The credit card industry tends to follow a cyclical pattern. Stick around long enough, and it will become obvious. Sure, the details change, the institutions evolve and adapt, and the competitive demands ratchet up. But the same patterns come back again … and again.
The current point of the market cycle feels very much like the mid-90s and mid-00s. The economy seems to be reaching a risky place in the expansion cycle, the competition in the credit card market has pushed costs and resource demands to hard-to-afford levels, and liquidity pressures are mounting. There are always a few new wrinkles, and this time around they are the added burdens of CECL and risk-based capital.
It’s no wonder credit card issuers are increasingly reaching a state of deep stress and anxiety.
TRK Advisors serves clients all over the country in every asset category. Anecdotally, we are hearing more and more comments like: “I don’t see how we can compete,” “Just staying even takes a crazy amount of effort,” and “What could go wrong seems much worse than what might go right.”
We’ve heard these types of concerns in past cycles, cycles that coincided with an increased demand for agent credit card programs.
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The Appeal Of An Agent Program
For those who are unfamiliar, an agent credit card program is one in which a third-party issuer runs the card program under the credit union’s name. The issuer purchases the credit union’s card assets — which removes all credit, fraud, and interest rate risk from the credit union — and assumes responsibility for marketing and servicing the accounts.
The credit union receives a significant payment up front and, often, strong ongoing revenue in the form of fee income from the partner. It also is relieved of the need to accrue for rewards, reserve against loan losses, and hold capital against the balances and credit lines (thanks risk-based capital).
When developed with thought and consideration, these partnerships can serve members and the credit union through less risky financials, stronger products, market-level reward programs, competitive credit lines and servicing tools, and consistent marketing across existing and new accounts. They can work well, and some programs have lasted decades.
Warning: A Casual Process Yields Bad Results
Past cycles have shown, however, that poorly evaluated and implemented agent programs end up damaging the credit union.
All-too-often, TRK runs into a credit union that responded to a third party asking “Wouldn’t you like to know what your card program is worth?” The third party asks for a few processor reports and the credit union merely waits for the answer.
This is a cataclysmic mistake that can lead to the credit union focusing solely on numbers and not member relationships or member value. The third party might be aligned with a specific partner and acting as its fiduciary in opposition to the credit union’s interests. And, the strategic reasons to consider this approach are rarely properly discussed before the process starts.
This casual approach often leads to unrealistic expectations and a broken relationship down the road. Worst yet, it can result in a failed process, stress and dissention among the credit union’s staff and management, and a waste of significant time better spent on managing the program.
A failed, poorly managed process can harm the card program and demoralize the staff. Card program success is difficult enough to achieve without adding these disruptions to the mix.
The agent programs that didn’t work well were almost always the result of a flawed process from the beginning.
How To Do It Well
If a credit union wants to determine if an agent partnership is its best option, then it needs to approach the evaluation differently.
The credit union needs to spend time up front identifying why such a partnership would be useful. It needs to survey all functional areas for positive and other impacts. And, it needs to generate a list of needs. Interested partners should respond to not only the financial elements but also the other critical components the credit union identifies.
I’ve been through this cycle several times myself — directly managing a significant credit card program and advising others about these types of negotiations — and I can say with certainty that the agent programs that didn’t work well were almost always the result of a flawed process from the beginning. Expectations were unrealistic, staff was not properly prepared, and the decision was second-guessed for years afterward.
Don’t fall in love with the number. Understand, first, if this idea serves the credit union’s purpose and its members. Make no mistake, getting the numbers is fun and exciting, but starting with them can lead to disaster.
Hundreds of institutions have moved to an agent model for credit card delivery. Hundreds of credit unions have stayed in that model. Others have re-entered card issuance after sitting it out for a while — and those that sat it out during the last recession and CARD Act implementation were happy to do so. There is no one right answer for everyone, but there is a wrong approach to getting the answer.
The agent partnership cycle appears to have returned. TRK is taking more calls about this topic than we have in a decade. If you are considering it, please be careful about taking a wrong, and damaging, first step. Getting a quick offer to see how it looks might seem quick and harmless. Although it might be quick, it is seldom harmless.
About the Author
Timothy Kolk is the owner of TRK Advisors and brings almost three decades of credit card experience and expertise to his clients. Kolk has helped credit unions across the United States improve their card programs, better serve their members, and create long-lasting, high-performing card programs. He can be reached at firstname.lastname@example.org or (603) 924-4438.
About TRK Advisors
TRK Advisors brings unmatched expertise to any card issuer. Areas of expertise include program performance analysis and opportunity identification, market and member segmentation, product design, processor RFPs, marketing program development, affinity/cobrand programs, de novo (startup) programs, and much more.