Case study: how to achieve a high growth, high yield, low risk credit card issuing program

This case study provides insight into the opportunity in the credit card issuing market, the key things too look for when selecting a partner for a credit card account issuing program, business rules to achieve a low-risk, high margin program, and the results obtained by Corserv clients in 2016.

Corserv client’s portfolios achieved an average net operating margin of 4.5% in 2016

Many financial institutions have implemented and built a profitable and secure card issuing business with Corserv, and their 2016 financial results reflect it.  Net Operating Margin represents direct contribution on a cash basis.  Purchase Cards were launched as a new product in 2016.  Below is a summary of the results achieved by Corserv’s Client’s card issuing portfolios:

Portfolio yields
Portfolio yields
Portfolio yields

Target significant financial results for your card issuing business

The credit card issuing P&L has the potential to provide a 4% – 5% lift in existing Financial Institution earnings based on credit card loans achieving 1% of total assets on an average FI’s pre-tax ROA of 4x.  A focused marketing program can achieve these results within 5 years.

Credit card issuing business achieves strong financial results

80% of Banks and 45% of Credit Unions do not have credit card loans or fees as part of their assets and revenue. They are missing out on a significant and high margin area of banking.

Below are results published by First Annapolis in 2017 reflecting “Revenue (including fees), expense, and profitability remain favorable for credit cards in comparison with overall bank average ROAs of 1%.”  In 2016, average after-tax return on assets for U.S. banks. with $10 billion or more in assets was 1%.

USA Consumer Credit Card P&L Estimates

Community financial institutions have strategic advantages over many competitors from their:

  • Relationship knowledge of business, municipality, and non-profit clients
  • Low funding costs
  • Multi-product customer relationships that lower credit card loss levels
  • Local brand awareness that lowers marketing cost, increases credit card acquisition, activation and retention rates
  • Business credit cards also enhance cross-selling opportunities and greater adoption of more services, resulting in longer, “stickier” and more profitable relationships.”

Regional banks are boosting credit card business to improve overall bank profitability with plans to double the (credit card) loans on their books in the coming years

Checklist for Selecting a Partner for your Credit Card Account Issuing Business

There is a lot to consider when implementing a credit card issuing business.  Don’t make your decision based on a comparison of just a detailed fee checklist from vendors.  Try to compare the total revenue, cost, and bottomline, preferably with measurable historical results from the vendor.  Below is a list of some key performance indicators to look for:

credit card profitability

 

IT processing typically averages less than 5% of the total expenses per account per year (exclusive of pass thru costs such as postage, plastic cards, etc), and too often FIs reduce a large part of their credit card entry decision to this 5% of the total expense. This is a major reason why 80% of banks today have no credit card loans on their books, and only 1% of community banks under $10B have $5 million or more in credit card loans. Instead, Financial Institutions should look at the credit card issuing P&L having the potential to provide a 4% to 5% lift in existing Financial Institution earnings, look at the total expenses, and ultimately look at the positive bottom line impact that can be achieved.

Below are services that comprise a significant portion of expenses that are required for optimum success and are included from Corserv but are often missing in proposals from others:

  1. 2016 FI performance, and respective references for profitability, growth and billing simplicity (vs hundreds of line items each month)
  2. Banking and Underwriting Functionality (credit, products, compliance):
    a. credit underwriting policies and strategies
    b. risk based pricing
    c. relationship value added to FICO score for decisioning, line assignment and pricing
    d. account holder contracts
    e. real time credit decisioning, including automated disclosures, with select recommended declines pushed to work queue for each FI second look at total relationship
    f. lead compliance with ad/marketing/compliance guide
    g. champion products (9) and pricing, with embedded reward points and redeem capabilities in UIs and on statements
    h. sharing of best practices
  3.  Full featured, and integrated, processing and servicing with execution of select marketing programs:
    a. Support to the new mobile “Pays”- Apple, Samsung, Android
    b. fraud detection work center (Falcon strategies managed)
    c. 200+ operational work flows
    d. 24X7 servicing with extensive self servicing by account holder and FI capabilities
    e. IVR
    f. “build your own” card design website
    g. Pre-Qualification functionality
    h. Relationship building marketing tools for new account and on going promotions
  4. Hands-on profitability and growth mgmt
    a. develop 5 year joint P & L based on current client results
    b. monthly management package for loans, revenue, losses and expenses of the program

Implementation/Start-up Support:

  • Project Implementation led by PMP certified project management team within 150 days of contract
    Set up Client branding across customer communications
  • Processing setup, plastics, EMV, statement build out, settlement, authorizations, Falcon fraud management system and more
  • Secure role-based access to cardholder, business program manager, & Client portals, credit decision & origination system (CDOS), data warehouse & decision support system and single sign on support. Robust and proven credit decision and origination system with “challenger” best results business rules and parameters
  • Access to proven account policies, procedures and strategies with tailored underwriting setup, cardholder disclosures, train the trainer support, rewards loyalty program set up and more

Card Account Issuing Support:

  • Assistance and proven templates to establish credit card pricing and other terms and conditions, underwriting guidelines and the form of all customer disclosures for the program
  • Sponsorship into Card Networks and access to competitive consumer, business and commercial card products, with and without rewards. Easily accessed and administered rewards program
  • Establishing and maintaining credit card accounts for Client, originate advances to accounts and settle transactions on the accounts with the applicable payment system network and other third parties
  • Fulfillment of cards, statements, notices, and other correspondence branded for your bank.
  • Selling all receivables and collections arising from accounts to Client daily at par value of the principal receivables
  • Provide daily report

Access to Cardholder Adoption Marketing Capabilities

  • Bulk email campaigns
  • Personalized email campaigns based on analytics
  • Traditional paper mail campaigns
  • Branch cardholder adoption campaigns

Account Issuing Business Analytics and Reporting

  • Tools that track, report and manage key drivers of profitability through fact-based decisions, working with clients to optimize profitability. Tailored reports using a modern Business Intelligence tool.

Business rules to achieve a low-risk, high margin Card Account Issuing Business

Of course the key to a successful credit card issuing business it to have a system that promotes cardholder adoption while minimizing credit and fraud losses. A robust credit decision and origination system is needed with proven “champion/challenger” business rules and parameters. The rules should allow for recommended and easily adjusted credit score limits by product and credit limits, adjustment based on relationship information such as number of products with the bank and balances, and review queues for decisioning on applications requiring additional consideration.

A system based on modern technologies and practices like Java, open APIs, agile development, and rules-based logic will help reduce upfront implementation costs and future changes. Technologies like tokenization of card numbers, robust address validation, matching of multiple applications, and other security features will maintain a secure program, reduce fraud losses, and ease regulatory compliance such as PCI.

Bottom Line: Achieving Growth and Bottom Line Results

Ultimately, you should select your account issuing program partner based on the results their programs are achieving with other clients. Corserv staff are subject matter experts in Credit Card issuing programs. This is the 4th generation system they have built together, having built and sold the other systems to banks who are still using them today. This expertise is what has allowed Corserv to invest and build a next-generation, modern credit card issuing solution over the past 8 years, and to configure it for optimal portfolio results.