Coming Back to Cards

With greater pressure on margins, community banks are seeking to build or take more control of their credit card portfolios to beef up revenues and engage customers

By Karen Epper Hoffman

Long known for their lending products, community banks are looking to credit cards as an easier and less expensive way to extend credit to customers and win new prospects.

Most community banks do offer credit cards, and have for several years, but many smaller institutions have eschewed focusing on them in favor of other loan products. In fact, many community banks offer their credit cards through agent bank programs, where they have little responsibility over cards’ issuance but also little control or ownership of the cards, according to Jeff Slawsky, a partner with McGovern Smith Advisors of Washington, D.C.

But as the economy continues to slowly rebound, Slawsky says many banks are migrating from agent banks to self-issuing models, and banks that have offered credit cards in the past are beginning to do so again. “It’s a combination of [issues, including] the opportunity to generate more assets. The credit card business is a very profitable business,” Slawsky says. “And controlling the payment mechanism is important to controlling the relationship with the customer.”

While competitive, the credit issuance environment for community banks is generally favorable, according to C.J. Klump, senior director, Visa Performance Solutions. He says in recent years he has increasingly seen community banks that have issued through an agent bank wanting to bring their credit programs in-house. 

“Strong job growth, upward movement in wage growth, and positive consumer sentiment are tailwinds supporting higher consumer spending growth, particularly in discretionary spending and durable goods,” Klump says. “Among all tender types, this spending growth is expected to increase the most for credit card payments.” He adds that the ongoing shift from cash and checks, the proliferation of mobile payments and online spending, and credit acceptance at more merchants are also increasing card usage.

John Buhrmaster, president and CEO of First National Bank of Scotia in Scotia, N.Y., agrees that when he sees peers at conferences, he is hearing “more and more interest in credit card programs… some looking for agent relationships and some wanting more control.” (See sidebar,

Card surrogate
TCM Bank, N.A., is a major agent bank and advisor to more than 750 U.S. financial institutions serving more than 300,000 customers, “issuing credit cards for banks who prefer not to issue cards themselves,” according to Damon Moorer, its president and CEO. Working through an agent like this, banks retain their brands while reducing financial and compliance risk, he says.

“Today the market is saturated with fierce competition from larger banks and national issuers,” Moorer says. “In many community banks, credit card issuance remains a secondary product. Even though credit cards are a great source of noninterest income, many issuers simply don’t have the time or specialized resources to grow their credit card business.”

The issue is further exacerbated, he says, by increased regulatory overhead, as well as “the recent explosion of innovation in the credit card space: EMV chip cards, mobile wallets, lucrative reward programs, SMS communication, and card controls.” He says community banks are revisiting their overall credit card strategies as a method to drive noninterest income and brand awareness. “Business cards in particular are gaining traction,” Moorer adds, “due to the deep value proposition they can provide.”

For community banks, facing shrinking margins and regulatory pressure on fees, credit cards present the opportunity for interest and noninterest income and building better relationships with customers and prospects. Indeed, Keith E. Nolan, vice president for association management for FIS Global Retail Payments, believes that “in today’s financial services market, it would be difficult to be viewed as a full-service financial institution without offering a credit card.” 

In fact, Nolan points out, many banks that had previously sold their card portfolios are getting back in the business, as they have realized two things. First, credit cards consistently have the highest return on assets compared with any other loan product. Second, the data a community bank can mine from a credit card transaction are “second to none” and can be used to cross-sell other bank products to their consumer base.

But, as with many plans, building or asserting more control over a credit card program is easier said than done. Aside from the inclination and the commitment needed to develop the credit card product line, Buhrmaster says that a community bank needs to have (or must be prepared to build) a strong underwriting program. He also encourages community banks to focus on getting “your best customers on board… the ones with high incomes, or other established relationships” as opposed to signing up as many people as you can.

What community banks lack in the hyper-valuable rewards programs offered by the country’s largest card issuers, Buhrmaster says, they can often make up with personalized customer service.

“Don’t try to be another Chase or Capital One,” he says. “Consumers need a second credit card. If you’re not going to be the customer’s first card, you can still be their second.”

Slawsky agrees that community banks need to consider the areas and ways in which they can be competitive with their peers and larger card-issuing counterparts, when it comes to credit cards. “Bankers need to ask, ‘What value proposition do we offer?’ and ‘How can I take advantage of my position as a community bank in comparison with the big lenders?’” he says.

Put a plan in motion
When planning a new credit program, Klump says community banks should “plan for variations in the time it takes to achieve a return on the initial investment to start the program.” Generating revenue estimates based on flexible “what if” scenarios can help set expectations, he adds. When it comes to the setup, he notes it’s important that community banks commit the right resources to support a successful program—handling some functions in-house while giving other tasks to processors or third parties. 

“A community bank needs to consider its resources, its assets and its overall strategy in determining which functions [it] should handle internally versus outsourcing,” Klump says. “For existing community bank credit card portfolios, effective growth strategies should be focused on product and channel optimization.

“Community banks should look to deploy both non-rewards and rewards products that are simple and easy to communicate.”

While targeted, multichannel marketing efforts are most effective, Klump says that, at a minimum, branch personnel should be trained and given the tools to speak knowledgeably to customers about the credit card options available. 

Slawsky and his fellow partner at McGovern Smith Advisors, Paul Tomasofsky, also point out that when community banks are considering upping their ante in credit cards, it is not a short-term gambit.

“They really need to commit to this business,” says Slawsky. “It is a specialty business and a long-term commitment for any bank.”

As such, Tomasofsky warns that community banks may find they lack the skill sets needed to successfully plan, execute and market a new credit card product, and they may need to plan on hiring or consulting to get that expertise. “At a typical community bank, the senior management is usually coming from the commercial side of the bank,” he says. “That can be a very different mindset.”

He adds that industry associations like ICBA, third-party service providers, and the card brands can all offer help and resources to community banks wanting to further develop their credit card products, or take greater control of them.

Case study: First National Bank of Scotia

First National Bank of Scotia is not exactly a newbie when it comes to credit cards.

The $460 million-asset bank, in Scotia, N.Y., has been offering a credit card with its name for 50 years—first through an agent bank relationship and eventually moving its portfolio in-house in the late 1980s, according to the bank’s president and CEO, John Buhrmaster.

“As a small community bank, it can be hard to negotiate for your own portfolio,” he recalls, especially since the bank’s total credit card outstandings were only at about $250,000 30-plus years ago.

And yet, the community bank made the bullish decision to bolster its credit card business early on, knowing that “it was not as competitive as we knew it could be,” Buhrmaster says. “We had a very vanilla program before. Now we’ve really expanded.”

Indeed, over the years, with the support of ICBA and financial services provider FIS, First National Bank of Scotia has added a range of consumer and business credit cards and debit cards (issued under both Visa and MasterCard) to its quiver of offerings. It even supports a points-based rewards program for its credit card products. Currently, it boasts $2.5 million in retail and small business credit card outstandings, more than double the amount it had three-and-a-half years ago.

One secret to this small bank’s success: selective and focused marketing to its best customers. The upstate New York bank approves and issues a credit card to every borrower in its residential mortgage program. Also, it lowered its own expenses by transferring all of its business lines of credit of $10,000 or less to credit card accounts.

“We just took the same terms and transferred those over,” Buhrmaster says. “It’s been a great experience.”

He underscores that, given today’s financial and economic realities, it is imperative for community banks to assert themselves in the credit card business—to lower their costs (in relation to more expensive loan products), increase earnings and highlight their brand with customers. He encourages banks without a program in place, or those that are not inclined to take risk in-house, to look to an agent relationship as an entry into this increasingly important segment.

“Community banks are leaving money on the table with not having a credit card in the wallet of their best customers,” Buhrmaster points out. “It’s really a sweet spot for us right now.”

Karen Epper Hoffman is a financial writer in Washington state.