August 31, 2020
Executives at financial institutions struggle with the decision to self-issue credit cards more so now than ever, especially with the dramatic shift in portfolio profitability brought on by the pandemic. There are many factors that cause concern including decreasing spend, decreasing margin, increasing delinquencies and losses, and challenges to growing receivables. The decision usually boils down to two distinct options: outsourcing or self-issuing. The variables for both options are complex.
Self-issuance is often based on two factors: program revenue and control over the customer experience. The reasons for outsourcing are more diverse and are often based on risk aversion and reducing overall costs.
Outsourcing allows a financial institution to eliminate adding portfolio risk to their balance sheet, in addition to:
• Significantly decreasing compliance risk
• Reducing costs related to managing a credit card portfolio
• Enhancing card product offerings
• Access to improved technology
• Better customer experience
• Driving fee income
FIRST MERCHANTS BANK’S DECISION
First Merchants Bank, an Elan partner, was at a point where it was a logical step to explore self-issuance as they had the scale and infrastructure. They began the process with significant analysis and hired an industry consultant to help them evaluate all aspects of the decision process. They created a comprehensive review of necessary steps to manage their own credit card program. This analysis took over two years from start to finish.
"It was a no-brainer to partner with Elan as compliance is a priority to both parties. Launching the program with Elan was clear and transparent and we always have had a strong relationship with our account executive.”
After a lengthy review, First Merchants made the decision to venture into self-issuing. The main driver for self-issuance was owning the program and the rewards. Todd Patrick, Director of Product Management & Financial Performance at First Merchants Corporation lead the initiative. “It was a high-risk, high-reward undertaking. In addition, we were interested in self-issuing as we wanted to own 100% of the revenue and to truly own the customer relationship,” said Todd Patrick.
Once First Merchants opted to move towards self-issuing, their partner program growth slowed as they were not fully engaged with Elan’s program.
Upon selecting their processing partner, their efforts to launch the program raised several compliance issues that were not evident in their review analysis. These issues caused concern for the First Merchants’ executive team. “Our selected processor failed to meet expectations, there were errors that were identified and caused us concern, which was frustrating” stated Todd Patrick.
The First Merchants team had specific concerns about relying on their chosen processor to ensure their program met rigorous regulatory requirements related to issuing credit cards. So much so that the executive team opted to terminate their processing relationship and move back to an outsourcing solution.
First Merchants fully re-engaged with Elan in an agent program in December 2019. Todd Patrick stated, “It was a no-brainer to partner with Elan as compliance is a priority to both parties. Launching the program with Elan was clear and transparent and we always have had a strong relationship with our account executive.” He went on to state “re-engaging with Elan was the right choice.”
Compared to last year, First Merchants is already seeing a 93% increase in new account openings in 2020.
SELF-ISSUE VS. OUTSOURCING CONSIDERATIONS
This situation can serve as a lesson to those evaluating this difficult decision: to launch and keep the program in-house or find an experienced partner in an agent program. The following are key considerations for financial institutions when evaluating self-issuance:
• Does your team have the correct and exhaustive information to make the decision?
• What is your financial institution’s experience with managing unsecured loan assets?
• What is the appropriate risk threshold for your institution?
• How should you align pricing with risk to optimize risk-based returns?
• Is there adequate staff to take on launching and managing a new card program across all functions?
• Are you confident that your processing partner will keep your card program compliant?
There are other issues to consider relative to entering the card issuing market. Card issuing is proving to be very much a scale game, where national issuers hold almost 90% of total assets across all card issuers.
Given their scale, the pre-pandemic reports of these national issuers are showing sustained card growth. Smaller financial institutions, however, have been challenged to sustain growth as shown in the graph below, which looks at a 5-year growth trajectory of balances across varying financial total asset segments. Across all segments, Elan has shown stronger growth trajectory when compared to self-issuers in that same peer segment.
As your financial institution confronts the decision to outsource or self-issue, as First Merchants Bank has learned, it is imperative to thoroughly evaluate all aspects of the program and make sure there are not any hidden issues as you move towards the program’s launch.
PARTNERING WITH ELAN FINANCIAL SERVICES
Partners of Elan Financial Services benefit from a holistic credit card program that focuses on the individual needs of the financial institution, with serving customers effectively as the ultimate goal. Partner financial institutions have access to state-of-the art technology that gives customers desired digital capabilities without upfront investment, and cardmembers enjoy the benefits of a product suite with attractive rewards.
In addition, Elan’s comprehensive fraud prevention program keeps fraud losses low per event compared to other industry players. Elan also takes on the compliance and regulatory burdens associated with running a credit card program, so financial institutions can focus on their customers.