A credit union’s credit card program is almost always its highest Return on Assets loan program; therefore, keeping it healthy, competitive, and growing is critical to the credit union’s overall performance. Many leaders are surprised to learn a seemingly small loan portfolio can generate 20% or more of a credit union’s overall bottom line and be the payment device of choice for high-value members. Those that recognize the importance of the card product make it a critical part of overall strategy and member relationship management.
As with all profitable and important products, credit cards bring out competitors. Credit-worthy consumers who already hold a credit card if not several offer little new business. Therefore, credit unions need to play as much defense with their existing relationships as they play offense to capture new accounts.
Unfortunately, many credit unions grapple with the best way to manage their credit card business.
Broadly speaking, there are three credit card management options:
- Controlling virtually all of the work internally on the core system.
- Using third parties to process transactions and manage day-to-day tasks.
- Outsourcing all elements of program management and decision-making in exchange for a fee-based revenue stream.
Each approach has its own advantages and considerations.
Option 1: In-house Credit Card Management
In this approach, the issuer uses a third party to process transactions and perhaps take on some ancillary functionality such as fraud system integration. Otherwise, the issuer handles all tasks, and all information is resident on the issuer’s core systems.
This approach requires the greatest internal resource commitment and staff expertise. There are few external resources to support product design, report management, compliance, and market observation.
The credit card market is so competitive that any issuer wasting time lamenting their operating structure will inevitably fall behind those who made informed decisions.
The benefits, however, can be substantial. For example, external costs can be lower and issuers can mine card program data directly and integrate it into member information systems to support marketing and decision-making. Additionally, the program and customization are entirely within control of the issuer.
Option 2: Third-Party Program Support (Full-Service)
A full-service approach is most common within the credit union market. Issuers contract with a third party to process transactions like with in-house approaches as well as to manage most of the day-to-day functionality of the program. There is come customization available, usually for statementing, cardholder servicing, settlement, payment processing, some marketing support, and similar functions.
In a full-service environment, the issuer owns and holds ultimate responsibility for the program, including development and compliance risk for all related policies, product set design and performance, and marketing commitments. This is popular, especially for small-to-medium programs, because resource-stretched institutions can rely on a dedicated expert to support the program and provide much of the information and market intelligence that is critical for success but difficult to maintain internally.
Option 3: Fully Outsourced (Agent Program)
Hundreds of credit unions employ this approach, which is structured as a licensing agreement between a qualified third-party issuer and the credit union.
The issuer is the owner of record for the accounts and holds the balances. The credit union receives a regular revenue stream based on account generation and portfolio activity typically some combination of balances and transactions. The credit union provides a license for the issuer to provide credit cards under the credit union’s name, and the issuer pays for 100% of the marketing and program management costs.
A credit union in this structure has to ensure it finds a partner with a consistent track record of providing competitive and fair products while maintaining acceptable service levels. These partners often provide servicing and technology platforms individual credit unions find difficult to maintain internally. Advantages of this approach include earning the highest possible Return on Assets, as revenues are 100% fee driven and do not rely on balance sheet assets; minimizing the capital required to provide a credit card to members; and offloading all market and credit risk to the third party.
To be sure, none of these approaches fits every credit union all the time.
After a period of some stagnation, more credit unions are starting to explore this option again. This resurgence is the result of risk-based capital rules punishing credit cards more than any other product, loan loss provisioning interpretations possibly requiring an increase in credit card loan loss allowance levels, and overall market competition making internally resourced growth too expensive.
To be sure, none of these approaches fits every credit union all the time.
Credit unions have achieved great success as well as disappointment under each approach. To achieve success, each credit union must understand the full set of advantages and burdens under each option. Like so many business decisions, understanding the trade-offs and risks and making informed decisions based on the credit union’s priorities and skills is the only way to determine the proper path is taken. When credit unions make the wrong choice, too often they look at the other party in the relationship as the problem when many times they should examine how they made decisions and whether they were diligent in understanding their own strategy and priorities.
Making the right choice is critical. The credit card market is so competitive that any issuer wasting time lamenting their operating structure will inevitably fall behind those who made informed, forward-looking decisions.
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