before we land in another far away country.  Sleep along the way if you can.

Eighth, devote much more to time doing pre-trip research than on the trip itself.  Who are the players? What are their successes?  What are there sustainable competitive advantages?  What are their possible organizational needs?  What seem to be their guiding values?  Who among the ranks are the future rising stars?  How do they differentiate themselves from their competition?  Are those solutions already in our wheelhouse?

Ninth, be prepared to experience meals like you’ve never seen or tasted before.  Delicacies for the palate at which you might first be a little surprised.  Enjoy trying new things, so dining out with international clients is a real treat.

Tenth, taking a ten or eleven hour plane trip is not for everyone.  But oh my, when you arrive you can be in a very different and very fascinating world.  New friends, new cultures, new ways of doing bank card consulting.  How refreshing it can be, if you are interested.  It’s one way I think R.K. Hammer has such an international presence.  We work hard to earn that reputation every day all over again with our bank card consulting clients, regardless of the continent or the country involved.

There is more, so much more than one could share, but perhaps this will at least get you thinking, get you started.  Also, review the International travel “Check List”. Good luck, my friends!   Got to run, folks, to LAX to catch another plane.  It’s been “banking without borders” for over 26 years now at R.K. Hammer.  I wouldn’t have it any other way, and thank my international friends for the experiences of a lifetime.

That’s the way I see it.

Robert Hammer is Founder and CEO of R.K. Hammer and

Credit Card Expert Witness

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How one chooses to deal with bad news, tells a lot about the integrity of people running the organization.  As a credit card expert witness RK Hammer can assist with the litigation. “Running and hiding” in the hope it will all just go away is never good PR strategy.  

We’ve seen some business owners and politicians try to hide the bad news, delay the updates, to their ruination.  Coming clean with bad news is important and necessary.  To hide from the truth brings out damage to your cause, often greater than the initial crisis itself.  The crisis won’t get you; the lying about it will.  Ask those former politicians who used to be important.  Their example shows us what not to do.

First, face the facts, damaging as they may seem.  Then, ask yourself what is the worst that could possibly happen as a result of the crisis.  Next, probe for corrective measures which could make a repeat of the problem far less possible.  Confide in trusted advisors such as credit card expert witness RK Hammer who may have insight in how to get out in front with responsible damage control.  If someone gives you good – but painful – advice, take it.

Then, be prepared to explain all of the above to the public and what you are doing about it now, and how the problem arose in the first place.  Give them a timetable for new updates, and who in the organization the press and others may contact for news on the matter going forward.  There is no magic bullet for dealing with very bad news, except to look at recent history as to how not to do so.  Get out in front of bad news quickly, before the press comes calling.

Credit Card Expert Witness

The news cycle rumor mill will be chasing you for a full disclosure.  So, give it all to them in advance – thus, give them nowhere to go for further bad news.  Reread this paragraph again, it’s that important.

Many companies and politicians come out of these situations even stronger for their forthright truthfulness.  Others, as we have sadly witnesses have stonewalled to this very day with things they should have divulged months or even years earlier.  Whatever you do in damage control mode, don’t stonewall, run or hide from the facts, hoping against hope that the people will become numb to the issue and just go away.  Never works like that, though.  Never will.  Half-truths are half-false.

You can’t just rope yourself off from the press to avoid having to answer tough questions as you stroll down the street.  You end up looking foolish and inept and insecure, and it really doesn’t accomplish anything meaningful.  Incompetence, insecurity, and lack of integrity usually becomes well known to all soon enough. As Ali-Foreman showed us, the phrase “Rope a Dope” comes to mind.

Everyone goes through crises during their careers – some minor and fleeting, and others life changing and forever forging your character, such as it is.  If you look yourself in the mirror in the heat of the crisis as it unfolds and still choose to delay, delay, delay with getting the true facts out because you may be too insecure within yourself to do otherwise, well then you may end up like those other sad sacks who chose the same disingenuous way of dealing with bad news.  Continuously hiding the truth.

The real battles for those who do this will have only just begun.  Don’t do it.  Learn from those weak others who chose the easy way out with what not to do.  Quick!  Those ringing sounds you may hear is FOX News on line 1 and CNN on line 2, both calling for an immediate and full comment.  Better take the calls.