Commercial Cards: Delivery Models Matter

Navigator Editions: Commercial Payments: Special Edition Navigator, March 2013
By: Frank Martien

As commercial cards, central travel accounts, and non-plastic virtual accounts continue to gain in popularity, financial institutions (FIs) with significant commercial banking activities are increasingly asking the question:  do we have the right program delivery model for our commercial cards offerings?

To explore this question further, one may first consider the various commercial card program delivery models observed across markets and illustrated in Figure 1.

Figure 1: Commercial Card Program Delivery Models
Source: First Annapolis Consulting research and analysis.

Referral Arrangements:

In the first model, Referral Arrangement, the FI is promoting a suite of FI-branded commercial card solutions offered by another provider (the referral partner).  Typically, the FI’s commercial bank relationship managers and treasury services sales would not actively promote these commercial cards, but would reactively direct commercial banking clients seeking a commercial card solution to the referral partner.  Once referred, the partner would underwrite and issue commercial card solutions requested by the commercial banking client.  Usually, but not always, this same referral partner would also be selected to run the FI’s own internal employee travel and purchasing card programs.  These solutions are branded with the FI’s name on the front of the cards albeit with clear disclosures naming the referral partner as issuer of the cards.

Within such an arrangement, the FI will receive a referral fee from the partner, which is typically calculated as basis points on spend and/or a specified amount per card issued.  The referral partner owns the P&L and all associated revenues and costs of delivery.  Upfront and ongoing investment requirements for the brand partner are minimized; but given the relatively nominal level of referral fees received, brand partner, banker, and client engagement in this type of commercial card program delivery model are often quite low.

With regards to contractual rights and responsibilities, the FI, with limited control over program delivery, wants to protect their brand and may require certain minimum standards related to how its clients will be serviced by the referral partner.  The FI may also seek to establish or document the underwriting and credit line assignment standards that will be deployed by the referral partner – an area for which we often see program issues encountered.  Thirdly, and at termination of an arrangement, the FI may wish to have an exercisable purchase right at the program’s then fair market value should the FI prefer to migrate the program in-house (i.e., self-issue) or to another referral partner.  Typically such a purchase would be for the client commercial card account relationships only; and, consequently, a systems conversion would not take place.  Rather, the legacy partner would close and collect residual amounts due on the old accounts while these same account relationships would be reissued new cards by the new issuer.

Full-Service Outsourcing:

In this second example, the FI is not only the brand partner, but may also hold the card network membership and be the bona fide issuer of the cards.  As issuer of the cards, the FI would typically have the power to price each client program (e.g., signing bonus, rebates, card fees), underwrite the credit, and thereby own the P&L.  The full-service outsourcing partner would then responsible for everything else, including delivery of the product and service to clients.

To effectively deliver the product and service to clients, the role of the outsourcing partner can be quite extensive.  For example, when an FI’s commercial banker has a qualified client lead, a card product specialist representative from the outsourcing partner may accompany this banker to help explain details regarding the product and help complete the sale.  The outsourcing partner may also lead the implementation process and provide card administrator service support, cardholder service support, the online solution through which clients can access and manage their cards, transaction accounting, billing, and remittance processing.

This type of structure has several positive attributes.  For example, the FI can access a strong product offering for its clients without incurring product development investment.  The outsourcing partner can earn incremental fee revenue for program delivery to help cover some of its fixed costs.

Drawbacks from this approach can be the lack of product or service delivery control for the FI and concerns from the outsourcing partner about spawning a future competitor.  Consequently, key contractual provisions for these types of arrangements can often revolve around control mechanisms for the above as well as rules of engagement for competitive situations – such as what happens when the FI and the partner both receive the same end-user organization card program RFP.  Theoretically, this type of program delivery model is quite possible; however, finding commercial card issuers with an interest in being an outsourcing partner can be a challenge.  As such, full-service outsourcing is far less common than referral arrangements or  systems outsourcing.

Systems Outsourcing:

In a systems outsourcing model, the FI is squarely in the business both strategically and operationally with control over most client-facing components of servicing.  Under this model, an FI will often contract with one or more third parties to provide card production/ mailing, transaction accounting, billing, and remittance support as well as an online solution through which clients can manage their cards.  Many FIs just launching or re-launching a commercial card program will also contract with a third party to provide ancillary components of client servicing support such as overflow, off hours, lost/ stolen reporting, or fraud monitoring and management.

Under the systems outsourcing model, the FI owns the client relationship, underwriting, product, and much of the servicing. As such, contractual requirements are more narrowly focused on clearly defining the third parties’ role, flexibility and exclusivities (if any) regarding this role, service level standards, and pricing.

Key Conclusions:

For any FI desiring a commercial card program, the optimal delivery model will certainly vary.  Figure 2 provides a high-level decision approach for which delivery model may fit best.

Figure 2:  Delivery Model Decision Tree
Source: First Annapolis Consulting research and analysis.

As one can see from this diagram, a natural first question for an FI considering a commercial card program is whether or not they want to offer this product at all.  Clearly, no delivery model is needed if the answer is “no” if, for example, the FI focuses on the consumer and/or small business market only.  Under a “yes” scenario, a next question might be to gauge how important incremental revenue or earnings may be in the broader decision to have a commercial card program.  If the program is merely an accommodation for clients desiring cards, then the most effective model may be had via a referral arrangement.  Alternatively, an FI’s last strategic question may be level of commitment to resources in deciding between the full service and systems outsourcing models.

In conclusion, FIs have several choices and considerations regarding how to offer a commercial card product to clients.  Going forward, we expect to see most FIs go the systems outsourcing route given the treasury services relationship and revenue build opportunity from commercial cards.

For more information, please contact Frank Martien, Partner specializing in Commercial Payments,

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