- Key insight: Large banks dominate credit card programs, creating challenges for smaller banks.
- What's at stake: There is potential interchange fee income, but also costs to consider.
- Expert quote: "Most small institutions do not have the scale to assume this kind of risk. An agent model, while nothing new or exciting, accomplishes the relationship aspect, which is likely the only strategic play." —Steven Ward, president and founder of iTech Governance Consulting.
For large banks, offering a
Banks can directly issue and manage a credit card program, or they can do so through an agent bank program such as Elan Financial Services, the private label brand of U.S. Bank, ServisFirst Bank, or TCM Bank, a subsidiary of ICBA Payments.
Banks need to think through the business case and the various options to evaluate what makes sense, David Shipper, strategic advisor at Datos Insights, told American Banker.
What do small banks need to consider before starting a program?
There are many technical and operational requirements to starting a card program. Banks need to weigh the investment and operating overhead against the benefits, said Scotty Perkins, executive vice president and head of product management and market strategy at ACI Worldwide, which helps banks launch and manage credit cards. Other considerations include whether the interchange they'd earn and the fees they can earn for adding value-added services is worth the total business case to institute a program, he said. Will they acquire more customers? Will they grow deposits?
Notably, the regulatory piece doesn't get any lighter because the bank is small, Phil Bruno, chief strategy and growth officer at ACI Worldwide, said in an email. "A card program brings Reg Z disclosures, fair lending, billing error resolution, and other obligations with it."
The bank also has to be clear about why it wants the program, he said. "Is it mostly about yield, or about keeping more of its customers' everyday spending instead of watching it go to a national issuer? Those goals lead to very different decisions on underwriting, rewards, pricing, and the product itself."
Another consideration is whether to charge an annual fee. A lot of banks are hesitant to do so, but it's an option, especially if the card provides significant value, Shipper told American Banker. "If you provide value for that annual fee, people will still sign up."
Weighing the route to take
If the bank decides to move ahead with a credit card program, the next question is how to structure it. Whether it makes sense to offer through a provider like Fiserv, FIS, or Jack Henry versus an agent bank depends on the bank and its objectives. With the former, the bank owns the customer relationship, the debt, and the credit decisioning, whereas with an agent bank program, the bank is not responsible for these things, but doesn't get to keep as much of the revenue, Shipper said. There's also a hybrid option where a bank can retain full control over the program while partnering with CorServ for infrastructure, reporting, underwriting, management and integrated services.
Based on a small sample, Datos Insights research shows that 56% of banks with assets under $10 billion directly issue and manage a credit card program, while 44% of banks in this category do so through an agent bank program.
Of course, the risk factor is a major consideration when deciding whether to go the agent bank route. "Most small institutions do not have the scale to assume this kind of risk. An agent model, while nothing new or exciting, accomplishes the relationship aspect, which is likely the only strategic play," according to Steven Ward, president and founder of iTech Governance Consulting.
Of course, agent bank programs keep a lot of the revenue. Integration with the bank's online and telephone banking may not be ideal, and customers might have to use a separate login, Shipper told American Banker. What's more, sometimes agent bank call centers serve many card programs, which could lead to customer service issues that community banks might not want to risk, he added.
The DIY approach
Shipper worked in a prior role at a $3 billion bank that launched its own program and was profitable in the first year, and the effort didn't require much additional staff, Shipper said. The bank had been using an American Express corporate card, and becoming its own issuer generated revenue that would otherwise have gone to Amex. The bank already had customer service and fraud teams for its debit business, and it chose the same vendor as its core and debit processor. Assuming that your corporate card spend is sizable, it could be really meaningful revenue for the bank, Shipper said, adding that "it doesn't even have to be all that big."
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Skip the card
Of course, there's another option entirely. Most smaller banks don't want to launch a card because about 90% of the card market is concentrated in the top issuers, Tony DeSanctis, vice president at Cornerstone Advisors, told American Banker. Scale is also an issue. If you're really good, about 20% of your customer base will get your credit card. If you aren't able to generate a minimum of 10,000 cards, the economics don't work out. "The smaller you are, the harder it is to get up to speed."
