Fueled by a competitive environment where customers across demographics demand uncomplicated digital experiences and fintech disruptors are nipping at the heels of traditional banks, we are seeing renewed interest in self-issuance credit card models among banks that have previously opted to outsource these capabilities.
Why? Credit cards are a “high touch” product that create frequent points of contact with bank customers and generate actionable customer data. They have the ability to strengthen customer retention and provide cross-sell opportunities through aptly designed rewards and loyalty programs. When well-managed, credit card programs are highly profitable and are often one of the highest yielding assets on a bank's balance sheet. By outsourcing aspects of program delivery, banks cede control over the program to third-party partners and shrink their revenue stream. Self-issuance brings the credit card assets and delivery responsibilities in-house, creating both opportunities and challenges.
The biggest banks are making huge investments to build digital experiences and products that not only meet customer needs, but keep them ahead of competitors. Fintechs have entered the scene with specialized services delivered via modern, nimble platforms. Meanwhile, the battle for deposits is heating up as consumer demand for loans grows. In response to this competition, many regional and mid-sized institutions are turning to self-issuance as a mechanism to drive customer engagement and retention, by taking ownership of their credit card customer experience.
Yet, successful self-issuance is not a simple proposition and requires commitment, creativity and investment. Banks should carefully weigh the benefits and challenges of the self-issuance model before making the leap.
Given current market dynamics, we are seeing an increasing number of mid-market banks consider the self-issuance model for their credit card programs. While there are certainly valid reasons for moving to self-issuance, the benefits that come with an agent based credit card model must also be considered.
For smaller and mid-sized institutions, resources will always be a challenge. Outsourcing the infrastructure, organization, and operations to an agent banking provider allows a bank to carry a credit card product without significant investment. From a financial standpoint, agent-based programs reduce a bank’s risk, keeping card assets and liabilities off its balance sheet. When moving to self-issuance, banks must be willing to invest in the development of internal capabilities and take on the regulatory burden associated with bringing the receivables in-house. If the credit card is not viewed as a core competency and the required investment in both time and resources is better allocated to other areas of the bank’s business, self-issuance is likely not an preferable solution.
Across our clients with agent programs, credit card penetration rates range from 2% to as much as 30-40%. While a higher penetration indicates that the agent program is successful, it also means that the bank is giving up a large part of its customer experience, customer data, and potential revenue streams to an agent partner. Ultimately, the success of an agent-based program should be considered in light of the bank’s strategic priorities. For banks seeking a consumer-focused business, the rationale for moving to self-issuance is more clear cut than a commercially oriented bank that needs a card product to augment its core business.
Finally, banks considering a move to self-issuance should also acknowledge the highly competitive card market that exists today. Simply launching a credit card program does not guarantee success. Card programs must provide a differentiated offering that attracts customers (through sign-on bonuses, benefits, and the like) and also drives continued spend. Banks must also carefully consider how they define “success” for a card program. Is your card program meant to drive bottom line revenue or, rather, support “softer” benefits like customer acquisition, retention, and engagement? Success with a card program can be defined in many ways.
There are many factors that make self-issuance an appealing proposition. Foremost, it gives banks the opportunity to capitalize on the high-touch nature of credit cards to control the cardholder experience and interact with their customers in meaningful ways, more regularly. Banks that issue their own credit card(s) can benefit from:
Profit and loss (P&L) ownership creates increased revenue opportunity and potential for diversification. It allows banks to break away from a “catalog” based product menu and, instead, develop distinct products for its customer base to enhance loyalty and engagement. Ownership of the credit card allows banks to expand product structures and create more dynamic rewards, resulting in more diversified revenue streams and greater consumer choice.
When a bank owns credit card data, it can use that information to drive successful marketing strategies and campaigns. Having that data offers flexibility to assess marketing materials and test cells to determine which strategies have the greatest impact on customer engagement. The bank can also leverage new product sets to drive campaign response and activation rates. Finally, access to customer data makes it easier to unify messaging across products, a key to more successful cross-selling.
With greater control, banks can move away from a “one-size-fits-all” servicing model and develop a more differentiated offering. Servicing that is customized and personalized tends to drive loyalty, satisfaction, and profitability across customer segments. Banks are also free to determine which servicing capabilities it will perform in-house and which to outsource to a third-party such as a card processor. In addition, as cardholder experiences increasingly become more digital, self-issuance presents an opportunity to develop and refine the digital customer experience.
Banks can select the processor, features, functionality, and servicing capabilities that best meet the needs of its business model and customers, rather than “riding the rails” of the issuing bank’s platform as an agent. This allows the bank to more easily customize services to drive portfolio performance and profitability.
Banks can establish their own underwriting strategies and credit risk profiles versus being locked into the issuing bank’s decisioning criteria. Underwriting internally allows banks to include relationship-based insights into decision engines. The bank is free to set its own rates and fee structures across its portfolio, using broad pricing approaches to capture the full customer credit spectrum.
To help evaluate agent-based and self-issuance models against a bank’s goals and mission, we’ve outlined 5 key considerations to jumpstart your thinking.
When evaluating a potential move to self-issuance, banks should leverage the following considerations as guidance:
The decision to become a self-issuer and the accompanying credit card operating model should flow from your bank’s goals and objectives. Recognize that there is not necessarily a right or wrong answer; the important point is that the decision reflects and is aligned with your business strategy. When we help clients evaluate the move to self-issuance, we often probe around some of the following questions to help reveal strategic alignment:
Is increased retention, engagement, and potential cross-sell of products to retail customers a priority for your bank, and does outsourcing the credit cardholder experience to a portion of your customers cause any concern?
Does your bank possess sufficient customer data to target campaigns and product offers effectively today?
Is diversification of revenue streams a priority for your bank and, if so, how much appetite is there for the increased risk and regulatory requirements associated with bringing credit card assets onto the balance sheet?
Self-issuance affords banks the unique opportunity to tailor their card product suite, value proposition, and customer experience in ways that meet the needs of their particular customer base. But, the credit card space is competitive. For self-issuance to pay off, it is critical to have an attractive product set and cardholder experience. Your bank will need sufficient market, competitive, and consumer insight in order to develop a compelling offering, as well as a sound plan for introducing the product into your customer base to realize a return on the investment.
The transition to self-issuance is not for every bank, but many have accomplished the shift successfully. It is essential to have a sound strategy and operating model in place and to be prepared to execute relentlessly against those. For banks to consider the switch to self-issuance, they must first have a target operating model that is grounded in principles that leverage the bank's core strengths. Even with in-house credit card programs, many banks will seek to outsource their less mature capabilities.
The transition to self-issuance requires operational investments, organizational commitment, and patience. It is much more likely to succeed with strong functional, operational, and senior leadership support. The move to self-issuance does not yield profits on day one. We find that self-issuance programs can require several years before they become directly profitable. While other indirect “soft” benefits like customer acquisition, engagement, and cross-sell abilities will be realized sooner, banks must consider if they have the patience to “wait out” the maturation period of a new card program.
Issuance models continue to evolve. This is particularly true in the current marketplace where innovation is happening faster than ever—and customer preferences are evolving rapidly. One practical way to move forward is to stage the transition process from agent to self-issuance, allowing the bank to test opportunities and accommodate growth as the bank brings more services in-house. For some banks, it may be preferable to leverage third-party expertise in certain areas while building internal competencies over time.
While the upside of self-issued card programs can be compelling, they are not without risks. If your bank is considering a move to self-issuance, you will need to think carefully about the operational implications required to create and maintain a successful card program. Self-issuance is not the right choice for all banks but, when aligned with a bank’s strategy and well-managed, it can yield greater profits and stellar customer insights.
We engage in discussions every day with banks evaluating their card programs. Our team can bring to the table valuable insights about card strategy, customer experience, operational best practices, technology, and other facets of the self-issuance equation to help you make the right decision for your organization. For more information, please contact us.
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