The Transformation of Traditional Agent Banking
To appreciate how agent banking has come full circle, you have to flashback to 1996 when most national and regional banks self-issued their own consumer credit cards. The industry had just experienced a decade long stretch of 15%+ average annual growth in receivables. Capital One was well underway in proving that direct marketing could drive an effective growth strategy of mass customization. To combat monoline issuers and attempt to capitalize on industry growth, many banks launched direct mail marketing campaigns on a national scale. Soon thereafter, storm clouds of rising charge-off rates began to form, particularly for banks that had aggressively mailed non-relationship prospects in the 1993-1995 time frame. Meanwhile, another juggernaut growth model built on the strength of endorsed relationships was enjoying growth and acclaim from Wall Street.
Similar to Capital One, MBNA was a publicly-traded monoline credit card issuer that needed to demonstrate growth to the capital markets. Following years of success with affinity groups, 1996 was also the year MBNA completed one of its initial agent bank-related portfolio acquisitions from Keystone Financial. Through acquisitions of bankcard portfolios, MBNA could achieve immediate receivables growth and also tap into a channel of ongoing new account originations. The credit card industry, specifically monoline issuers such as MBNA, First U.S.A., and Capital One, were very much in favor on Wall Street, fueling a wave of portfolio acquisitions. Notably, Capital One relied on organic growth and did not acquire credit card portfolios as part of its strategy. In retrospect, it seems strange to think that large banks would sell their card portfolios given the importance of the customer relationship, but there was a major land grab underway and the allure of a premium on a sale and the belief that accessing scale while reducing exposure to credit losses created a wave of momentum.
From 1996 to 2004, MBNA, Chase, Citi, and Bank of America acquired over $25 billion in receivables from 10+ agent bank portfolios of $500 million+ directly from banks exiting the business. Based on our analysis, the average premium paid for these portfolios was in the 18% range. Of course, hundreds of other bankcard portfolios were also acquired and other buyers included U.S. Bank and First of Omaha. Even American Express became an agent bank program provider via acquisition of the Bank of Hawaii program in 2000. Agent banking was vogue on almost every issuer’s radar screen as a growth opportunity in some form or another. Alternative structures and models ranging from program management to servicing-only arrangements were also being marketed in the agent space.
In mid-2005, another watershed event occurred that triggered a re-shaping of the agent banking market. Bank of America (“BAC”) announced its acquisition of MBNA. By then and based on public disclosures, MBNA’s agent program had reached $15 billion in receivables – or – close to one-tenth of MBNA’s entire book of business. These receivables were spread across 350 financial institutions with more than 15,000 branches. The proverbial “80 / 20” rule was operative for these financial institutions. After the BAC acquisition, many of MBNA’s largest bank partners began to consider re-entering the card business. Aside from a clear competitive sensitivity, some of these banks recognized that they could be more efficient and effective in promoting their own card in the branch versus an independent third-party agent. The notion of “payment strategy” was also top of mind as banks sought to optimize their relationship-based product sets, namely credit and debit. One of the quickest to react to the BAC acquisition of MBNA was Wachovia. Many other banks have since re-entered the business, most notably PNC in tandem with its National City combination; SunTrust, Regions Bank, and M&T Bank to name a few. Some small and mid-sized banks have also re-entered the business via full-service providers that offer access to data processing and cardholder servicing and are commonly known as group service providers.
While the tide has shifted towards larger banks self-issuing, agent bank program providers (such as U.S. Bank, First of Omaha, Barclaycard, and UMB), are still very much in the agent market serving thousands of mostly small to mid-sized financial institution partners and billions in receivables. The traditional agent model has proven to be resilient for smaller banks that lack scale and would not derive as much benefit from a transition to self-issuance. Ironically, the U.S. still has approximately 7,500 FDIC-insured financial institutions, many of which are a perfect fit for the legacy agent model.
What’s next for agent banking? For the foreseeable future, we believe there will be a clear line between national scale card issuers and those at the regional, super-regional, or community level. Many of the catalysts that set off the first wave of larger-scale agent banking transactions no longer exist (e.g., the acquisition hungry monoline issuers, the aggressive ambitions of regional banks to compete in the card business beyond their branch footprint, etc.). In the aftermath of industry consolidation, agent banking has returned to its roots and is more of a classic sourcing decision of “make versus buy” weighed against competitive strategy and sensitivities. Absent a series of external shocks and a loss of strategic discipline, we believe agent banking will remain heavily concentrated and quite successful in the market segments in which it originated decades ago.
For more information, please contact John Grund, Partner specializing in Card Issuing and Retail Services,email@example.com; or Frank Martien, Partner specializing in Commercial Payments,firstname.lastname@example.org
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