Free Up Resources: The Power of Third-Party Credit Card Program Partnerships

For community banks and credit unions, managing credit card programs often feels like navigating a dense regulatory maze. These programs are among the most compliance-heavy offerings in the financial sector, with CARD Act regulations impacting nearly every operational aspect – from initial underwriting and disclosures to billing, interest rate adjustments, and collections. The extensive systems, continuous training, and vigilant monitoring required to meet these demands can severely strain the limited resources of smaller financial institutions.

This escalating regulatory burden is prompting more community banks and credit unions to explore strategic third-party card program partnerships. These specialized partners can take on critical functions such as compliance management, technology integration, customer service, and fraud prevention. Recognizing this trend, regulatory bodies like the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the FDIC have issued comprehensive risk management guidelines for community banks engaging with third-party vendors.

By strategically leveraging these partnerships, financial institutions can transform compliance from a resource drain into a competitive advantage. This approach frees up internal capacity, allowing banks and credit unions to focus on vital areas like growth initiatives, product innovation, and enhancing member experiences – the very aspects where these institutions can truly differentiate themselves in a crowded market.

The Growing Pressure on Smaller Institutions

Compliance costs disproportionately affect community banks and credit unions. Data from the Conference of State Bank Supervisors (CSBS) over the past decade consistently shows that compliance consumes a larger share of payroll and budgets at smaller banks compared to larger institutions. For the smallest banks, compliance can account for 11% to 15.5% of payroll, compared to 6% to 10% at the largest. Similarly, data processing costs claim 16.5% to 22% of small banks’ budgets, while only 10% to 14% for the biggest FIs. Consulting costs also show a significant disparity, representing 50% to 64% for small banks versus 19% to 30% for larger ones.

Unlike larger competitors, smaller financial institutions often find that compliance costs don’t scale down as their balance sheets grow. Every dollar allocated to regulatory adherence is a dollar not invested in lending, innovation, or crucial member outreach. This creates a challenging trade-off, where essential growth initiatives and service enhancements are frequently deprioritized.

Furthermore, many institutions are struggling to modernize digital onboarding processes. They often rely on fragmented identity and fraud checks, which not only slow down growth but also contribute to higher application abandonment rates. Credit card programs, in particular, carry immense compliance responsibilities, covering everything from underwriting and disclosures to ongoing monitoring, pricing, billing, and collections.

Jovilyn Herrick, CEO of NextLEVEL Compliance, notes, “Having worked inside a credit union compliance function, I’ve seen how card program compliance can quickly become resource-intensive. Offloading execution-focused compliance tasks to a specialized partner allowed internal teams to shift their attention toward growth and member service/experience, such as enhancing card features, improving fraud response, and supporting digital and marketing initiatives.”

Areas like card features, robust fraud prevention, and superior digital experiences are crucial for smaller financial institutions seeking to stand out. Yet, these are often the first to suffer when compliance demands peak. While larger competitors typically boast dedicated teams for both, smaller institutions frequently face the difficult choice between them.

Tony DeSanctis, Senior Director at Cornerstone Advisors, emphasizes, “The biggest advantage of outsourcing or using a third party for your credit card program is that you simplify your compliance and regulatory resource needs significantly. You basically take one of the more highly regulated products in the banking ecosystem out of the equation and your compliance team’s job becomes significantly easier and more focused on other lines of business that are more critical.”

What Specialized Partners Bring to the Table

Specialized third-party card program partners excel at handling most day-to-day operational compliance tasks. This includes generating necessary disclosures, managing payment allocation rules, and implementing changes mandated by evolving regulations. By taking on execution-level compliance and operations, from disclosures to fraud management and regulatory updates, these partners allow internal teams to focus on strategic initiatives.

“The primary advantage is access to deep, dedicated expertise that’s difficult to maintain internally on a consistent basis,” Herrick explains. “Card compliance evolves rapidly, and specialized providers bring current regulatory interpretations, established controls, and examiner-ready documentation. From both my credit union experience and my consulting work, this approach often results in fewer audit findings, faster response to regulatory changes, and greater confidence when introducing or modifying card products.”

This agility in responding to regulatory shifts means institutions with partnerships can adapt quickly, gaining an edge over competitors still navigating internal processes. The ability to move faster on product changes or regulatory adjustments is a clear competitive advantage.

Furthermore, the actual card products can be significantly enhanced. “From an advantages perspective, the products that partners offer are actually more robust — they’re typically coming from a larger institution with better rewards programs, better feature functionality, and better capabilities,” DeSanctis points out. He also notes that financial institutions can often negotiate data access in their agreements, preserving the ability to use card spend data for personalized insights and targeted offers.

However, trade-offs exist. “The economics is the biggest disadvantage, you don’t make anywhere near as much money,” DeSanctis explains. “And the member experience can be impacted because while it’s branded by your institution, it’s managed and serviced by someone else who doesn’t know, for example, that they just declined the CFO of your biggest commercial client for a credit card, whereas the credit union may have made an exception and underwritten and approved it.” Clear communication with members about service expectations can help mitigate some of this friction.

Accountability Remains with the Institution

It’s crucial to understand that utilizing third-party vendors does not absolve a bank or credit union of its responsibility to comply with consumer protection laws. The FDIC’s 2024 Consumer Compliance Supervisory Highlights explicitly warns that over-reliance on third parties can increase noncompliance risk if financial institutions lack adequate record access, fail to monitor vendors effectively, or neglect board and management involvement throughout the relationship. Regulators still hold the institution fully accountable for third-party performance, with recent guidance raising expectations for oversight.

“In practice, the most successful arrangements treat the partner as an extension of the compliance team, with leadership and the board maintaining clear visibility into performance and risk,” Herrick advises.

This visibility hinges on rigorous due diligence before signing any agreements. While standard checks like certifications, SOC reports, and written policies confirm controls, it’s equally vital to assess how a partner performs under pressure. Madhu Nadig, co-founder and CTO of Flagright, suggests, “What banks should really be testing is how a partner thinks about compliance under pressure. In our experience, interviews with second-line leaders, reviews of historical exam findings, and scenario-based walkthroughs are often more revealing than any written policy.”

The regulatory bar continues to rise, especially concerning data privacy. Proactive partners who anticipate regulatory changes, strengthen controls, and support examiner scrutiny related to consumer data protection are invaluable. As BCG notes, institutions that stay ahead of regulatory shifts can truly turn compliance into a long-term competitive advantage.

Turning Compliance into a Competitive Advantage

Third-party card programs offer a powerful solution for community banks and credit unions to manage their compliance capacity, access specialized expertise, and keep pace with an ever-evolving regulatory landscape. By strategically partnering, financial institutions can free up internal resources that would otherwise be consumed by regulatory demands.

However, the underlying accountability for compliance always remains with the institution. The most effective partnerships are built on a foundation of shared responsibility, clear communication, and robust oversight. This collaborative approach empowers smaller financial institutions to strategically allocate more resources towards differentiating themselves where it truly matters – enhancing member experience, fostering innovation, and driving sustainable growth.

Source: thefinancialbrand.com