Payments are growing fast, but unfortunately community banks are not participating in this exponential growth. This is due to their utilization of agent bank programs, which cede control over decisions being made regarding their credit card portfolios to the agent bank.
According to the 2020 McKinsey Global Payments
In agent bank arrangements, the local bank does not underwrite, fund, or keep the credit card balances on its books. As a result, community banks miss out on receiving the lucrative issuer interchange, fees, and interest which can generate a return on assets of more than 6%.
However, by partnering with a sponsor bank and a technology provider, community banks have an opportunity to regain these controls, tap into the growing payment card market and foster a better customer experience to keep their brand top-of-mind in the communities they serve.
According to the FDIC call reports, community banks own half of all term loans to small businesses, yet four out of five have no credit card loans. Therein lies a strategic opportunity for community banks to capitalize on the credit card growth. Community banks have the access and expertise to leverage their local relationship and services to capture credit card business like they do for term loans. Specifically, commercial charge cards are prime for growth from employee expenses to virtual card payments to vendors.
To find success, community banks should employ a program to offer their own branded credit card issuing program and to own the P&L, but with a shared sponsor bank partner to support network sponsorship, risk, compliance and servicing functions.
With the ability to own the card program experience, community banks are better equipped to serve the needs of the communities they serve. Community banks often put the focus on supporting small, local companies and residents because they have close ties to the areas they serve. Community banks are often small businesses themselves, so they understand the challenges many local businesses owners face, as they might have even faced some of the same problems or concerns.
Today, 99% of the credit card market share is controlled by 1% of national and superregional banks, as documented by FDIC call reports. Community banks are often mistaken for not being able to offer the full range of services available at a national bank. This is not true. Community banks can provide the same level of service, if not better, but they must ensure the proper technology and systems are in place. They can provide competitive and long-term credit card products for commercial, business and consumers that deepen customer relationships. Partnering with a technology provider expedites time to market, reduces investment for the bank, provides scale and ensures products are continuously updated.
