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Credit cards help smaller banks build relationships

Dullum, Justin

[interview: Chris Lorence]

Q:

Why should a community bank issue credit cards? Everybody has a credit card. You can't live without one. The primary reason community banks should offer cards is to complete an established relationship: Most people come to a community bank for a reason-because they have the family atmosphere where they know your name. Many banks have had relationships with certain families for generations. Forty years ago it was all about savings accounts. That was the important thing. But as society has moved toward the idea that it's okay to borrow money, banks have had to move into that and give customers the tools they need to build financially. Sadly, most of our community banks have an elderly customer base. These people aren't going to be around forever. If banks don't have the electronic services available, the next generation won't keep their money in the bank. They'll put it in their Charles Schwab account. Credit cards can be lumped into this: there may not be an enormous need today, but it's part of building for the future.

Is it common for community banks to offer cards?

It's becoming less common as the bigger banks eat up the market. The little guy will say, "I've only got 500 cards. I better get out of this business" instead of thinking "wait, I don't have to compete with the big banks. I know my customer."

Certain types of credit card lending have become political issues. Should banks be wary of being lumped in with less reputable lenders?

There's not a risk of that in community banking. Lenders being characterized as predatory are in a different business than community banks. In most bank situations, there is still a human being making the decisions and they make fewer bad decisions. There is little risk that community banks will be singled out as predatory lenders. You'll find that most of our banks only lend to "A" credits, period. If a customer has ten grand in the bank, the bank will likely give that customer a $2,000 credit card. We're trying to change that a little bit, though. We're saying yes, give the credit card to your "A' customer, but look at ways to get them to your other customers as well. People who don't have $10,000 in savings will one day, and they may not keep it with you because you wouldn't give them a credit card. It's about relationship building.

For cards to make a profit, customers need to keep a balance. "A" credit customers tend not to keep balances. Do banks have to loosen lending standards to make a profit?

Customers with the best credit do pay off their balances but I would say loosening credit isn't the right way to characterize it. Community banks have more options because they have more information about their customers. When you look at a credit card, you have to look at the entire relationship you have with that customer and also think about building new relationships. Say a college student has a grandfather with a lot of money, and parents with loans and business at your bank. Give that student a $1,000 credit card. The likelihood that will go bad is low. The family will never let that happen. Lighten up a little bit. Don't give them $10,000. Give them $500. Get them started working with your bank. It's why Citibank is on college campuses. Get them young and make them happy with what's going on. The students think, "Hey, you gave me a chance and gave me a $500 credit card." Bankers write that much off on stupid things. It's worth it to plant that seed.

What's the main thing that prevents community banks from offering credit cards?

Credit cards have the stigma that they are a lot of work. Credit cards are something customers hear about three or four times a week. They see them on television. They get junk mail. So the marketing is something banks have to stay on top of. People want to know what your rates are and so on. Credit cards are a volatile market and bankers often say they don't want the hassle. ICBA Bancard does this work for banks. The difference with us is that we are part of a trade association. Our philosophy is that our reason to be here is to serve the needs of community banks. The difference between us and some other service providers is that we're not interested in taking your customers. If we take your customers, there will be no need for your bank and we're out of a membership.

Chris Lorence is vice president of business development for ICBA Bancard, a subsidiary of the Independent Community Bankers of America.

Copyright NFR Communications Inc Nov 1-Nov 14, 2002
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