Long stuck with cookie-cutter credit issuing capabilities due to their size, staffing, partners and geographical limits, small financial institutions (FIs) have been at a distinct disadvantage in the crowded credit card market. But issuer processors like i2c are changing the dynamic, giving them direct issuing services and other tools needed to level the playing field against the biggest players in the game.
FIs have traditionally had few options for credit card issuing outside of what third-party agent banks offer, i2c Vice President of Global Product Development Dan Hanks told PYMNTS.
He added that such legacy solutions are “basically off the shelf, take it or leave it. That’s what you see the community banks having to go with when they go with agent bank solutions.”
And these cookie-cutter solutions simply can’t match the functionality and richness that major issuers can offer.
“That’s the danger for the community banks because the community banks really rely on loyalty,” Hanks said. “You know your customer, you’re in the community, you have that strong relationship, but ultimately loyalty only goes so far.”
The problem is that big issuers can sweep in with full-featured credit cards that appeal to small bank customers — then poach them.
“Let’s say the customer gets a product from Chase, Wells, Citi, BofA or someone like that,” Hanks said. “As soon as that happens, those banks are going to start cross-selling into that customer base. Mortgages, [home equity lines of credit (HELOCs)], auto — all the things which are core to the community bank business, and that’s the danger. You don’t want to let one of those large players into that relationship.”
Observing that smaller FIs are “realizing that the agent bank model isn’t working for them, and they’re starting to take that step into direct issuing,” Hanks said it can be rough without help.
He said it’s simply not feasible for most community banks or credit unions to pay up and staff internal credit card issuing teams to compete. One solution for these smaller FIs is to partner with an issuer processor like i2c to handle the heavy lifting and day-to-day program management.
See also: Agora Services, i2c Partner on Digital Banking for CUs, Community Banks
Agent Bank Model ‘Not Working’ for Smaller FIs
Banks are beginning to understand that working through agent banks isn’t the best solution, but starting from scratch without help just isn’t feasible, Hanks said.
Reciting the litany of ancillary services needed to support direct issuing — decisioning, call center, fraud, disputes, reporting, settlement, statements — he said, “They’re not going to be able to staff up 10 to 15 people at a community bank to run a card business.”
Digital banking and card issuing platforms like i2c’s provide solutions that enable these players to do direct issuing without the internal investments and staffing requirements that card programs demand.
“You can set up a [credit card] product with us [containing] rewards — cash, points, miles, even crypto — in a [graphical user interface],” he said. “One person can do it in an hour and basically have a product up and running.”
“[Building a card program on our platform] brings end-to-end services, a full decisioning engine, advanced fraud detection, and everything to help them along,” he added. “All these features are optional. Some banks like to do some of these things themselves, but we can provide all of that for them” as needed.
Read also: Community Banks Prep for Credit Rebound, Seek Agent Bank Alternative
Leveraging Loyalty and Realizing More Revenue
As the wave of branch closures that started in 2020 gains more momentum this year, community banks, regional banks and credit unions are under pressure to innovate and keep loyal customers engaged. Direct issuance is a key strategy for many small operators as they go on the offensive.
Having a strong partner makes much of this possible.
Hanks told PYMNTS that “it really helps them make that jump. We’ve seen community banks that can basically run their [direct issuing] business with two or three people.”
And i2c doesn’t just offer a loyalty component.
“You actually own a card business,” he said. “You get the interchange revenue, you get the interest income from it. There’s a positive business case” there when the smaller FI owns the card business and doesn’t have to split revenues with agent banks.
“You can make a much more competitive product while still having positive economics because you are keeping all of that revenue,” he said. “You’re outsourcing a lot of the operational work … so you get the scale benefits. Cards [are] a scale business. You need some way to manage that.”
By controlling issuance end-to-end, smaller FIs can then leverage the loyalty they’re known for, generating more customer satisfaction while creating new revenue and data streams. It also taps into their superpower: knowing their customer. And, they don’t have to worry about losing customers to other FIs trying to cross-sell competing core banking services.
Take a bank customer with a credit score of 660, Hanks said.
“If they just apply anywhere [they may] get rejected, even with the agent bank,” he said. “But let’s say you’re a community bank, and you know they’re at 660, but they’ve had a checking account with [you] for 15 years. Their paycheck shows up with direct deposit like clockwork every two weeks, they had a car loan with [you], which they paid off. Those are the kinds of things you can bring into your decision, [using] the decisioning engine we [provide], and then say at 660, ‘I can give this customer a card.’”
Beyond that, adding a FinTech partner for direct issuing has implications for finance outside of community banks and credit unions as it can reduce risk, which spurs innovation.
Large banks “tend to be more conservative, which is absolutely the correct decision from their point of view,” Hanks said. “But that isn’t necessarily the thing that drives innovation the best.”
“You see it with the FinTechs as well, with different segments, different products, more innovation,” he added. “Whether it’s a type of product or the segments they’re going after — younger customers, thin file, no file, new to bank customers — there’s a lot of opportunity there.”
Read also: i2C, Credijusto Launch Credit Card for Mexican SMBs
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