Ending card outsourcing can boost control for issuers

Despite the advantages of bringing cards in-house, many financial institutions still outsource their portfolios to agent credit card issuers to manage the programs on their behalf.

Why? Some cite the fear of managing credit risk or compliance. However, the advantages and potential growth outweigh the challenges, and with the right strategic pieces in place, financial institutions can provide their customers with an enhanced banking experience while growing revenue.

Credit cards remain one of the most profitable offerings by retail banks and financial institutions in the United States, and they serve as a perfect gateway to acquiring new customers. Mercator reported in 2020 that over the previous six years, credit card banks’ ROA is about two and a half times that of commercial banks. These results are driven by improved interest rate margins and stronger collection results.

Credit cards also remain one of the most popular financial tools for consumers. The Federal Reserve reports that 83% of adults in the U.S. have at least one credit card, and 29% of respondents to a survey by the Diary of Consumer Payment Choice indicated that credit cards were their preferred form of payment.

For many card users, the biggest way to personalize a card is through different rewards programs. With the pandemic limiting travel last year, consumers began demanding new ways to cash in their travel rewards. Smart issuers were able to quickly change the ways users could redeem their rewards on non-travel options. For example, shifting travel rewards to be eligible for restaurant orders or in-home entertainment options.

Additionally, financial institutions can build card programs for specific niches. Banks can tailor cards to different audiences such as college students looking to build credit or military members serving overseas. Furthermore, financial institutions that bring their card program in-house can leverage relationships with merchants to offer personalized rewards in their community. This reinforces a “buy local” message that many agent credit card issuers cannot offer.

While outsourcing a credit card program may seem like a plausible option for financial institutions, there are several risks associated with this approach. Financial institutions that utilize outside credit card organizations have to share their customer data, increasing the likelihood of fraudulent behavior. Fueled by the impacts of COVID-19, credit card fraud is one of the fastest-growing forms of identity theft. These risks associated with utilizing a credit card company can create irreparable damage for financial institutions, ultimately soiling their reputation.

On the other hand, in-house card programs enable banks and credit unions to maintain maximum control over security and privacy. Even if the bank changes processors, the customer data is still in-house, providing the most secure experience.

After a year of dealing with limited opportunities for travel, shopping and spending time with others, consumers are eager to jump back into the marketplace. Banks should use this year to build their own credit program and establish themselves as the best option for consumers in their community to provide modern credit card programs that fit their specific needs.

Build it now, and benefit from the growth.