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Agent programs give even small banks chance to offer credit cards

Bengtson, Tom

The road to the electronic payments system is paved with plastic, so say a number of bankers who are offering credit cards through thirdparty providers.

"Credit cards are evolving and more frequently they will begin to include microchips," commented Michael Hosemann, president and CEO of TCM Bank, N.A., a credit card bank chartered by the Independent Community Bankers of America. "It is more important than ever that banks participate in the credit card arena if they want to stay on top of developing technology in financial services."

Through so-called "agent" agreements, even the smallest bank can offer credit cards. There are several companies that offer community banks the opportunity to serve as an agent in their credit card program. Two such companies are TCM Bank, a Tampa, Fla.-based subsidiary of ICBA Bancard, and Elan Financial Services, legally known as Firstar Bank USA, N.A., based in Waukegon, Ill. The services allow a community bank to offer a credit card with its own name and logo on the plastic card that is issued to customers. The third-party company takes care of marketing, approves the credit applications, sets the interest rates, underwrites the credit, collects the payments, provides monthly statements, and absorbs the risk of default or fraud. For the community bank, which can collect referral fees and a portion of the interest income without any major expenses, such arrangements can be a pretty good deal.

Both Elan and TCM Bank can offer Visa and MasterCard services to banks of all sizes, even the smallest institutions that may have fewer than 100 credit card customers. Representatives from both credit card companies said their service is designed to help the community banker enhance his or her relationship with the local customer. The concept behind both companies is to serve as a back-room service provider while the community bank takes the visible role as the bank offering credit cards. From the customers' perspective, the credit card bank is virtually invisible, although by law they are required to include their name on the back of every credit card they issue.

Each company also is sensitive to competitive issues. That is why Elan, for example, does not use its legal name. Customers may be confused to see their community bank's name prominently displayed on the front of the credit card, and the Firstar name in the fine print on the back of the card. Elan also agrees not to market Firstar products to customers of the community bank. The customer information the community bank shares with Elan is kept confidential and used only for purposes of marketing the community bank's credit card.

TCM Bank opened in May 1998 specifically to address the competitive concerns of community bankers. As a limited purpose, credit card bank, TCM Bank does not have any other services it could market to the agent bank's customers.

Elan, which has been offering credit card services for 35 years, works with about 1,100 agent banks in 29 states. These banks earn a fee every time one of their customers is accepted for a new credit card. There is also interchange income, which builds every time a cardholder makes a purchase with the credit card.

TCM Bank, with $55 million in assets, works with 170 banks that collectively have 50,000 credit card customers. Its "True Neighbor" program pays agent banks $8 for every new customer obtained through an application originating from the bank, $4 for every new customer obtained through a direct mail effort and $20 for every new customer obtained from telemarketing efforts conducted by the agent bank. The agent bank also gets 3 percent of the interest revenue generated by each customer account. Agent banks are required to keep $100,000 on deposit with TCM Bank, with those deposits collectively used to fund the credit card loans. TCM Bank pays a market rate of interest on those deposits.

TCM Bank "allows us to issue a credit card in our name and not use a correspondent," said Jim Stanosheck, president and CEO of the $17 million State Bank of Odell, Neb., which was one of the first banks to sign up with TCM Bank. "The correspondent bank might be bought and things change." Stanosheck said his bank has 75 to 80 credit card customers.

Pat Wesner, executive vice president for Elan, called the credit card a "have to have" product for most consumers. She said that while few people will select a bank based on the credit card they offer, most expect to be able to obtain a credit card from the bank they patronize. "It is ultimately the service a bank offers that will distinguish it from its competitors," Wesner said.

Wesner encourages bankers to consider the make-up of their customer base as they evaluate the need to offer a credit card. She said if the market includes a sizeable portion of younger adults who are starting families and beginning careers, the bank should seriously consider offering credit cards.

Hosemann warned that a community banker won't get rich offering credit cards, but that offering credit cards is an important way "for banks to leverage their relationship with the community."

Copyright NFR Communications Inc Sep 9, 2000
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