which are balances unlikely to be collected due to the borrower becoming substantially delinquent. These balances must be accounted for as they may eventually become permanent losses for the credit card program. Analysis of Card Program Fee Income Fee income is earned by a bank or credit union from account-related charges. It can be divided into two primary components within a credit card program: direct fees and interchange fees. Direct fees are charged directly to the cardmember for a service, convenience, or to make up for a missed payment. Interchange fees are paid by the merchant at which the credit card is being used. Interchange income is determined by the transaction volume and is often viewed as a low-risk source of revenue. However, there are investments and expenses that are required to grow this revenue stream, so it may not be as low risk as it initially appears. The most obvious investment to banks or credit unions associated with products within the credit card program are rewards offers. Stronger rewards propositions within a credit card program result in more value to the cardmember, higher level of spend on the card, and higher portfolio growth over time (new account growth). In theory, offering higher rewards values on a credit card program results in higher spend and portfolio growth. The tradeoff is that rewards have a direct variable cost linked to the same driver as the interchange income: purchase volume. Many cardmembers nowadays expect robust rewards from a credit card program, however that doesn’t change the fact that such rewards are costly for issuers. Financial Trade-off: High-value rewards programs such as a 2% cash back reward, will single-handedly offset all interchange fees earned. Credit card issuing is a complex mix of variable revenues and expenses that are
driven by the overall card program’s product designs. More than one calculation must go into measuring card profitability. Whether it is interest income earned or fee income earned, many factors and assumptions introduce some form of risk to the bottom line. If a bank or credit union does not get the card program’s formula right, profitability is lost and any value of card issuing becomes a burden to the overall enterprise. Outsourcing Considerations Banks and credit unions should take a critical look at calculating their credit card program’s overall profitability. One aspect to consider is using third party resources to dive deeper into factoring in all expenses tied to managing the card program. These expenses may be more extensive than the obvious costs. Also, it is important to weigh the risks of unsecure credit card lending by comparing the true income to other loan assets. Many banks and credit unions find the profits of self-issuing may not outweigh the inherent risks and hidden costs. Partnering with a third-party provider may allow banks and credit unions to optimize their credit card programs while mitigating risk and the various costs associated with running a credit card program, including those that may be not so straightforward. ▪
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About Elan Financial Services Elan serves over 250 active credit union partners. For over 50 years, Elan has offered an outsourced partnership solution that provides credit unions the ability to market a competitive credit card program to their members and outsource most major functions such as marketing, servicing, compliance, underwriting, etc. For more information, visit www.cupartnership.com.
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THE FINANCIAL BRAND INSIGHTS WINTER 2021
THE FINANCIAL BRAND INSIGHTS WINTER 2021
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