Retailers love store credit cards and purchase financing. When a store offers its customers credit, those customers are more likely to continue shopping there and making larger purchases. The store then collects additional profit on each sale in the form of interest, usage fees, and penalties.
When retailers partner with banks to provide lines of credit to their customers, banks get to see some of that profit, too. On its face, it’s an attractive and mutually beneficial arrangement, giving banks an additional source of sales outside their usual channels. However, not all that glitters is gold…
Consumer advocates are quick to warn consumers about the downsides of opening an in-store credit card, like undisclosed fees and penalties, promotional discounts that eventually expire, and potential harm to their credit scores. But it’s not just customers who use co-branded credit cards and purchase financing at their own risk.
Banks that partner with retailers expose themselves to non-compliance risks.
Following the financial crisis of 2008 that gave rise to the Great Recession, Congress, the Federal Reserve, and the Consumer Financial Protection Bureau have pushed for increased oversight and regulation of creditors. In 2009, President Barack Obama signed into law the CARD Act, imposing strict regulations to protect cardholders from unclear, unfair, or even predatory business practices.
Of course, banks are painfully aware of these regulations and the hefty penalties that come along with them. When a bank issues credit products in-house, it has direct oversight and control over the process. The bank can ensure that credit applications and accounts are being handled in compliance with regulations.
However, partnering with a third party retailer removes that element of control.
Banks must trust that their retail partners are just as rigorous about compliance as they would be themselves – and as with many things, there are no guarantees that all will go according to plan.
Merchants are also subject to the Payment Card Industry Data Security Standard (PCI-DSS), which aims to protect the security of payments made with credit and debit cards. That includes payments made online, and the possibility that hackers might access consumer data and disperse it to criminals. A separate set of standards, the Payment Application Data Security Standards (PA-DSS), ensures that a merchant’s vendors supply products that are PCI-compliant.
And these are just a few examples of the extensive regulations surrounding the issuance of credit. The penalties for non-compliance with these laws and standards are nothing to be taken lightly. Not only are there hefty punitive fines to consider. Non-compliance has a ripple effect that touches share prices, investors, and senior managers, not to mention customers.
What can banks do to protect themselves against non-compliance risks?
Short of staying out of the co-branded credit card business altogether, and missing out on the benefits, banks must take it upon themselves to ensure that their partners are behaving by the rules.
As customer experience experts and advocates with a long history of serving banks, CSP has developed a solution to this problem. We can do the footwork of checking in and collecting information on retailer compliance for you. We look for red flags like:
- How was the customer treated during the application process?
- Were they pressured into applying for a credit card?
- Was the private information on their applications handled properly?
- Did the retailer do enough to make the consumer aware of policies, rates, and fees?
To find out more about how we help banks protect themselves, contact John Berigan with your questions by email or by calling (800) 841-7954 ext:101.
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