Navigating the role of cards within payment platforms

Key Takeaways:

Think through your program goals. Develop vendor relationships that reflect bank card program goals. Is your program a revenue play? Used for interchange? Meant to build brand awareness and loyalty? This determines who controls the risk, the data, and other considerations, and helps you establish a beneficial partnership.

Select a vendor that favors scalability. Card programs, especially versatile approaches built to scale up and down, can be key generators of fee income, interest margin, and other opportunities. Choose a vendor that helps with a flexible strategy.

Cards for the near future. The fast-changing payments market challenges the banking industry to respond with modernized card programs, leaving FIs to decide if card programs should integrate with payments platforms or operate separately. Investment in these programs persists as consumers and businesses appreciate the float and rewards programs, while FIs can leverage co-branded marketing.

Transcript

BAI’s Rachel Koning Beals: Your background gives you a unique perspective on the challenges banks face with payments today. Could you walk us through some of the key complexities that banks are grappling with and how we arrived at this point.

Joe Schmithorst: With my background, I saw the complexities and the hurdles and just some of those decision points that banks had to make, whether it be a larger bank or a smaller financial institution. And we really looked at like payments as a whole, but then narrowing in on your debit and credit card processors, and how do you make those decisions? And I think a big part of it is there’s so many options, and it gets a little daunting, whether it be your payment strategy, or does your credit card fit into your payment strategy, or is your credit card separate from your payment strategy? So a lot of those conversations are happening.

I think more specifically around the credit card piece is just the understanding of all the decisions that need to be made in order to launch your credit card. So I think how we got here, though, is there’s just a lot of options, and the ability to sift through all those options, and make a clean decision is tough. And that’s where you know, like my role at prime x can really help navigate those decisions and help them make the right decision.

BAI: Then there’s a regulatory piece to it …

Schmithorst: Yeah, there’s the regulatory component of it, the lending aspect of unsecured lending, there’s regulatory, the compliance piece of it. Then there’s the which vendor do we select to help us go through all this? And is it Visa, MasterCard, Amex? And do we own our own BIN? Do we share a BIN? There are three traditional models. There’s the agent/bank model, where the financial institution takes absolutely no risk, but they get a white label card that a third party is going to issue on their behalf. But they also do not own the customer experience, and they don’t get any of the revenue from interchange finance charge or fees. So there’s that balancing act of, okay, we don’t need a lot of staff, and we don’t take any risk, but we get a card with our name on it. And then there’s the other side of the spectrum of self-issuance, where a lot of those decision points come into play in terms of what BIN do we want through which network, which processing vendor are we going to pick? Which tech stack? How do we want to integrate that into our digital banking?

So all those decisions, but once that kind of hard process of making those decisions and getting it set up, then the revenue starts to flow through, and you own the customer experience and the marketing and all that stuff. And then the third one that we’re starting to see is a hybrid model, where it’s kind of a shared BIN approach, so the financial institution gets to own part of the experience. They might get to set the value proposition and all that and take on more of a revenue share agreement with the vendor. So different approaches all have pros and cons depending on the situation of the financial institution.

BAI:  We have this big question out there about data sharing, right? So I’m assuming that’s going to factor into our conversations. Do you want to walk us through each of these models?

Schmithorst: Most definitely. Yeah. So the start with the first one. We talked about an agent bank where, again, that’s a third party on your behalf, with your financial institution’s name on it. And to your point there, like data sharing is a great point of that, like the data is not essentially yours, but the customer, you know, is walking into your branches and all that. So that from a customer perspective, the experience is happening, you know, right there, within your branch, or digital experience so and then the self-issuance piece is that that’s the data.

You hit on a really good topic, the data sharing piece of that, because that’s also when you’re selecting a vendor to make sure that you understand. How are they going to use your data? Because at the end of the day, and that model, that is your data, it’s your customer, and you should be able to access it, or it should be coming over to you via file or real time, or some way, either back in your court or your enterprise data warehouse, or some mechanism there. So that is a really good point there to make sure that that data is coming back into your kind of bank ecosystem.

And then the hybrid, similar approach, in terms of the data, piece of that, just make sure you’re asking those questions: Where’s the data flowing? How do we get access to the data? Because at the end of the day, you the financial institution should be using that data too to make the cross sale. You know, the propensity models of they have a card, they’ve been making a lot of purchases at Autozone, and then another car, so pushing auto loans. So those types of marketing decisions can be used from those data points too.

BAI: When implementing a new payment strategy or platform, what would you consider sort of the biggest challenges bank needs to think of first?

Schmithorst: I’d say the first thing is identifying the desired outcome that you want with the card program: What does the financial institution really want to use this card for? Is it a revenue play? We want interchange? We’re tired of giving it to everybody else and want the finance charges and control that kind of risk model. That’s one component of it. The other one could be: We want to use it as a loyalty mechanism. Because you think about it, on average, you’re using your credit card, 15, 20, sometimes 30 times a month, could vary based on consumer, but that your [bank] names on that card every time they pull it out, and you want to, you know, be proud of that. They don’t pull out their mortgage every month and say, Hey, look at my mortgage card here. So it’s a way of driving loyalty back into the community bank.

Then it’s piecing it all together, finding the right vendor, you know, getting your BIN set up, all that kind of stuff. And then the big part too, is there’s this, there’s this time in our industry right now, which is super interesting, because there’s somewhat of the legacy platforms, if you will. And then there’s a lot of fintechs that are coming out that are, you know, all cloud based, and they have all the buzz words and that kind of thing, and faster to implement and things like that. So I would say, just look at all of them. Look at all the different providers.

BAI: Do we talk about aligning with your values and things like that? Like this is sort of no easy endeavor in a lot of ways. So maybe you have some sort of best practices in that regard.

Schmithorst: I would say definitely, during the RFI and RFP process when the financial institution is looking at different vendors, you know, there’s the tech layer of it, like, what are you going to get from a widget perspective, if you will, and what does the interface look like, and how does it integrate into your digital banking and your core and all those types of things. That’s one big component of it. But I’d say a bigger piece that often gets left out is that extension of the team and the values? And can you just pick up the phone and call your vendor and say, hey, we’ve got a problem here? Or, hey, I’ve been thinking about this idea. What are your thoughts on this?

Or, I’ve seen this out in the industry, what are your thoughts on this? And that is a very critical thing that’s not really, you know, concrete into an SLA or into a contract, typically, but as you shop and look for the different vendors, always get referrals and references and things like that to not only understand the connectivity and the pricing and all that kind of stuff, but is this company that we potentially might partner with a good fit for our community financial institution in terms of culture, and do they pick up the phone when we call, or do they just say, Go, enter a ticket kind of thing? So I think really understanding who you’re going to do business with is very important.

BAI: Now smartly, we always talk in these conversations about, you know, the warnings and what to watch out for. But now’s the time. Let’s talk about a few success stories, right? There’s a reason we’re in this business. It works usually, right? There’s a reason to engage with partnerships. There’s a reason to update your payments strategy. So any real-world examples where there was a challenge identified and there’s a success story behind it?

Schmithorst: We’ve had two actually, recently that have come over. One’s a startup that we just started, de novo, and it’s doing quite well getting the experience out there and connecting all the different technical things, but also the financial institution starting to see the revenue come through and the impact on the customer experience. And then another one was actually a transition over from an agent bank model because they were ready to take that in-house, and we helped them navigate, kind of the technical aspects of it. You’re going to bring this in house now, and we’ll help you kind of be that extension of your team. So there are two different flavors there, but both with great results so far in terms of, they love seeing the revenue flow through, and it’s been great to see the customer experience, and, you know, the loyalty back to the financial institution.

BAI: That’s great. One thing that our research has turned up for this year in particular, but certainly going forward, is you know retail banking margins in particular, with the interest rate situation still not as bank-favorable as banks would hope, and just economic uncertainty, retail bank margins still a little crunched. So efficiencies always desired, banks want programs that are scalable, can respond, you know, efficiently, without a ton of new investment all the time?

Schmithorst: Yeah, that’s a really good question and a good point, because, as we all know, efficiency ratios and net interest margins and all that are the key things in the financial institution world. So yes, you can scale this up, scale it down. I think the cool part about it is that if you again, choosing the right partner in the right efficient model, you can, scale it up and get the interchange revenue, the higher yields, because unsecured credit typically has a higher yield because you’re taking on a little bit more risk. So that helps your margins, your interest margins, there and then the fee income that comes with a two for balance transfers, your cash advances, is a good driver of non-interest income. So the interchange, the fee income, and then the higher yield on the on the balance, which really helps the balance sheet, if managed appropriately.

And then, if it’s an acquisition play, in terms of you can go full force in the acquisition play and bring it into accounts or scale it back. You know, pull those different marketing levers. The same with the portfolio. You know, if you want to drive spend, we could do some merchant category spend and get offers to drive spend in different categories, which is always good, driving different interchange models and revenue. So there’s definitely different ways to scale it up and scale it back.

It’s just, I think when, when that scale up comes, a lot of folks in the financial world will be like, let’s go do this marketing campaign. It’s like, well, time out, are we ready to support it? And that’s where it’s like, have that conversation of, we’re going to do this big campaign, is underwriting ready to take on that additional volume, or we have an instantly approved set up, or is the back office ready to take on more calls, because we’re driving more awareness to the card. So make sure that foundation is set up. But there are definitely opportunities to scale it up, scale it back, to drive different line items on the P&L.

BAI: Payments is evolving all the time, so I’m sure your bank clients push you a little bit too: What’s next? What’s kind of pushing your thinking? Let’s call it, the near future.

Schmithorst: Yeah, no, that’s a really good question. And we get that a lot, just from partners, internally, externally, all that. So there is a lot going on in the payment space right now. I mean, just with regulation, legislation, the stable coin, cryptocurrency, all that fun stuff, real time payments, and then you still have the cards over here, but there’s a lot of pressure on … change from business owners and the merchant side of the house Just be aware of all that’s going on. Don’t react to something that’s happening because it’s a headline or a shiny object. Do your homework, do the research. And then the interesting part about the cards perspective, which is, you know, obviously, where we come into play and can help navigate all that is, the card is not going away anytime soon. I mean, the consumer, think about, you know, Apple Pay, or Google Pay, digital wallets, the evolution it took to kind of adopt that EMV chips, even checks, like checks still exist. Cash still exists.

So, I think there’s a lot of, when you read articles, it’s, I don’t know, kind of, you know, go away credit card kind of thing. It’s not going away or but it, but it’s not, I mean, it’s the consumers still really rely on the credit card again, for the float of it, the rewards component of it. It’s still a very, you know, strategic product for financial institutions and non-financial institutions, such as the co-brand models and all that.

I think the biggest thing that’s shaping it is, right now, there’s just a lot of buzz. There’s a lot of what, what could happen, what’s going to happen in the long term. I guess my two cents or a bit of advice is just have an awareness of what’s going on but always come back to your customer. What is your business owner looking for? What’s your consumer client looking for? And build out those products and services.

BAI: I want to thank Primax’s Joe Schmithorst for joining us today with insight on card payment strategies at the bank, including what he sees ahead for this business line. And thank you for tuning in.