8 minute read 25 Jun 2021
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How card issuers can transform amid digital disruption

By Rodrigo Dantas e Silva

EY Americas Payments Leader

Decisive leader. Skilled strategist. Passionate about transparency in the payments industry. Especially interested in technology’s effects on industry traditions.

Contributors
8 minute read 25 Jun 2021

As credit card issuers face more pressure from digital disrupters, companies are adapting to create more innovative and resilient platforms.

In brief
  • Digital competitors are squeezing revenues of traditional credit card issuers, whose ability to respond is hindered by slow, costly legacy systems.
  • QR codes, point-of-sale (POS) financing, card aggregation platforms, and e-commerce offerings highlight an urgent need for card issuers to transform.
  • Companies are responding by developing better customer offerings, modernizing platforms, and deploying innovative tools to fight fraud.

The disruption of the COVID-19 pandemic has accelerated the growth of digital payment methods such as contactless and card-not-present transactions, driving card issuers to transform at speed. Companies that consider how to adapt through differentiated products and services can increase resiliency and improve competitiveness in a fast-changing market.

Three pain points put credit cards under pressure

The traditional card life cycle enabled US$6.75t of consumer and business spending in 2020.1 Depending on the issuing bank, this life cycle may include origination and adjudication, clearing, settlement, fraud, customer service, and collections services.

Traditional card transaction life cycle

Traditional card transactions

But card issuers are losing ground to digital competitors, with three pain points putting traditional models under pressure:

  1. Slow to adapt
    Legacy systems that are hard to configure hinder card issuers from making nimble changes to card offerings, impacting competitiveness.
  2. High operating costs
    Running legacy systems can be expensive, requiring specialized resources to develop and test changes and to operate mainframe legacy applications such as COBOL.
  3. High replacement costs
    Switching providers and setting up a new processing platform can be very complex and disruptive. A core credit card processor at a large issuer can interface with more than 100 upstream and downstream enterprise applications.
How is the credit card industry evolving to digital newcomers?

As card issuers grapple with these challenges, newcomers are gaining market share, with four key disruptors to the traditional model:

Disrupters to the traditional card transaction life cycle

Distribution to the traditional card transactions
1. QR codes

QR codes satisfy customers’ needs for contactless payments while also offering merchants the potential of lower acceptance costs if the transaction is facilitated by an Automated Clearing House (ACH) rail.

Legacy card networks are responding by diversifying product portfolios through acquisitions and new products, to maintain as much transaction volume as possible.

2. Buy now pay later at the point of sale

POS financing is one of the fastest-growing consumer lending products, expected to grow at a compound annual growth rate of 28% through 2023.2

Its ability to lift sales appeals to merchants while POS’s deferred payment options are attractive to customers. However, for card processors, issuers, and networks, POS’s popularity is negatively impacting transaction volume and interchange. Many are fighting back by joining forces to offer similar solutions.

3. Card aggregation platforms

Card aggregation platforms allow consumers to decide which card to use for a transaction after the POS, giving them time to assess reward offers. While these platforms have minimal to no impact on interchange or transaction volume for processors or issuers, they do highlight the need to bring better rewards and incentives to market faster to stay competitive.

4. E-commerce offerings for access by the unbanked and underbanked population

As recently as 2019, approximately seven million US households were without a bank account, limiting their options to shop online.3 A number of e-commerce leaders have developed new payment solutions for these consumers, which allow them to pay via cash, wallets, and bank transfers and use partner stores to finalize transactions.

While these e-commerce offerings do not necessarily impact the revenue of traditional card players, companies should consider how to compete in what is a rapidly expanding market with huge growth potential.

How are payment players reacting?

Card issuers are responding to increased competition and innovation by creating modern, resilient platforms that allow them to quickly develop and bring to market the feature-rich options customers want.

1. Enhancing customer-facing products

Card issuers are enhancing the customer experience through new features such as better rewards and personalization and moving quickly to adapt as conditions change. For example, COVID-19 saw a rise in demand for cards to be issued virtually, a trend that is likely to continue. In response, JP Morgan has partnered with Marqeta to provide digital issuance to commercial cardholders, who can then spend immediately through mobile-wallet provisioned cards.

More dynamic rewards and benefits are another trends accelerated by the pandemic and set to continue. We’ve seen some issuers allow customers to adjust premium travel benefits to at-home benefits while others waived annual fees for consumers under duress. Issuers are also offering benefits that resonate with consumers’ passions, including support for small businesses and environmental sustainability. Multiple debit cards in the market now offer crypto rewards. This ability to differentiate will be critical to combat emerging payment alternatives threatening card transaction revenue.

2. Modernizing card platforms

The easy and intuitive experiences offered by leading online retailers and tech platforms have heightened customer expectations in financial services. Card issuers must modernize to keep up, by adopting microservice-based technical architectures, increased use of application programming interfaces (APIs), and cloud-based hosting of processing platforms.

Microservices architecture structures an application as a collection of services that are organized around business capabilities and are independently deployable. This increases flexibility, allowing upgrades at the component level, without disrupting entire systems. Microservices architecture also allows a choice of programming language that is best suited to that component’s function, enabling the speed to market that is crucial to maintaining an issuer’s competitive advantage.

APIs also enhance competitiveness, enabling the intersystem connectivity required to give customers the omnichannel experiences they demand. Different APIs suit different needs and card issuers will need to consider their size, services, and priorities when determining the best way forward.

Cloud-based hosting offers greater flexibility, efficiency, and cost savings compared with traditional processors, which are evolving to keep up with cloud-based solutions such as those from Marqeta. For example, Global Payments has recently announced its partnership with Amazon Web Services (AWS) to create an industry-leading, cloud-based issuer processing platform. Cloud-based processors offer scalability and enhanced security, with the potential to save costs that would have been spent on managing infrastructure.

3. Digital tools to enhance credit card fraud management

Fraud continues to be a focus for card issuers and processors. Payment card fraud losses totaled US$28.65b globally in 2019, with COVID-19 further fuelling significant growth in fraud activity.

One of the most common types of credit card fraud is synthetic fraud, which uses fake personally identifiable information (PII) to create new credit profiles. Fraudsters sometimes manage these profiles for up to five years, making identifying fraudulent accounts extremely difficult. Card companies are combatting the practice by increasingly efficient data mining techniques that can differentiate real customers from fake profiles. For example, Visa’s Advanced Identity Score uses artificial intelligence and machine learning capabilities to generate a risk score for new account applications. The premise is that real people leave data trails that can be found for years beyond PII, whereas synthetically invented customers do not exist prior to the creation of their credit profile. We expect these capabilities to continue to gain traction as tools against broader fraud across the industry.

How to determine the best path forward for transformation?

As organizations consider which of these innovations will form part of their own transformation, they should first determine their end goal. Is change driven by a desire to be the fastest to market or offer the most innovative products? To increase resilience against uncertainty? Or to enhance customer-centricity or digital savviness?

Just as the purpose driving transformation will differ depending on a company’s customer base, region, and future ambitions, so too will the path forward for different card issuers. But, all will need to adapt to the key trends reshaping their sector to ensure competitiveness in a fast-changing market. Issuers need to consider how they will expand sources of growth, capitalize on emerging technologies, and optimize existing offerings by asking themselves:

  • What products and services do our customers want and expect? Understanding customer demands can guide the development of innovative offerings. Leveraging advanced analytics can help companies anticipate the needs of potential new customer segments.
  • How can we deliver in a way that meets customer needs? The ability to sell enhanced offerings to the highest growth customer segments will be critical to competitiveness.
  • Can we make FinTech partnerships work for us? Companies should evaluate whether to build, buy, or partner to best suit their needs. A card issuer seeking to solve a specific use case may consider partnering with a FinTech. A company aiming to overcome several pain points, including scalability, flexibility, and speed to market, may reap more value by investing in an end-to-end card issuing platform conversion.
  • Where are our resiliency gaps? Companies may need to optimize existing platforms and/or create new ones to build greater resiliency.

Answers to these questions can be a foundation for card transformation strategic planning, regardless of scale, and ensure that outcomes achieve an issuer’s primary growth drivers and overall card strategy.

The primary contributor for this article is Dan Seeger, Senior Manager, Technology Consulting, US Card Issuance Leader.

  • Show article references#Hide article references

    1. “U.S. General Purpose Brands,” Nilson Report website, February 2021.
    2. “The Rising Popularity of Buy Now, Pay Later (BNPL),” PYMNTS.com website,6 April 2020. 
    3. “How America Banks: Household Use of Banking and Financial Services: 2019 FDIC Survey,” Federal Deposit Insurance Corporation website, October 2020.

Summary

As the trend toward digital and alternative payments continues to grow, traditional card issuers must urgently transform if they are to maintain revenue and competitiveness. Three main areas can be the focus for change depending on a company’s own growth drivers and transformation strategy.

About this article

By Rodrigo Dantas e Silva

EY Americas Payments Leader

Decisive leader. Skilled strategist. Passionate about transparency in the payments industry. Especially interested in technology’s effects on industry traditions.

Contributors