As advisors to Credit Unions and other financial institutions in the credit card business, R.K. HAMMER reports various research results throughout the year. This is based upon direct, ongoing discussions with issuers (over 500 on our data base radar screen, 80% of those being Credit Unions), regulators and examiners, processors, rating agencies, investment bankers and analysts, journalists and others in the trade.
As the accompanying chart shows, the cost for card companies to book an account have been rising, as high as $230 per account. This is extraordinarily high, even by historic standards. What that means to the acquiring side of the house is that portfolio valuations have fallen there, too. Any dollar of expense flowing through a credit card company can impact both sides of the business: acquiring and issuing. Years ago, when acquiring portfolios were on a rapid, frantic pace, prices were rising, rising to perhaps unrealistic levels. The same thing happened in the charge off end of our business. Prices paid for charge offs were at levels which reality just could not support. The result? Portfolio prices have fallen.
The same is true of acquiring portfolios and their residuals. What once might have gone for much more have steadied in the 1.5 to 12.5 times gross revenues level. If a portfolio seller is willing to take some of the sale price on the back end, and have some skin in the game, the net present value of that would necessarily be higher than if they demand all the sale price up front, and a corresponding lower net present value. A seller desiring the highest net present value will want to take this into consideration. Portfolio sellers should be aware of these trends, and not have unrealistic expectations about valuation. As with the card issuing chart here, costs have been rising. That will ultimately impact portfolio sale valuation, on both the issuing and acquiring sides.
Every industry and profession goes through periods or cycles of change. In the current environment, we have seen operating costs and loan losses rising, putting pressure on issuers and acquirers, at the same time as increased regulatory scrutiny, especially on any asset or loan of less than prime. So, costs rise, examiners toughen their stance, and profits are declining. All these things combine to make it a very difficult period to sell portfolios at high prices. Some portfolios of poorer quality are unable to be sold at any price. It is important that we all have realistic expectations, especially in a tough market.
Regarding Credit Card Account Acquisition Costs, the following is noted:
- Average Cost Per Account (CPA) varies widely, from as low as $10 to over $230 per account, based upon sourcing method. Response rates, too, range widely from 0.3% to over 6.0%. The average financial break-even period, driven by costs and revenues, range from as little as 11 months on average for Portfolio Acquisitions to 40 months for other riskier national solicitation methods.
- While average costs per acquired account is $78 in our industry composite model, any given issuer might have average CPA reported far different, based upon their unique mix of solicitation methods, mail drop costs, the competitive attractiveness of the specific card account offer(s), the true affinity of any sponsored group with its members, and the response and approval rates for a given solicitation.
Metrics and trends for our model are as follows:
- Acquisition Costs, trending up, averaging $78;
- Response Rates, down, averaging 0.7%;
- Debit Active usage rates, flat, averaging 68%;
- Annual Cardholder Renewal Rates, down, averaging 82%;
- Break-Even Periods, up, averaging 25 months.
Why wouldn't credit unions and other card issuers just use the lowest cost method? Simply because the lowest cost acquisition method doesn't necessarily mean the highest profit method; nor does the highest cost acquisition method mean lower profit portfolios. It usually takes a balanced mix of most methods to distribute acquisition costs/benefits in the most beneficial manner. Look at the break-even periods on the attached chart again; that drives operating profits (ROA) more than anything and is self-explanatory.