The prevailing operating model for the largest consumer credit card issuers in the U.S. is to deliver key portfolio servicing functions (e.g., customer service, collections, etc.) in-house or, in the case of the very largest issuers, use a combination of internal and specialized BPO providers for delivery. However, many large issuers still leverage third party credit card processors to deliver select servicing functions such as fraud detection, lost/ stolen or chargeback processing. This allows them to take advantage of specialized skills, scale, and other capabilities provided by their card processor.
Recent entrants and re-entrants to the credit card market have taken a different approach to servicing, relying more heavily on their processors for program delivery. While their reasons vary, accessing capabilities, launch complexity, time to market or conversion timing (for those institutions re-acquiring their portfolio), and delivery management (i.e., integrated provider) have been the key drivers of outsourcing servicing functions. Likewise, credit card processors have made it easier for card issuers to outsource portfolio servicing functions, including customer service. Many have shown flexibility in deal structure and delivery model to facilitate those issuers that would like to transition particular functions in-house over time as it builds out internal capabilities.
Figure 1: Percent of Observed New Entrant Issuers that Outsourced Servicing Functions to their Credit Card Processor
Source: First Annapolis Consulting research and analysis.
The chart below depicts select portfolio servicing functions outsourced to card processors by new entrants/ re-entrants. The data reflects five recent program launches that First Annapolis advised in setting up and sourcing card processing and portfolio servicing partners. In most cases, the card issuer chose to outsource a majority of servicing functions to its card processor, including customer service, cardholder website, and other critical customer facing functions, while maintaining strategic decisioning (e.g., account acquisition strategy, risk management, etc.) in-house.
It is unclear whether the trend for large card issuers (and in this case, new issuers) will be to outsource customer service and other key servicing functions to card processors. While unique circumstances dictated several of the delivery strategies described above, we expect the card processors to be long-term players in the portfolio servicing space. Card processors are increasingly enhancing their capabilities in portfolio analytics, campaign management, and marketing execution areas. This allows them to offer a more robust set of solutions to their card issuing customers. We believe integrating the various components of analytics, execution, card processing, and servicing together will likely create a viable value proposition for new entrants and other card issuers.
For more information, please contact Scott Reaser, Principal managing the Strategic Sourcing practice,scott.reaser@firstannapolis.com
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