Insourcing vs. outsourcing: Top 3 questions to ask

Ongoing regulatory, competitive, and economic changes in the credit card landscape are driving many credit unions to review their credit card program strategy and evaluate whether to invest in growing an internal program or explore an outsourced solution.

As leaders begin an evaluation, consider these three questions as a guide to help frame the decision whether to rely on in-house issuing or seeking an outsourced partnership based on what is best for your credit union and members.

1. What is the true cost of a credit card program?

Let’s start with profitability. Credit unions often discover the total cost of a card program is considerably higher than initially assumed. To accurately evaluate a card program’s total return and efficiency, it is critical to examine the program’s fully burdened profit & loss statement with all expenses to clearly understand the contribution that each account brings to the bottom line.

In addition to easily identifiable expense items such as processing costs, rewards program management, staffing needs and network dues — also consider costs related to changes in regulations (CECL), provision expectations, interest rate philosophy, and capital reserves.

Administrative costs necessary to support the program can often be left out of the profitability equation, and these include functions such as managing risk, fraud, collections, disputes, third-party provider relationships, and more. The number of employee hours required alone can account for about 60% of non-interest expenses. Another potentially overlooked expense, which must be considered relative to the card program’s profitability, is the cost of ongoing investments in product upgrades and technology to facilitate digital integration, meet cardmember expectations and maintain market competitiveness.

2. What do my members need?

It shouldn’t be a surprise that members ranked a digital-forward experience highly, but a strong reward program and best in class fraud protection are closely, if not equally, ranked by cardholders.

Technology
From account acquisition to reward redemption, credit unions should offer the entire cardholder lifecycle digitally. Nearly 80% of cardholders are enrolled in their card’s mobile app, with adoption rates even higher for consumers under 65.

The cost and resources of implementing these features is significant and the investment in ongoing technology management and updates can be daunting, or even unexpected, as technology evolves unevenly. A recent report said smaller financial institutions have doubled their investments in digital transformation from $200,000 per one billion in assets to $425,000 per billion from 2021 to 2023. Credit unions and community banks often lack the financial resources and free capital to invest in technology for cardmembers and risk losing business to competitors.

Rewards and products
Offering an array of products to meet the unique need of your members is also important. From secured cards to high-reward products, matching the right products with the different lifestyles of your members is key. A recent report showed that 81% of surveyed cardholders ranked rewards and cash-back programs as a top reason for choosing one card instead of another.

Review your current program with these questions in mind:

• Do we provide a product suite to meet member needs across the credit score spectrum?
• Can our program’s products and rewards compete against national issuers?
• Do we have the resources and expertise to market our cards effectively?

Fraud protection
Cybersecurity and fraud is top of mind for consumers as it seems issues with data breaches and stolen identities are mentioned in the media on a daily basis. In December 2022, the Nilson Report forecasted that U.S. losses from card fraud would total more than $165 billion over the next 10 years.

Investment in the management of fraud protection can be expensive and time consuming. Many national issuers provide real-time, AI-managed fraud prevention tracking to their consumers. Offering a similar option will keep your credit union’s cards competitive. Be sure to consider the cost of adding this type of tracking in your evaluation, as well as easy to use mobile app features for your members if they are at risk, such as turning their card on or off as needed. Additionally, understanding the average cost of each fraud event is key to planning your program and how that will affect your revenue stream.

3. When should you consider outsourcing?

Whether staffing, liquidity, or resources is prompting an evaluation, initiating a review of your existing program, or your need for a new program, now, could well be the ideal starting point.

As you consider your options, review the following questions:

• Can our credit union maintain a competitive credit card program long term?
• Do we have the capital to invest in digital capabilities to meet member expectations?
• Can we allocate the resources needed to manage the program’s profitability and risk in a changing economy?

If your credit union can’t produce affirmative answers to these questions, it may be time to evaluate the benefits of an outsourced partnership.

Many credit unions are hesitant to explore outsourcing because they fear losing control over the member experience. The key to mitigating this concern is to choose the right partner. A quality partner should understand the credit union’s culture and provide program visibility and ownership.

Benefits of an Outsourced Partnership
A successful partnership allows credit unions to leverage the expertise, scale, and investment of the issuing partner, which minimizes the credit union’s risk, cost, and time commitment. Cardholders will likely benefit from a larger product suite, a more robust rewards program, stronger technology, and enhanced fraud protection.

Elan Credit Card is a trusted partner to more than 250 credit unions and has been a leader in the industry for decades. Learn more about a partnership with Elan and view all sources here.