Card Processing RFPs

As banks ramp up marketing efforts and dramatically increase the value of rewards programs, credit unions are feeling increased pressure to remain relevant and maintain an attractive bottom line within their credit card programs. Success in this market requires ongoing investment in marketing, technology and skills, as well as continually refining product value propositions.

Many are looking to expense management to help pay for those elements. But we worry that the standard approach to controlling card processing expenses—generating a request for proposal, or “RFP,” to various card processors—is often badly managed in ways that not only hurt individual credit unions, but have dangerous long-term consequences to the movement as a whole.

To see how this can be, let’s start by understanding that the large bank issuers, unlike credit unions, tend to control the technical development and investment decisions regarding their own card processing systems. This gives them the ability to create proprietary technology and tools to develop capabilities and competitive advantages not shared with others. This also allows for a disciplined approach to evaluating system investments; each bank will reap the rewards of any investment it makes.

Credit unions, in contrast, mostly contract with third-party group service providers for processing services. These GSPs negotiate master agreements with organizations like First Data (a CUES Supplier member based in Atlanta) or FIS based in Jacksonville, Fla., and then bring all their individual clients together into this relationship. The GSP then develops specific interfaces and support tools for its many clients, reducing the development costs and resources required of any single credit union.

This difference is critical. Large banks can invest in their own systems, knowing they will benefit from those investments. Credit unions that share systems through GSPs have little incentive to support the ongoing investment GSPs must make to ensure their clients stay competitive.

This is much like the classic “problem of the commons” seen in introductory economics text books, in which several farmers share a common pasture for their cattle. The outcome is always that individual incentives lead every farmer to overgraze the field and consume as much as they can as fast as they can. This is rational to do individually, but ultimately, everyone starves.

In much the same way, GSPs are a shared resource and can get overused by their clients with little individual incentive to support what it takes to keep the GSP healthy.

This tension can become destructive when credit unions review processing options through RFPs. Simply put, too many RFP projects overprioritize cost savings. This can happen either explicitly or implicitly.

Explicitly prioritizing cost savings is straightforward: The RFP defines the likely winner as one with the lowest cost proposal. Implicitly favoring cost savings can be trickier to recognize, but most often occurs when a credit union asks for many responses related to non-cost elements such as functionality, consultative support, mobile tools, or any number of other critical areas, but ultimately gets overwhelmed and simply picks the lowest cost option anyway.

All the GSPs have files full of detailed RFP response documents where the receiving credit union, despite what they expressed at the start, really did not digest anything more than the cost elements. It’s a game the GSPs have to play, which in the long run is not good for the GSP or its clients.

These tendencies are then supercharged by the way many third-party RFP consultants get compensated. It can sound like it makes perfect sense to pay a third party based on “how much they save you.” But this focuses the entire process on driving processing expense to the lowest level possible.

Over time this forces GSPs to work toward becoming low-cost operations, yet the credit union market really needs their GSPs to maintain the skills and resources to keep credit card program support competitive with the large banks. They need the GSPs to invest in competitive advantage, just as large banks do. No matter the industry, a low cost provider cannot sustain excellence in functionality or client service. Yet, of all loan products, credit cards most require ongoing innovation and support in exactly those areas.

So, what can individual credit unions do to avoid this destructive, self-defeating dynamic? As a first step, do not pay any outside advisor based solely (or even a little) on how much cost their process is alleged to save your credit union, unless you are fine with low cost, limited functionality and questionable service. Think of outside help on such work as you do accountants or lawyers: Seek to pay an hourly fee for expertise gained over many years of practice.

Second, make sure your advisor affirms in writing that it does not receive any referral payments from any GSP for your RFP or any other business. An advisor that receives payments from a GSP for any reason will be biased on all RFPs, even those on which such a payment is not being received. Some advisors always seem to land their clients at the same GSPs, which certainly is curious, when functionality, cost and support levels differ materially. Get references and ask them specifically why they chose any particular GSP; the answers can be enlightening about an advisor’s priorities.

Third, make sure your RFP process is structured to allow the credit union to (i) prioritize the value-added support elements it would like to receive from its processor, and (ii) make sure the decision process keeps an eye on those priorities. Do not ask so many questions that the responses are too large to digest: Focus on priorities. But most importantly, do not let the process devolve into a low-cost provider battle. Cost certainly does and should matter, but marginal cost savings are never going to be a better choice than working with a value-adding partner.

Lastly, there is a difference between client-owned CUSOs and for-profit processing organizations. For-profit providers can certainly meet the needs of issuers perfectly well, but CUSOs are necessarily better aligned to the viewpoints of the credit union movement and are not driven so singularly to maximizing profitability. They can be, back to the original example, a tremendous shared resource so long as all their clients contribute to their health and upkeep.

Owner of TRK Advisors, Timothy Kolk brings more than two decades of credit card experience and expertise to his clients. Kolk has helped CUs across the United States improve their programs, better serve their members, and create long-lasting, high-performing programs. He can be reached at tkolk@trkadvisors.com or 603.924.4438.

Credit Union Management magazine’s Web-only “CFO Focus” column runs the second Thursday of the month.