For decades, regional and community banks have, in effect, given away a fundamental relationship-building tool from their lending arsenal — credit cards.
Because of the expense, the need for management expertise and technology and regulatory burdens associated with running a card program, most banks have opted for agent card programs with large and monoline issuers.
In doing so, these banks have ceded control over nearly all aspects of their customers' card accounts to the outside company, weakening customer relationships and mitigating long-term financial benefit. Banks' customers were often subjected to unfriendly rate and fee policies, and the cards became merely transactional — not relationship — tools. Frequently, the program provider became a competitor with its client banks.
However, economic, industry and regulatory shifts have combined to create an environment ideal for banks to bring the credit card business back to the way it was before agent bank programs dominated. By owning and controlling their credit card businesses, community and regional banks can diversify their local-market lending through balance sheet funding via low-cost, local deposits, while they strengthen their customers' overall banking relationship.
Recession-fueled unemployment, foreclosures and bankruptcies have produced record-setting delinquencies and losses for major card issuers. In 2009, the top three issuers' card programs lost more than $10 billion. And they are saddled with billions more in nonperforming assets that they will probably be looking to shed.
It is estimated that up to one-third of the $874 billion in U.S. banks' credit card assets are now considered noncore and will probably become available for sale to investors and financial institutions.
In addition the Credit Card Accountability, Responsibility and Disclosure Act has fundamentally changed the landscape, forcing issuers to comply with provisions affecting interest rates, billing, disclosures and fees, among other areas. Large issuers have estimated their cumulative CARD Act compliance costs at well over $1 billion.
More importantly the very business model mega-issuers used to control and dominate the industry for decades is now dead and buried.
The most significant result of these tectonic shifts in the card industry is a leveling of the playing field. Big banks are in retreat, leaving ample room for inroads by opportunistic banks that have their own compelling reasons for taking back the card business.
Many community banks, especially, need to diversify their loan portfolios to reduce dependence on real estate lending. Moreover, the recession and current interest rate environment have put a premium on low-cost, core deposits and noninterest income. And regulators are placing renewed emphasis on both local deposit-taking and local lending.
In short, the timing could not be better for community and regional banks to reintroduce a relationship-based approach to the card business. And recent research on the benefits of relationship banking clearly demonstrates its value.
In a 2009 paper, economists from the Chicago Fed, the Office of the Comptroller of the Currency, the University of Nevada, Reno, and the University of Pennsylvania's Wharton School analyzed a data set of about 100,000 credit card accounts. The authors also had access to information about the other relationships the cardholders had with the issuing bank. They found that, compared to nonrelationship card accounts, the relationship accounts demonstrated lower probabilities of attrition and default, along with higher use rates. Moreover, these effects were more evident as relationship strength increased (measured by such factors as number of relationships, length of relationships, size of balances and customer proximity to the branch).
It is not a leap of logic to predict that the very same dynamic is at work in reverse; that is, high-performance credit card accounts have a positive effect on other banking relationship accounts.
