RankingBanking: Fueling Successful Strategies

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Bank Director’s recent RankingBanking study, sponsored by Crowe LLP, identified the best public banks in the U.S. While their strategies may vary, these banks share a few common traits that enable their success. These include a consistent strategy and a laser focus on customer experience, says Kara Baldwin, a partner and financial services audit leader at Crowe. Training and organizational efficiency also allow these bankers to retain that customer focus through challenging times. In the year ahead, banks will need to manage through myriad issues, including credit quality, net interest margin management and new regulatory concerns. 

Topics include: 

  • Cultural Consistency 
  • Organizational Efficiencies 
  • Customer Centricity  

Click here to read the complete RankingBanking study.

Getting Everyone on Board the Digital Transformation Journey

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Digital transformation isn’t a “one and done” scenario but a perpetual program that evolves with the ever-changing terrain of the banking industry. Competition is everywhere; to stay in the game, bank executives need to develop a strategy that is based, in large part, on what everyone else is doing.

According to a What’s Going On In Banking 2022 study by Cornerstone Advisors, credit unions got a digital transformation head start on banks: 16% launched a strategy in 2018 or earlier, versus just 9% of banks that had launched a strategy the same year. But it’s not only credit unions and traditional big banks that community financial institutions need to be watching. Disruptors like Apple and Amazon.com pose a threat as they roll out new innovations. Fintech players like PayPal Holding’s Venmo and Chime are setting the pace for convenient customer payments. And equally menacing are mortgage lenders like Quicken’s Rocket Mortgage and AmeriSave, which approve home loans in a snap.

An essential consideration in a successful digital transformation is having key policy and decision-makers on the same page about the bank’s technology platforms. If it’s in the bank’s best interest to scrap outdated legacy systems that no longer contribute to its long-term business goals, the CEO, board of directors and top executives need to unanimously embrace this position in support of the bank’s strategy.

Digital transformation is forcing a core system decision at many institutions. Bank executives are asking: Should we double down on digital with our existing core vendor or go with a new, digital platform? Increasingly, financial institutions are choosing to go with digital platforms because they believe the core vendors can’t keep up with best-in-class innovation, user experience and integration. Many are now opting for next-generation, digital-first cores to run their digital platform, with an eye towards eventually converting their legacy bank over to these next-gen cores.

Digital transformation touches every aspect of the business, from front line workers to back-end systems, and it’s important to determine how to separate what’s vital from what’s not. Where should banks begin their digital transformation journey? With a coordinated effort and a clear path to achieving measurable short- and long-term goals.

Here are some organization-wide initiatives for banks to consider as they dive into new digital transformation initiatives or enhance their current ones.

1. Set measurable, achievable transformation goals. This can include aspirations like improving customer acquisition and retention by upgrading customer digital touchpoints like the website or mobile app.
2. Prioritize systems that can produce immediate returns. Systems that automate repetitive tasks or flag incomplete applications create cost-efficient and optimal outcomes for institutions.
3. Invest in a discipline to instill a changed mindset. A bank that upgrades a system but doesn’t alter its people’s way of thinking about everything from customer interaction to internal processes will not experience the true transformational benefit of the change.
4. Conduct a thorough evaluation of all sales and service channels. This will enable the bank to determine not only how to impact the maximum number of customers, but also impart the greatest value to them through product assessment and innovation.
5. Get employees on board with “digital” readiness. Form small training groups that build on employees’ specialized knowledge and skills, rather than adopting a one-size-fits-all model. Employees that are well-trained in systems, processes and technology are invaluable assets in your institution’s digital transformation journey.

Banks must foster their unique cultures and hard-earned reputations to remain competitive in this ever-changing financial services landscape. As they build out digital strategies, they must continue fine-tuning the problem-solving skills that will keep them relevant in the face of evolving customers, markets and opportunities. Most importantly, banks must embrace a lasting commitment to an ongoing transformation strategy, across the organization and in all their day-to-day activities. For this long-term initiative, it’s as much about the journey as it is the destination.

Digital Transformation Starts With the Customer

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Digital transformation isn’t an end unto itself; the goal should ultimately be to make your customers’ financial lives easier. Without figuring out what customers need help with, a bank’s digital journey lacks strategic focus, and risks throwing good money after bad. In this video, Devin Smith, experience principal at Active Digital, walks through the key questions executives should ask when investing in digital transformation.

  • Customer Centricity
  • Creating a Cohesive Experience
  • Build versus Buy

Solving for Blind Spots in Bank M&A

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Mergers and acquisitions are a major driver of change and returns in the banking industry. As banking leaders head into mission-critical strategic planning sessions for 2023, now is the perfect time for boards and executives to map out the coming year’s organizational and budgetary priorities. Recognizing that M&A can be a principal platform for growth, what are the key considerations empowering banks of all sizes to increase their influence and scale their organizations?

Reducing Risk
Mitigating institutional risk is at the top of the list of priorities as banks begin exploring M&A opportunities. Ensuring your bank has a comprehensive plan, inclusive of division of labor, is critical for successful M&A. Does your bank have the right staff with expertise and experience at the planning table, so nothing gets missed?

Tapping into the knowledge base of current customers and how the bank plans to maintain those relationships is a smart first step. But what about potential prospects the bank wants to reach – what do those people want? What’s relevant to them?

Well-designed research programs are table stakes for successful M&A. Data on markets and prospects will give decision-makers insights beyond their customer base. Even if bank leaders feel familiar with a market, updated data-based intelligence provides a true picture of opportunity and risk, so banks can form a plan suited to their particular circumstances. Smart data will also help uncover if another financial company using similar branding and overlapping media, or presents other legal and reputational exposure before the deal is done. 

Enhancing Efficiency
Data and insights will also produce efficiencies in M&A by helping executives discover whether their brands and names bring unneeded baggage. Having a brand that requires exhaustive explanation can be an opportunity cost, resulting in time not spent focusing on a prospect’s needs and the bank’s options for meeting them. Likewise, marketing’s return on investment can be negatively impacted when brand elements are limiting or nondescript.

For example, brand names with specific vocations or cities may cause a prospect to wonder if that bank is truly designed to help someone like them; they may eliminate the bank from their list of options before exploring the institution’s breadth of services. Also, if banks with similar branding or name invest in advertisements or community sponsorships, a consumer may mistakenly assign the message or public relations value to a competitor because they miss the distinction between local banks with similar names.

Competitive research will help boards and executives take a comprehensive look at their brand to identify what parts of their story prospects don’t know and what is meaningful to them. Leveraging data can help ensure messages and communications are spotlighting parts of the brand story that will have the most resonance with consumers, and have distinct and competitive value propositions in that market.

While it’s true that a financial institution may have to change its name because of a merger, research will help identify names that represent a hurdle to overcome both legally and reputationally. In our experience, brand research can become a downstream activity executives assume they’ll take care of later, but we think of it as a critical part of due diligence. Further, a powerful research program helps ensure banks can make the most of the brand launch, when people may be more open to hearing a renewed brand story that’s relatable and relevant.

Targeting Growth
M&A allows institutions to elevate their expansion efforts and future-proof their organizations. Oftentimes when executives consider marketing and brand research in light of M&A, they point to customer satisfaction data. While this is an important measure for retention and engagement, a more comprehensive data set is indispensable to help ensure organizations aren’t operating on biases and blind spots.

Smart banks leverage robust research in the M&A process to help uncover opportunities, eliminate friction and help distinguish, define and differentiate their brands. A crucial component of retention and growth pre-and-post merger is employees. Research insights can predict potential turbulence and inform strategies to equip employees to champion change and maintain performance. They can also be key factors in recruiting the best talent to fuel growth in new markets.

While bank executives may be satisfied with their current positioning and their current markets, data-driven insights will help institutions leverage their assets and increase the influence of their brand in the merger process — allowing them to grow and go further.

The Nuts and Bolts on Executive Sessions

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A board’s success can depend on the strength of the independent directors. But as boards become more centralized around the CEO’s carefully choreographed meetings, there’s greater potential for kabuki-style processes, with all decisions eventually funneling through one member of management. Executive sessions may be instrumental to the strength of independent directors and should be a part of the board’s meeting schedule.

Most boards believe they hold management accountable. Nearly three-in-four (74%) of the directors, chairs and chief executives surveyed by Bank Director in 2021 said their board had several directors willing to ask difficult, challenging questions. Another 72% felt free to exercise their own independent judgement if they disagreed with a board decision. Yet, in Bank Director’s 2022 Governance Best Practices Survey a year later, 24% believe that holding management accountable would improve the governance process.  

Executive sessions can be a powerful tool in the toolbox for independent directors to hold management accountable and allow room for directors to gain a stronger understanding of certain concepts before coming to a decision. 

“Whoever is chairman controls the agenda,” says James McAlpin Jr., a partner at the law firm Bryan Cave Leighton Paisner LLP, which has sponsored Bank Director’s annual Governance Best Practices Survey. Sometimes, the CEO retains the chair title and directs the agenda. Sometimes, an independent director retains the chair title. Boards have to decide which model works best for them, while ensuring independent directors have a voice. Executive sessions help ensure that directors can discuss scenarios when the chairs “may not raise the matters themselves,” he adds.

By addressing such topics in open forums, directors can determine if they’re viewing certain issues as other members do or if there’s a lack of cohesion on strategies. Discrepancies in opinions or doubts on a strategy may not come to the surface if the issue isn’t brought up during the normal process of a board meeting. 

Executive sessions occur when a group of directors call for time to discuss an item or topic, without the presence of specific individuals. There’s no hard-fast rule, although they generally involve independent directors without the presence of executives. This typically would exclude the CEO, if he or she sits on the board. But it could include a group of directors that do not participate in a certain committee, for instance, but who can provide broader input. Or it could include the CEO but exclude everyone else in the room who doesn’t sit on the board. 

Since executive sessions aren’t transcribed, they allow for a free flow of conversation. This gives the directors a chance to express their feelings on certain topics, bring up concerns or even ask questions of a sensitive nature. While it may seem as if such sessions would be awkward to call, since the CEO or other executives may wonder why such conversation needs to take place, there’s a tactic to counteract this potential. 

“It’s recommended to have them on regularly scheduled basis,” says Charles Elson, the founding director of the Weinberg Center for Corporate Governance at the University of Delaware. By building them into the agenda, he adds, they don’t become an unusual, uncomfortable situation since everyone knows when potential leadership issues will be discussed. Among directors and CEOs surveyed by Bank Director in 2021, 38% said the board held an executive session at the end of every board meeting, while 16% held them quarterly and 24% called one whenever independent directors wanted one.

For companies listed on the New York Stock Exchange (NYSE) or Nasdaq, it’s less of a social concern and more of a proper practice. Both exchanges require companies to incorporate executive sessions of the independent directors on a regular basis. Nasdaq defines that as at least twice a year (if not more), while the NYSE leaves the definition more open-ended. Such executive sessions provide an outlet for directors at community and private banks as well, serving as a valuable way to address concerns without worrying about hurting others’ feelings or working relationships.

Historically, executive sessions have been a tool of senates and parliaments, but they began to make their way to the boardroom at a greater rate in the mid-1990s. Directors needed a way to speak on certain topics off the record; this resulted in having small meetings with one or two directors over lunch or on the way to the parking lot. Instead, executive sessions formalize these conversations, encouraging directors to speak as a group. This can not only lead to a greater awareness of a certain type of thinking among directors but can also provide stronger conclusions, questions and coordinated insights for management or the board at large.

“It’s not so much hiding [issues] but addressing them in an appropriate way,” says Chip MacDonald, a financial services lawyer at the law firm Jones Day. “Whether it’s a committee function or whole board function, if you have full-time employees or officers on the board, you may want to exclude them.”

McAlpin, who works with boards at community and family banks, has often suggested that a board move to executive session when discussing certain topics that require more room for debate or discussion. 

“They provide particularly strong value when there’s an issue that’s difficult to discuss in front of the CEO or chair,” he says. “It’s better to have the discussion than not and if you do it on a regular basis, it provides open time for people to just share notes.”

The areas of discussion that are addressed during a session can run the gamut, from strategy, managerial issues, regulatory concerns or an investigation. The reason for the session will determine the people that may be present during the conversation.

The discussions are off the record, but this isn’t meant to imply that there’s nefarious conversations happening. In some cases, it might provide an open forum for direction on a new strategy. Or it may even allow for “due process,” says MacDonald. 

For instance, say there’s an accusation made against a certain member of the management team. While it’s important to scrutinize, a board may not want to make it publicly known until they have a chance to investigate the impropriety. Why? First, the board has to make sure that the accusation has validity before divulging it in a board meeting transcription. Second, the board must ensure it has a plan in place to address the issue. The closed-door executive session provides room for directors to plan.

But executive sessions also offer a way to address regular aspects of the oversight role. For instance, when discussing pay potential of top executives, the compensation committee will meet without any executives around to determine pay. This will be presented to the full board. If directors want to discuss the committee’s findings without offending certain individuals on the board — like the CEO — then an executive session would be prudent in such cases. 

The same tools can address potential strategies presented to the board. Or, in the case of a regulatory concern, the directors may want to discuss with fewer people so they have a clear understanding of the problem before coming to a decision. 

For an executive session to take place, there’s no specific quorum required, and there are no rules around whether executives should stay or go. In some organizations, a specific independent director runs all executive sessions; in others, any director can call one at any time. In both cases, the directors that seek an executive session or the director that handles executive sessions — often a lead independent director — can determine who stays and who goes. 

There’s also no requirement that the directors inform the CEO, or anyone else not in on the conversation, about what occurred during the session. But experts advise that it’s often good practice to have one director speak with the CEO after the conversation to provide a high-level recap of the talk. This doesn’t need to occur — and probably shouldn’t if directly addressing CEO wrongdoing. The regular communication with a CEO, however, can ease the potential of imaginations running wild. 

“It’s probably never a comfortable moment,” says McAlpin. “They may always wonder what is discussed in the room; best practice, have the lead outside director give an overview of what was discussed.”

The session cannot come to a decision that’s final or binding. Instead, it may provide a game plan in addressing an issue with the full board. Once the game plan is set, the directors can bring it to the full board for a vote. 

Executive sessions ensure that the directors’ game plan has the input of everyone involved. With that insight, then the board can operate with a full and robust voice. Failing to do so, would “be a breach of duty,” says MacDonald.

Digitizing Documentation: The Missed Opportunity in Banking

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To keep up in an increasingly competitive world, banks have embraced the need for digital transformation, upgrading their technology stacks to automate processes and harness data to help them grow and find operational efficiencies.

However, while today’s community and regional banks are increasingly making the move to digital, their documentation and contracting are still often overlooked in this transformation – and left behind. This “forgotten transformation” means their documentation remains analog, which means their processes also remain analog, increasing costs, time, data errors and risk.

What’s more, documentation is the key that drives the back-office operations for all banks. Everything from relationship management to maintenance updates and new business proposals rely on documents. This is especially true for onboarding new clients.

The Challenges of Onboarding
Onboarding has been a major focus of digital transformation efforts for many banks. While account opening has become more accessible, it also arguably requires more customer effort than ever. These pain points are often tied back to documentation: requesting multiple forms of ID or the plethora of financial details needed for background verification and compliance. This creates friction at the first, and most important, interaction with a new customer.

While evolving regulatory concerns in areas such as Know-Your-Customer rules as well as Bank Secrecy Act and anti-money laundering compliance have helped lower banks’ risks, it often comes at the expense of the customer experience. Slow and burdensome processes can frustrate customers who are accustomed to smoother experiences in other aspects of their digital lives.

The truth is that a customer’s perception of the effort required to work with a bank is a big predictor of loyalty. Ensuring customers have a quick, seamless onboarding experience is critical to building a strong relationship from the start, and better documentation plays a key role in better onboarding.

An additional challenge for many banks is that employees see onboarding and its associated documentation as a time consuming and complicated process from an operations perspective. It can take days or even weeks to onboard a new retail customer and for business accounts it can be much worse; a Deloitte report suggests it can take some banks up to 16 weeks to onboard a new commercial customer. Most often, the main problems in onboarding stem from backend processes that are manual when it comes to documentation, still being largely comprised of emails, word documents and repositories that sit in unrelated silos across an organization, collecting numerous, often redundant, pieces of data.

While all data can be important, better onboarding requires more collaboration and transparency between banks and their customers. This means banks should be more thoughtful in their approach to onboarding, ensuring they are using data from their core to the fullest to reduce redundant and manual processes and to make the overall process more streamlined. The goal is to maximize the speed for the customer while minimizing the risk for the bank.

Better Banking Through Better Documentation
Many banks do not see documentation as a data issue. However, by taking a data-driven approach, one that uses data from the core and feed backs into it, banks transform documents into data and, in turn, into an opportunity. Onboarding documents become a key component of the bank’s overall, end-to-end digital chain. This can have major impacts for banks’ operational efficiencies as well as bottom lines. In addition to faster onboarding to help build stronger customer relationships, a better documentation process means better structured data, which can offer significant competitive advantages in a crowded market.

When it comes to documentation capabilities, flexibility is key. This can be especially true for commercial customers. An adaptable solution can feel less “off the shelf” and provide the flexibility to meet individual client needs, while giving a great customer experience and maintaining regulatory guidelines. This can also provide community bankers with the ability to focus on what they do best, building relationships and providing value to their customers, rather than manually gathering and building documents.

While digitizing the documents is critical, it is in many ways the first step to a better overall process. Banks must also be able to effectively leverage this digitized data, getting it to the core, and having it work with other data sources.

Digital transformation has become an imperative for most community banks, but documentation continues to be overlooked entirely in these projects. Even discounting the operational impacts, documents ultimately represent the two most important “Rs” for banks – relationships and revenue, which are inextricably tied. By changing how they approach and treat client documentation, banks can be much more effective in not only the customer onboarding process, but also in responding to those customer needs moving forward, strengthening those relationships and driving revenue now and in the future.

A Look Inside Fifth Third’s ESG Journey

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Mike Faillo was recently promoted to the new role of chief sustainability officer at Fifth Third Bancorp, with a team focused on the Cincinnati-based regional bank’s environmental, social and governance (ESG) program, including its climate strategy and social and governance reporting. Faillo started his career in public accounting at PwC in 2008, just in time for the collapse of Lehman Brothers and the onset of the financial crisis. He spent the next several years auditing a trillion dollar bank, and then working on Comprehensive Capital Analysis and Review (CCAR) stress tests and developing resolution plans.

Faillo says those experiences informed his journey to lead ESG at $211.5 billion Fifth Third. 

When he joined the bank’s investor relations team in 2019, he dug into Fifth Third’s ESG profile and learned that the organization wasn’t effectively telling its story. So with support from the bank’s executive leadership team, including Chairman and CEO Greg Carmichael, Faillo transformed Fifth Third’s corporate social responsibility report into a broader, data-driven report in 2020 that tells the bank’s complete ESG story. Faillo jokes that he went from writing about the death of a bank through living wills to the life of it in the ESG report.

In this edition of the Slant podcast, Faillo also discusses the need for agility and teamwork on ESG, and how he works across the organization to uncover opportunities for the bank. He also digs into the complexities of measuring carbon emissions, and why it’s a great opportunity to work with business clients to help them on their own journeys to net zero. And he addresses what’s easiest — and hardest — for banks to get right on ESG. The interview was conducted in advance of Bank Director’s Bank Audit & Risk Committees Conference, where Faillo appears as part of a panel discussion, “How Banks Are Stepping Up Their ESG Plans.”

Opportunities For Transformative Growth

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The bank space has fundamentally changed, and that has financial institutions working with more and more third-party providers to generate efficiencies and craft a better digital experience — all while seeking new sources of revenue. In this conversation, Microsoft Corp.’s Roman Chwyl describes the rapid changes occurring today and how software-as-a-service solutions help banks quickly respond to these shifts. He also provides advice for banks seeking to better engage their technology providers.

Topics addressed include:

  • Focusing Technology Strategies
  • Partnership Considerations
  • Leveraging Digital for Growth
  • Planning for 2022 and Beyond

The Next Wave of Digital Transformation

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There is no question that digital transformation has been a long-term trend in banking.

However, innovation is not instantaneous. When faced with the obstacles the recent pandemic presented, bankers initially accelerated innovation and digital transformation on the consumer side, thanks to a broad scope of impact and the technology available at the time to streamline human-to-human interactions.

Now, as easy-to-use technology that automates complex interactions between human and machine and machine-to-machine (M2M) interactions becomes more readily available, the banking industry should consider how it can transform their own business and the banking experience for their business clients.

The First Wave
Why were consumers first served in the early days of the pandemic? Because there are often a lot of consumers to serve, with similar use cases and needs. When many account holders share the same finite problems, it can be easier for banks to commit personnel and financial resources to software that addresses those needs. The result is the capability to solve a few big problems while allowing the bank to effectively serve a large base of consumers with a mutual need, generating a quick and viable return on investment.

The first wave of digital transformation in banking concentrated on consumers by focusing on digitizing human-to-human interactions. They created an efficient process for both the bank employee along with the customer end-user, and then quickly moved to enable human-to-machine interactions with the same outcome. This transformation can be seen in previous interactions between consumers and bankers, like account opening, check deposits, personal financial management, credit and debit card disputes and initiating payments — all of which can now be done by a consumer interacting directly through a digital interface. This is also known as human-to-machine interactions.

In contrast, business interactions with banks tend to be more nuanced due to regulations, organizational needs and differences based on varying industries. For instance, banks that manage commercial escrow accounts for property managers and landlords, municipalities, government agencies, law firms or other companies with sub-accounting needs frequently navigate various security protocols and regional and local compliance. Unfortunately, these complexities can slow innovation, like business online account opening that is only now coming to market decades after consumer online account opening.

The Next Wave
Automating these business interactions was once thought to be too large of an undertaking for many banks — as well as software companies. But now, more are looking to digitally transform these interactions; software development is easier, further advanced and less costly, making tackling complex problems achievable for banks.

This will mark the next wave of digital transformation in banking, as the potential benefits have a greater effect for businesses than consumers. Because profits for each business client are much higher than consumer accounts, banks can expect strong returns on investment by investing in value-add services that strengthen the banking experience for business clients. And with so many niche business verticals, there is opportunity for institutions to build a strong commercial portfolio with technology that addresses vertical-specific needs.

While the ongoing, first wave of digital transformation is marked by moving human-to-human interactions to human-to-machine, the next wave will lead to more machine-to-machine interactions. This is not a new concept: Most bankers have connected two separate software systems, and have heard of M2M interactions through discussions about application programming interfaces, or APIs. But what may not be clear to executives is how these M2M interactions can be extremely helpful when solving for frustrating business banking processes.

For example, a law firm may regularly open trust and escrow accounts on behalf of their clients. Through human-to-human interaction, their processes are twofold: recording client information in an internal software system and then providing the necessary documentation to their bank, via branch visit or phone, to open the account. They need to engage in additional communication to learn the balance, move money or close the account.

Transforming this to a human-to-machine interaction could look like the bank providing a portal through which the firm could open, move funds and close the account on their own. While this is an excellent improvement for the law firm and bank, it still requires double data entry into internal software and banking software.

Here, banks can introduce machine-to-machine automation to improve efficiency and accuracy, while avoiding extraneous back and forth. If the bank creates a direct integration with the internal software, the law firm would only need to input the information once into their software to automatically manage their bank accounts.

The digital transformation of business banking has arrived; in the coming years, machine-to-machine automation will become the gold standard in the financial services industry. These changes provide a unique opportunity for banks to help attract and satisfy existing and prospective business clients through distinctive offerings.

Three Steps to Building a Commercial Card Business In-House

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As the economy recovers from the impact of the Covid-19 pandemic, community banks will need to evaluate how to best serve their small and medium business (SMB) customers.

These companies will be seeking to ramp up hiring, restart operations or return to pre-pandemic levels of service. Many SMBs will turn to credit cards to help fund necessary changes — but too many community banks may miss out on this spending because they do not have a strong in-house commercial card business.

According to call reports from the Federal Deposit Insurance Corp., community banks make up half of all term loans to small businesses, yet four out of five have no credit card loans. At the same time, Accenture reports that commercial payments made via credit card are expected to grow 12% each year from 2019 to 2024. This is a significant strategic opportunity for community bankers to capitalize on the increased growth of cards and payments. Community bankers can use commercial cards to quickly capitalize on this growth and strengthen the relationships with existing SMB customers while boosting their local communities. Commercial credit cards can also be a sticky product banks can use to retain new Paycheck Protection Program loan customers.

Comparing Credit Card Program
Many community banks offer a branded business credit card program through the increasingly-outdated agent bank model. The agent bank model divorces the bank from their customer relationship, as well as any ability to provide local decisioning and servicing to their customers. Additionally, the community banks carry the risk of the credit lines they have guaranteed. In comparison, banks can launch an in-house credit card program within 90 days with modern technology and a partnership with the right provider. These programs require little to no upfront investment and don’t need additional human resources on the bank’s payroll.

Community banks can leverage new technology platforms that are substantially cheaper than previous programs, enabling issuers to launch products faster. The technology allows bank leaders to effortlessly update and modify products that cater to their customer’s changing needs. Technology can also lower customer acquisition and service costs through digital channels, especially when it comes to onboarding and self-service resources.

More importantly in agent bank models, the community bank does not underwrite, fund or keep the credit card balances on its books. It has little or no say in the issuing bank’s decisions to cancel a card; if it guarantees the loan, it takes all the risk but receives no incremental reward or revenue. The bank earns a small referral fee, but that is a fraction of the total return on assets it can earn by owning the loans and capturing the lucrative issuer interchange.

Bringing credit card business in-house allows for an enhanced user experience and improved customer retention. Community banks can use their unique insight to their SMB customers to craft personalized and tailored products, such as fleet cards, physical cards, ghost cards for preferred vendors or virtual cards for AP invoices. An in-house corporate credit card program gives banks complete access to customer data and total control over the user experience. They can also set their own update and product development timelines to better serve the changing needs of their customers.

Three Steps to Start an In-House Program
The first step to starting an in-house credit card program to build out the program’s strategy, including goals and parameters for credit underwriting. The underwriting strategy will establish score cutoffs, debt-to-income ratios, relationship values and other criteria so automated decisions reflect the policies and priorities of the bank. It is important to consider the relationship value of a customer, as it provides an edge in decision making for improved risk, better engagement and higher return. If a bank selects a seasoned technology partner, that partner may be able to provide a champion strategy and best practices from their experience.

Next, community banks should establish a long-term financial plan designed to meet its strategic objectives while addressing risk management criteria, including credit, collection and fraud exposures. It is important that bank leaders evaluate potential partners to ensure proper fraud protections and security. Some card platform providers will even share in the responsibility for fraud-related financial losses to help mitigate the risk for the bank.

The third step is to understand and establish support needs. These days, a strong account issuer program limits the bank’s need for dedicated personnel to operate or manage the portfolio. Many providers also offer resources to handle accounting and settlement, risk management, technology infrastructure, product development, compliance and customer service functions. The bank can work with partners to build the right mix of in-house and provided support, and align its compensation systems to provide the best balance of profitability and support.

Building an in-house corporate credit card program is an important strategic priority for every community bank, increasing its franchise value and ensuring its business is ready for the future.