Giant bank mergers such as the plan by Bank of America Corp. to buy LaSalle Bank Corp. for $21 billion have become routine, forcing the collection agencies that serve them to take such combinations into account as a matter of business. The largest vendors or internal collection units may squeeze out smaller agencies that are left to search for new business to survive. For those that are kept on with the new entity, prices banks pay for the service may drop.
While observers say it’s too soon to say how Bank of America will treat its collection business, collection professionals note that they’ve been through this before and have learned that they must prepare.
“Knowledge and experience is the only thing that makes you plan for it,” said Tom Hyberger, director of operations for Credit Bureau USA, in Hammond, Ind. The firm has 25 collectors and 35 people on staff. Its annual revenues for fees generated from accounts totals $960,000, Hyberger said.
The winds of a bank merger are more likely to buffet a smaller agency, simply because those agencies with a national presence are more likely to have stable, larger banks as clients, said Chris Cleusen, vice president of financial services for I.C. System, a collector that works with the top 10 lenders in the country.
Still, mergers have added to the pricing pressure for those larger vendors as well. Bank’s use the larger volume they have after an acquisitions as leverage to win pricing concessions from their vendors, Cleusen said. I.C. System takes that into account in its ongoing strategy to maintain its business and be efficient and competitive, he said.
“The business might be there to be worked, but worked under terms of the new entity,” Cleusen said. For a company as large as I.C. System, the bright side is that mergers can mean new business, he said. I.C. System focuses on financial services, health care, retail and communications.
Bank of America in April said it would buy LaSalle’s parent, ABN AMRO North America Holding Co. The deal has yet to close as several European banks fight over the ultimate parent, Dutch bank ABN AMRO, but BofA has said it plans to close on the LaSalle deal by the end of the year. BofA wants to boost its presence in Chicago, the third largest banking market in the country.
A BofA spokesperson declined to comment on how it would treat the collection of the bank’s charged off credit card accounts. Others said it’s too early to tell. The combined banks will have a substantial amount of collection business. BofA’s card receivables totaled $167.5 billion at the end of the second quarter. Its managed credit card charge off rate was 4.88 percent in June, up from 3.39 percent for the same period in 2006. Thirty-day delinquencies came in at $8.6 billion, while 90-day delinquencies were $4.3 billion. LaSalle Bank Corp. had assets of $118.3 billion. It did not return calls seeking comment on the bank’s credit card receivables.
Banks typically have both an internal collection unit and hire a third-party agency. When a merger occurs, the acquiring bank may decide it can work with fewer vendors or eliminate the acquired bank’s vendors. In addition, most banks have “stringent” standards that could exclude some vendors from doing business with them, said Dennis Hammond, president of the Debt Marketplace, Inc.
Bank consolidation has been playing out in both small and large markets for the last decade. “We’ve seen this before,” Hyberger said. For example, Credit Bureau lost its client, Bank Calumet Inc., in 2006 after First Midwest Bancorp Inc. bought the bank for $307 million in cash and decided to conduct its collection work in house, Hyberger said.
When another client went through a merger, Credit Bureau had to push to find new customers to make up for the lost business. “You put the pressure on your sales department to find a new outlet and bring in a new revenue stream,” Hyberger said.
Banks that merge also must decide whether to convert the newly acquired data from one collection system to another, place the debt with a third party or to sell it, Hammond said. “[The bank’s] cost could outstrip any return it might get on any downstream collection efforts,” Hammond said.
BofA will be making these decisions as it did when it closed on the purchase of MBNA Corp. for $34.2 billion in 2006. The acquisition left BofA as the largest credit card issuer in the United States as measured by balances, the company reported at the time.
“It’s not going to be an overnight thing,” Hammond said, adding that such decisions can take between 12 and 18 months.