As more Americans resort to plastic to survive, major banks are reshaping their credit card portfolios, buying and selling off accounts — and the cardholders who go with them. What happens when your issuer dumps your credit card?
With nearly 100 banks going out of business in the first nine months of 2009, bank failures remain the most common way that cardholders can find themselves dealing with a new creditor. But with the banking industry in upheaval, cardholders may also be tossed to new card issuers for a different reason: credit card portfolio sales.
As those involved in credit card lending reshape their businesses in a recession, they increasingly are willing to shed their credit card lending businesses — and millions of cardholders have no choice but to go along with the deal and learn the quirks, policies and mailing addresseses of their new lenders.Watch your mail: It could be you.
Divestment season now open
New York banking giant Citigroup kicked off the fall divestment season with the announcement that it sold three of its least profitable North American credit card portfolios, worth an estimated $1.3 billion in combined managed assets, to Minneapolis-based U.S. Bancorp.
Terms were not disclosed, but sources close to the deal indicate that the portfolios include credit cards issued by Keycorp, Associated Bancorp and the American Dental Association.
Citigroup will continue to service the divested card portfolios through mid-2010.
In a related move, Citigroup also discontinued its co-branded card program with home improvement retailer Home Depot.
Citigroup received a $45 billion federal bailout last October, in effect making the U.S. government its largest shareholder with a 34 percent stake. The credit card divestiture is part of an ongoing initiative to offload troubled assets and realign the banking giant along less risky core banking businesses.
A major autumn shedding of high-risk, low-yield credit card portfolios by embattled banks has been widely predicted since the market meltdown in the fall of 2008. Some economists have characterized credit card debt as the other shoe waiting to drop as rising unemployment and the housing crunch forces more Americans to resort to plastic to survive.
Should cardholders be concerned?
As more credit card portfolios are acquired, cardholders grow increasingly nervous. Will my terms change? My APR? What about my rewards points?
Robert K. Hammer, a Thousand Oaks, Calif., investment banker who specializes in the buying and selling of credit card portfolios, says most cardholders don’t even notice the change.
“It’s typically a nonevent,” he says. “The cards continue to be usable and, especially if the bank was an agent of somebody else, there will be zero change in card terms.”
As part of its due diligence, the acquiring bank compares the terms and conditions of the failed bank’s credit card portfolio with its own. Do acquirers typically honor the contracts made by the failed bank?
“Most do,” says Hammer. “There is a process called data mapping that compares the old terms of the seller to the terms of the buyer: What’s their annual fee, what’s ours? What’s their over-limit fee, what’s ours? What’s their late fee, what’s ours? Unless there is something egregiously out of kilter, it is in the interest of everyone not to have a whole lot of change — except to maybe offer better services or new services. Sometimes it works out to be even better for the cardholders.”
For sale: credit card portfolios
Ninety-five banks failed nationwide in the first nine months of 2009, and all industry observers agree that dozens more will follow before the recession is through. Their assets, including credit card portfolios, are typically seized by banking regulators and sold as quickly as possible to other financial institutions.
When small banks fail, they hardly cause a ripple. But when major whales belly flop, the whole pool is affected.
Former FDIC Chairman L. William Seidman, who oversaw the failures of more than 1,000 banks and 700 savings and loans during the S&L scandal of the late 1980s and early 1990s, says credit card portfolios, though rare in failed banks, are both valuable and problematic for the federal liquidators.
“Generally, I think it’s a good asset that the acquiring bank would want. It depends on the standards of credit card issuing they’ve been using as to whether the balances are any good or not. As far as being easily collectable, they are probably problematic. The question is, is the acquiring bank in the card business themselves? Is this a business they want to be in?”
In the fall of 2008, the failure of Washington Mutual, with $300 billion in assets, became the largest bank collapse in U.S. history. Similar cannonballs by Wachovia, IndyMac and Lehman Brothers (whose $613 billion in debt made it the largest bankruptcy in American history) did nothing to inspire consumer confidence in the banking industry.
Transition not always smooth
Not all bank failures result in happy card customers. Consider the case of Internet-based NextBank, the financial institution founded by the now-defunct NextCard, which failed in February 2002. The FDIC auctioned off NextBank’s 590,000 credit card accounts to Utah-based Merrick Bank.
Merrick, an experienced subprime lender, repriced NextBank’s card portfolio based on its own risk models. Soon thereafter, 100,000 NextCard holders received notice that their interest rates were being raised from as low as 9.9 percent to as high as 29.7 percent. Some also were hit with annual fees of up to $120 and an additional $500 to their account balance to offset the risk to Merrick. Litigation soon followed.
Hammer says the Merrick mess was an unfortunate misstep by lenders with a subprime focus.
“Usually that doesn’t happen. The major banks have done this for decades and they know exactly what to do to have a seamless transaction and assuage the fears of the cardholders. If you chase off all the cardholders, you’ve just lost your shirt on the transaction.”
New Fed guidelines protect consumers — next year
To try to halt such egregious practices, federal credit card regulations finalized in December 2008 will put a stop to capricious APR hikes. The problem is, the new regs are not scheduled to take effect until July 1, 2010.(A federal law, the Credit CARD Act of 2009 was passed later and codified many of the regulations.)
The Fed made clear that sudden rate-gouging on existing accounts will not be tolerated: “The acquisition of an account does not involve any choice on the part of consumers, and the Agencies believe that consumers whose accounts are acquired should receive the same level of protection after acquisition as they did beforehand.”
However, the rules won’t apply to variable-rate accounts, expiration of teaser rates or accounts that are more than 30 days overdue.
Hammer says that regulations aside, suddenly hiking a cardholder’s APR just doesn’t make good business sense. After all, the institution that acquired your card wants to retain you as a happy card user. Mass account closures would be their worst case scenario.
Watch your mail, make your payments
As a cardholder, what’s your best move to protect yourself should your bank fail? Actually read your mail from your credit card issuer — at least until the dust settles. If you have questions, call the customer service number listed on the back of your card, not the local branch of your now-defunct bank.
“The watchword for cardholders should be this: Watch your mail,” says Hammer. “That’s where you’ll be notified of any changes.”
In the meantime, your card should work fine, even under new management.
“Consumers can still use their credit and debit cards; they continue to work until they receive something from the acquiring institution,” says FDIC spokesman Lujuan Williams-Dickerson.
Oh, and don’t assume just because your bank is off the hook that you are. Continue to make those credit card payments.
“You shoot yourself in the foot if you do that, you’ll trash your own credit,” says Hammer. “Loans are still due and payable, just as issuance of credit is due as well. They have to continue to honor your use of the credit card. Which they would.”