With the current economic environment and recent legislative enactments, credit unions are under increasing pressure to find new sources of revenue and maximize existing sources. Certainly credit card issuing is among the leading potential sources of income. Central to this decision is whether a credit union should select a pass-through (internal) credit card processing solution or a fully outsourced solution.
The key difference between the two is that with pass-through, the credit union’s host platform is the system of record for the credit card accounts. With outsourced, the processor’s platform is the system of record. In both processing scenarios, the credit union has responsibility for underwriting and carrying credit card loan receivables. Using a pass-through solution, the credit union typically handles all transaction authorization and posting, along with back room services, such as cardholder member servicing, statement generation, payment processing and collections. With the fully outsourced solution all processing is delivered by the processor.
Among the benefits of pass-through are:
Control. Because the host platform resides with the credit union, the issuer can maintain a high level of control over their credit card program. With this ownership, the credit union can determine implementation timing for program option changes and promotions, account upgrades and new product roll out. Having all member accounts resident on the host platform provides ease in analytics, service delivery and simplifies member account access.
Flexibility and speed. In making changes to a credit card program, the credit union has complete internal control, enabling it to affect a wider range of changes faster.
Simplified data access. With pass-through credit processing, all member accounts reside on a single platform providing ease in identifying members for relationship pricing, product offers and cross-sell opportunities. Generation of combined statements for all accounts becomes possible.
Member service. By knowing the complete relationship at a glance, service to members can be performed more quickly, completely and enable an all-important sense by the member that they do indeed have a personalized relationship with their credit union.
Operational expense savings. Reduction of processing expenses is a benefit since all processing is performed by the host platform. Streamlined operational processes further reduce expenses.
Full-service allows for:
Reduced staffing and training expense. A key argument for outsourcing is that a credit union typically does not need to employ highly skilled staff to support the credit program. Existing staff can be reassigned.
Economies of scale. Credit unions can reduce their internal servicing and system output costs as these are transferred to high volume providers.
Expertise and infrastructure. A credit union needs to take a hard look at its internal staff and its hardware and software infrastructure. Without the right expertise and tools, it may be more cost-effective to outsource to a processor with a turnkey solution.
Reduce capital expenditure. Hardware and software expense can be considerable, and this expense takes on heightened importance in an economic downturn. That burden is shifted to the processor.
Updated technology. Keeping up with fast changing regulatory requirements is becoming a great challenge. This compliance responsibility falls to the processor. Because the platforms are designed for credit card processing only, the latest products and services are provided. Processors are incentivized by their competition to continually deliver the newest bells and whistles.
How do you decide between the two?
Processor capabilities. The credit union needs to determine what products, program options and value-add enhancements it wants to provide members in its credit card program. The next step is to examine the core processor credit module capabilities to determine their product solution can be supported.
Financial condition. Consider the need to conserve capital.
Expertise. What resources does the credit union have internally to perform the tasks necessary to run a credit program, and what is their prior experience?
Systems and infrastructure. The credit union needs to determine whether their operational and technology expertise is among its core competencies. Both pass-through and full-service offer benefits to credit unions in their drive to find new and greater sources of revenue.