Credit cards have become embedded in the payments landscape, making it critical for every financial institution, large and small, to be involved in a way that best suits their business. However, with much of the U.S. credit card market concentrated among a few key players, many smaller banks feel they can’t compete.
Credit Card Issuance by Small Issuers: Strategies, Risks, and Options, a report by Brian Riley, Director of Credit at Javelin Strategy & Research, examines the current market for small issuers and the ways they can contend with the credit card giants.
Top Issuer Advantages
There are 600 million active cards in the U.S. alone, meaning every household has around three cards on average. Yet, out of the 7,000 companies that issue credit cards in some form or another, 95% of cards are issued by the top 10 credit card companies.
Due to the centralization, smaller issuers might feel there’s no use fighting over the morsels the big companies leave by the wayside. They might also feel there’s no way they can compete against a bank like Chase, which has $180 billion in its portfolio.
Another advantage top issuers have is the ability to write off bad debt. Recent data from the Consumer Financial Protection Bureau indicates credit card issuers had a 14.3% average margin in 2023 and wrote off 10% of their receivables.
“It’s not feasible for smaller financial institutions to do the same, and still generate net income,” Riley said. “After servicing their operating expenses, marketing costs, technology investments, and occupancy, their costs will far exceed the remaining 4.3%.”
Protecting Main Street
While top issuers have advantages, there are ample reasons for smaller banks to have a credit card presence. Protecting their business from bigger financial institutions is chief among them.
Large banks like Citi and Wells Fargo have such an established credit card business that when they begin to expand beyond their footprint, credit offerings are where they start. And those products can be offered to any customer, regardless of where they are in the U.S.
“There are lots of hidden millionaires, which are people scattered throughout the country that have successful businesses of all shapes and sizes,” Riley said. “In many ways, those types of customer relationships are what community banks and credit unions thrive upon. Small bank owners have their feet on the street, their kids play softball with other business owners’ kids, and that’s how those relationships are built.”
One of the strategies bigger banks employ is to locate and attempt to attract the “hidden millionaire” customer base. Once the larger banks get their credit card offering up to speed, they will then move to offer deposits, college loans, mortgages, and other financial services.
“It might seem like a David and Goliath fight,” Riley said. “But small banks need to have a credit card business of some sort so they can protect their market.”
A Line of Defense
For small banks, risk is one of the major deterrents to establishing a credit card business. For that reason, those financial institutions need a line of defense that top issuers don’t require. Small banks often don’t want the debt on their balance sheet because they’re not big enough to handle it, but there are partners that can help.
“It’s similar to how mortgages are serviced,” Riley said. “Banks typically originate mortgages and then sell them to Fannie Mae or another entity, which takes them off the bank’s books. The bank gets the money back and they can reinvest it in another mortgage. There’s a sourcing channel and a servicing channel.”
Partnering with agent banks can deliver benefits like increased liquidity and efficiency. Partners can also reduce regulatory burdens and help financial institutions present compelling credit card options.
There are often hybrid programs for those banks that are willing to take on more aspects of the credit card business. It allows those institutions to become more of an equal partner with agent banks, instead of just a referral source.
There’s a trade-off, however, because banks and credit unions won’t make as much money as they would if they were the sole issuer. Even though they may lose product control, financial institutions will reduce their risks dramatically.
Turnkey Infrastructure
When Citi and Chase and their fellow big banks pioneered the credit card model decades ago, they had to build the whole infrastructure from the ground up. With the help of agent banks, small financial institutions don’t have to reinvent the wheel.
“Every bank should have a play on credit cards,” Riley said. “Just like if you don’t have a debit card, you really don’t have a consumer bank anymore. If small banks have the right money on deposit, they can reach out to a partner and it’s a turnkey solution. It’s remarkable how quickly they can turn a credit card business on, and then banks can operate through their whole ecosystem.”