Playing Your Cards Right

Driving Full Client Relationships while Delivering Profitable Non-Interest Income

Lately when I speak with bank executives, I’ve been getting the feeling of déjà vu.

“We must deliver the right combination of product & talent to expand commercial relationships beyond lending."

“We must continue to diversify our revenue and grow non-interest income.”

“We must do more to stop the increases in fraud; specifically, business check fraud.”

Sound familiar?

I’ve learned it’s hard for community and regional banks to keep up with the speed of change in AP/AR processes and their client’s demands for evolving payment options. To meet the need, many banks offer card programs through referral partners such as Elan, TIB or others. However, these programs limit a bank’s opportunity to capture interchange revenue and have limited capabilities for commercial customers.

In the Fed’s most recent payments study, credit cards drove 84% of the growth of non-cash payments, and with B2B adoption on the rise across AP/AR processes the value of card payments is growing at double digits annually.

Putting Your Cards on the Table – Comparing Referral and Direct Card Issuance Programs

What’s the Opportunity? Understanding Revenue:

Interchange revenue is the primary income driver of a commercial card program- Distinct interchange rates apply to various transaction types, ranging from standard to large-ticket transactions, and preferred pricing.

Additionally, interest charges applied to clients who utilize cash advances or fail to make full payments constitute another revenue stream of interest income.

Late fees, phone payment fees, and membership fees also contribute to income, however, they typically represent a much smaller portion compared to interchange income.

With interchange income being the primary driver, it is important that financial institutions have active clients utilizing their card programs. If a program is inactive or low activity, it may not be a profitable program due to the expenses we will discuss next. Many banks leverage card programs as a targeted strategy to reduce B2B checks and in turn reduce risk of check fraud.

Understanding Expenses

Program rebates, also known as revenue share, have been the prominent expense driver, with competitive forces leading to increased rebate rates across the industry.

The current financial climate, characterized by escalating interest rates, has elevated the cost of funds as another primary expense for these programs. Banks are underwriting credit for their commercial clients to utilize and defer payments for 30 to 55 days. Within the current environment, cost of funds has squeezed bank’s profit margins on commercial cards programs.

Two additional expenses relate to our previous article around fraud and credit risk. These are two expenses for any program, but how a bank properly mitigates these risks can directly reduce these expenses.

Additional program expenses include overhead/program management, processing fees, network fees, and operational expense. All these expenses should be included in a comprehensive P&L statement to accurately reflect program expense.

4 Steps to Crafting a Clear Path to Profitability

Armed with a deeper understanding of the revenue and expenses, mid-sized banks can now chart a clear path to profitability for their commercial credit card programs.

1. Develop a Comprehensive ROI Analysis Model

When reviewing a commercial card program and potential providers, it is important to build a comprehensive ROI model. The model should allow for flexibility in revenue projections based on average client spend volume to determine interchange potential. It is also critical to detail expenses to include all relevant program expenses. Industry trends and averages can be used to determine fraud loss and credit loss projections. Your ROI model will help you identify your break-even and create a business case for investing in this initiative. This will also help you create sales goals to identify your target marketing approach within your current bank portfolio and to bring in new customers to the bank. Banks that already have a strong treasury management portfolio generally can build an attractive ROI by adding a commercial card program to their suite of products.

2. Build a Strong Business Case

Leveraging the ROI model, craft a robust business case and go-to-market strategy, keeping market dynamics in mind. Strategies to minimize the top expenses of cost of funds and rebate should be developed. For example, the introduction of a rebate program offering shorter billing cycles for competitive rates can be a strategic move. Separating rebate rates for standard and non-standard transactions is also essential to safeguard profitability.

3. Tailor your Sales Approach

Even with appropriate guardrails, your sales approach makes or breaks your program’s profitability. Commercial card programs should be positioned as part of a comprehensive payment’s strategy discussion with your commercial clients. Leading the discussion around the key value propositions of efficiency savings, unlocking working capital, and fraud protection is the best practice approach. Rebate is valuable but should not be the lead into a discussion with a client. This is the cherry on top of an already superior payment type. It is important that your sales teams are comfortable positioning the value with clients in this manner, as this ultimately is the most effective way to drive profitable programs.

4. Maximizing Revenue for Existing Commercial Card Programs

In addition to new initiatives, a comprehensive ROI analysis can serve as a valuable tool for optimizing existing programs. This approach can aid in identifying strategies to reduce expenses and enhance revenue. Maintaining a product line P&L for commercial card, business card, and virtual cards can enable banks to explore opportunities to achieve this goal. Furthermore, assessing the possibility of outsourcing specific functions to third-party providers can be a viable expense reduction strategy.

Conclusion

While commercial cards have been present in the financial landscape for over two decades, community and regional banks have historically encountered limitations in entering the market independently, often relying on agent programs. The current landscape presents an opportune moment for community and regional banks to adopt a direct issuing strategy for commercial cards.

Through effective cost mitigation strategies and a well-defined go-to-market plan, these banks can successfully launch commercial cards, nurturing deeper commercial relationships and boosting non-interest fee income. Commercial cards emerge as a foundational element in advancing payment innovation, thus positioning them as integral components of a bank's core treasury solutions.

At Scale, we have dedicated over 15 years to implementing direct issuing programs for more than 20 financial institutions. We are passionate about bringing these products to banks of ALL sizes. Reach out today to discuss a customized ROI model for your bank.