How Third-Party Card Programs Can Lighten Your Regulatory Burden
By Liz Froment, Contributor at The Financial Brand
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Credit card programs are among the most compliance-intensive products in banking. CARD Act rules touch virtually every operational layer, from underwriting and disclosures to billing, rate changes and collections. For community banks and credit unions, maintaining the systems, training and ongoing monitoring these requirements demand can strain limited resources.
That’s driving more smaller financial institutions to consider third-party card program partnerships. These programs can handle compliance, technology integration, customer service and fraud management. The Federal Reserve, Office of the Comptroller of the Currency (OCC) and FDIC issued risk management guidelines for community banks managing third-party relationships.
Now, community banks and credit unions are treating these partnerships strategically. Third-party partners can help turn compliance into a competitive edge by freeing up internal capacity for growth, product development and member experiences — the areas where these institutions can differentiate.
- Banks and credit unions are under pressure to modernize digital onboarding, but most still rely on fragmented identity and fraud checks that slow growth and increase abandonment.
- Credit card programs carry some of the heaviest compliance burdens in banking, touching underwriting, disclosures, billing, pricing, collections and ongoing monitoring.
- Smaller banks and credit unions spend a far larger share of payroll and budgets on compliance and data processing, leaving fewer resources for lending, innovation and member experience.
- Third-party card program partners are increasingly handling execution-level compliance and operations, from disclosures to fraud management and regulatory change updates.
- Regulators still hold the institution fully accountable for third-party performance, with recent FDIC and interagency guidance raising expectations for oversight and governance.
- The right partnerships can turn compliance into a growth lever, freeing internal teams to focus on product features, digital experience and differentiation.
Want more insights like this? Check out Elan’s content portal: Credit Card Issuance: Strategies & Solutions
Freeing Up Capacity for What Matters
Compliance burdens often hit community banks and credit unions harder: Across a decade of Conference of State Bank Supervisors (CSBS) survey data, compliance eats 11% to 15.5% of payroll at the smallest banks, versus 6% to 10% at the largest. Data processing costs accounted for 16.5% to 22% of small banks’ budgets, compared with 10% to 14% for the biggest financial institutions and consulting costs represent 50% to 64% of small banks’ budgets, but only 19% to 30% for the largest banks.
For smaller financial institutions, compliance costs don’t shrink as balance sheets grow. They’re hard to scale down and every dollar spent on compliance is one not spent on lending, innovation or member outreach.
That’s where third-party card programs can help.
“Having worked inside a credit union compliance function, I’ve seen how card program compliance can quickly become resource-intensive,” Jovilyn Herrick, founder and CEO of NextLEVEL Compliance, a consulting firm that helps credit unions navigate regulatory environments, told The Financial Brand. “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.”
Card features, fraud prevention and digital experience are key areas where smaller financial institutions can differentiate themselves from the competition. They’re also frequently the areas that get deprioritized when compliance demands spike. Larger competitors have dedicated teams for both, while smaller institutions often have to choose between them.
“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,” says Tony DeSanctis, senior director at Cornerstone Advisors, a consulting firm serving banks and credit unions. “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 Can Deliver
Specialized third-party card programs can handle most day-to-day operational compliance work, including generating disclosures, payment allocation rules and change management for regulations and other requirements.
“The primary advantage is access to deep, dedicated expertise that’s difficult to maintain internally on a consistent basis. Card compliance evolves rapidly and specialized providers bring current regulatory interpretations, established controls and examiner-ready documentation,” Herrick says. “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.”
Faster response to regulatory changes means institutions with partnerships can adapt while competitors are still figuring out internal processes. Community banks and credit unions that can move faster on product changes or regulatory shifts have an edge over those still working through internal compliance reviews.
The products themselves can be stronger, too, which helps smaller institutions compete in a crowded market. “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,” says DeSanctis.
DeSanctis also notes that financial institutions may be able to negotiate data access in agreements, helping preserve the ability to use card spend data for personalization and member insights. That data can reveal when members are ready for a new product or if they’re drifting toward a competitor and the bank can step in with personalized offers, solutions or educational resources to help.
But there are trade-offs to consider.
“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.”
Partners typically handle service issues through escalation, so setting expectations with members upfront can help reduce some friction.
Accountability Stays with the Institution
Using vendors doesn’t remove a bank from its responsibility to comply with consumer protection laws. The FDIC’s 2024 Consumer Compliance Supervisory Highlights warns that reliance on third parties can increase noncompliance risk if financial institutions lack access to records, fail to monitor vendors and don’t have board and management involvement during the relationship.
“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,” says Herrick.
But that visibility depends on evaluating partners thoroughly before signing. Standard due diligence, including certifications, SOC reports and written policies, confirms controls exist. But it’s also critical to know how a partner responds when something breaks or regulators push back.
“Banks often describe partner due diligence as a checklist exercise, but the reality is that effective diligence looks much more like a stress test of judgment, incentives and governance,” Madhu Nadig, co-founder and CTO of Flagright, an AI transaction monitoring platform, tells The Financial Brand. “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 bar keeps rising, especially around data privacy: According to BCG, banks that stay ahead of regulatory changes can turn compliance into a long-term competitive advantage. Community banks and credit unions need partners who can help them get there.
“Data privacy has become a central component of card program oversight. Regulatory expectations now extend beyond baseline security controls to include data governance, incident response readiness and alignment with both federal and state requirements,” says Herrick. “In my experience, credit unions increasingly expect card partners to be proactive; anticipating regulatory changes, strengthening controls and supporting examiner scrutiny related to consumer data protection.”
Turn Compliance into a Competitive Edge
Third-party card programs can free up compliance capacity, deliver specialized expertise and help community banks and credit unions keep pace with evolving regulations.
But accountability needs to stay with the institutions. The partnerships that work well treat compliance as a shared responsibility with clear communication and oversight. That frees smaller financial institutions to put more resources towards competing where it counts.
