Every executive can see the extent to which digital is changing the card business. A convergence of new customer behaviors, technologies, competitors and regulations will require issuers, acquirers and processors to review their overall card strategy to align the customer experience and operating model to new digital requirements.
For issuers, customers’ preferences are becoming clear: they don’t like sharing personal data with merchants, especially after the data breaches that have happened over the last 18 months (e.g.: Home Depot, Target). The strong adoption of contactless cards, the growth of e-wallet solutions (e.g.: PayPal, Alibaba) as well as the initial uptake of Apple Pay and crypto-currencies, have proved the benefits of a customer experience that does not require exposure of personal data (as in pull transactions, such as with cards) but simply requiring consumers to approve the purchase by tapping or clicking on their mobile devices (including through push transactions, such as e-wallet transactions).
Changing the customer experience from pull payments to push payments is something banks need to consider, starting from remote transactions and then moving to in-store transactions.
Regulators are already driving in this direction promoting push payments (e.g.: through the PSD2 enabling payments initiation services) and reducing cards profitability (e.g.: Interchange fees regulation). The caps on interchange fees not only will make the card business less profitable but will likely persuade issuers to consider alternatives to card payments offering a better customer experience without requiring sharing of sensitive data. Launching push payments solutions, such as those enabling payments directly from bank accounts (e.g.: Zapp, Swish, iDeal , MyBank) can be the option to consider both for online and in-store payments.
Since these new push payments solutions will take some time to achieve scale, an alternative route to improve customer experience can be to partner with new technologies such as Apple Pay and Samsung Pay. While these still use card networks with pull transactions, they disguise card data through tokenization allowing merchants to process payments without handling sensitive data. They have the potential market reach and influence to make a big impact using this technology, although with an extra organization in the value chain, margins may be impacted and issuers’ brand may be disintermediated from the consumer.
Some may argue that margin compression will be partly compensated by increased transaction volumes, driven by cash displacement of low value transactions, but this highlights the banks’ dilemma in the cards business: are current card management systems able to processes high volumes, coming from multiple products?
Efficiency in the card business is emerging as a key priority and – maybe for the first time – lots of issuers, acquirers and processors will have to identify how to offset the impacts of regulation and competition while reducing costs, improving flexibility and fraud management.
Issuers have a variety of choices, but it is becoming increasingly rare for a bank to develop its card technology capabilities entirely in-house without use of packaged software or outsourced processing. Banks can choose to renew their card capabilities through improving in-house platforms (e.g.: adding functionalities for digital commerce), acquiring a third party solution or outsourcing to a processor, and of course combinations of these for different card products.
As a first step, issuers should think carefully about what activities they should do and what activities (e.g. dispute management) are commodities and should be done by a 3rd party.
Digital innovation can also help to improve customer experience and one of the strategies might be to offer more with the card product. Mobile coupons, financial management and budgeting tools or just targeting more lending on the card could produce more revenues from cards if card product offers more. Now, it has become more important to cover up engaging card customers via their smart phones so that they can confirm risky transactions, available discounts when they are near a merchant that offers a discount.
Whatever a bank’s choice, it is clear that to ensure profitability the card business requires investment to overcome the hurdles of card legacy systems, to develop new digital capabilities (e.g.: value added services, mobile payments, fraud management) and to transform the customer experience, in particular to avoid cardholders sharing sensitive card and personal data with third parties for each transaction.