Small Banks vs Big Banks: Credit Card Competition Draws Parallels with Checking Accounts?
- The world is becoming "more and more plastic"
- In the current market, small credit card issuers face an uphill battle
- Partnerships and collaborations are effective strategies
PaymentsJournal addresses the challenges smaller banks face in a financial environment that has become more and more "plastic" -- that is, reliant upon credit and debit cards.
Credit cards have become embedded in the payments landscape, making it critical for every financial institution, large and small, to be involved in a way that best suits their business. However, with much of the U.S. credit card market concentrated among a few key players, many smaller banks feel they can’t compete.
Credit Card Issuance by Small Issuers: Strategies, Risks, and Options is a report by Brian Riley, Director of Credit at Javelin Strategy & Research, and it takes a look at the current market for small issuers and the ways they can compete with the credit card giants.
Smaller banks, he explains, face significant competition from large financial institutions, which dominate the credit card market and can easily expand their offerings nationwide. To safeguard their business, Riley notes, community banks and credit unions should establish a credit card presence to attract local clientele, particularly "hidden millionaires"—successful, often unnoticed local business owners. These banks thrive on personal relationships developed within their communities, which can be crucial for retention and competition.
“It might seem like a David and Goliath fight,” Riley said. “But small banks need to have a credit card business of some sort so they can protect their market.”
Technology Partnerships Key for Leveling the Playing Field
An interesting parallel between checks and credit cards can be seen -- specifically in regards to how smaller financial institutions can keep up with the "larger financial institutions"big guys." Smaller FIs are able to build stronger relationships with their communities, specifically the "hidden millionaires." They can tailor their products to them and provide unmatched customer service. This is a major reason why individuals choose to open checking accounts at their local banks.
Furthermore, smaller FIs are positioned to deploy the latest technologies as fintech vendors, core processors, and service bureaus collaborate to enable ease of integration for new technologies like AI and machine learning. Because of their size, larger FIs cannot pivot to new technologies or new processes as quickly. Smaller financial institutions are more agile and nimble, meaning they can take on newer technology or deploy new processes at a quicker pace. For instance, for larger FIs to adopt AI and machine learning technologies and replace antiquated OCR check processing technologies, there are many hurdles to overcome internally. However, with AI and machine learning technologies embedded in the items processing at service bureaus, smaller FIs are able to deploy at a much quicker pace.
As banking continues to evolve, smaller FIs need to ensure that they are building relationships with their communities, while also leveraging their technology partners to deploy technologies that enhance their customers' experience.