Small FIs Now Have the Data and Tech to Issue Credit Cards

The credit card market has typically been dominated by a few key players.

The top-five issuers are behind roughly three-quarters of credit card loan balances, and the Federal Reserve reported that credit card debt stands at an all-time high of roughly $930 billion.

Dan Hanks, vice president of global product development at i2c, told PYMNTS that self-issuance of credit cards can boost small and mid-sized financial institutions’ (FIs’) presence across traditional lending channels and their operating margins.

Typically, these smaller FIs have relied on larger agent banks to handle card issuance. They’ve lacked the resources to do so on their own, but the wealth of data they have at the ready, with the aid of modern processors, can help them issue their own cards.

Historically, leveraging a larger FIs’ scale and reach has entailed establishing an agent-bank relationship, where a larger FI will issue for hundreds of small banks.

Hanks likened the agent relationship to “a cookie-cutter approach,” although for small and mid-sized FIs, there are some key considerations that might initially prove attractive. They don’t have to take all the in-house responsibility, while they get a card with their banks’ branding on it.

Giving up Some Profits

“You’re giving up profitability,” Hanks said of small and mid-sized FIs letting larger banks take on card issuance. “Credit cards [are] one of the most profitable products for banks.”

The other areas where these small and mid-sized FIs cede control lies with the customer experience, where a negative interaction — say, when a customer waits too long on hold with the agent bank’s call center — winds up reflecting poorly on the smaller FI.

“It’s your brand that takes the hit,” Hanks said.

The partner bank ultimately determines the very nature of the small or mid-sized FIs’ customer base, since it’s the agent’s underwriting models that wind up being used to approve or deny credit applications.

But as Hanks told PYMNTS, small and mid-sized banks have the data they need to embrace self-issuance and provide a better customer experience, particularly in the area of underwriting.

“They know what your savings and checking account balances are,” he said. “They’ve probably seen your direct deposits coming in from your paycheck for years. You might have had a longer history with them. They can incorporate all of that into a decision and potentially make a better decision,” about lending.

For example, a partner bank might adhere to strict rules. They might hypothetically turn away any applicant with less than a 680 FICO score. On the other hand, a smaller, data-driven FI might decide that a customer with $10,000 in long-standing deposits and a 20-year history with the bank but with a 670 FICO represents an acceptable credit risk.

Data-Driven Approach

A virtuous cycle takes shape for the small issuer taking that data-driven approach into account. It can issue more cards, which provide more data points on how those borrowers and cards are performing, which in turn helps refine and recalibrate risk models. Additionally, the same data flow ties into other channels of credit issuance.

The real-time insight into where consumers are spending their money can incentivize an FI to issue an unsecured auto loan, for example, and deepen the customer relationship. The small issuer also can personalize rewards to enhance customer loyalty.

Next-generation platforms such as i2c as issuer-processors can be leveraged through cloud-based tech and application programming interfaces (APIs) to offer more competitive, differentiated products than what small and mid-sized FIs have available to them today, he said. An increasingly popular example is virtual cards, emailed to consumers to use immediately after their approval, which can then be provisioned into mobile wallets.

“We can also do push provisioning, so we can push [the cards] immediately into the wallets — Apple Wallet, Google Wallet, Samsung’s … a minute after they are approved, they can be making a purchase at the point of sale,” he said.

Buy now, pay later (BNPL) options tied to credit cards are proving popular as well for larger ticket purchases, he said. The customer makes a large purchase as usual with the card but then has the option to move that balance to an installment loan set by the bank.

“You get one credit card statement, you get to see your normal transactions, then at the bottom you see your 12 installment payments coming each month,” he explained. “It’s all consolidated into a single monthly payment for the customer, and so it’s very easy for them to use.”

Looking ahead, as small banks eye the profit potential inherent in cards, outsourcing back-office functions to platform providers can help FIs set their own rules and have everything from call center support, fraud monitoring and dispute processing managed elsewhere, leveraging the processor’s scale advantages to allow the bank to manage the card portfolio profitably without needing to add large amounts of staff.

As Hanks told PYMNTS of self-issuance: “We’re seeing a lot of interest, even in this tougher economic environment. For these smaller banks, issuance need not be as daunting a challenge as might have initially been thought.”