The customer value proposition of credit cards has not really changed in the past 10-15 years. Addressing current challenges to profitability to ensure long-term viability may require issuers to revisit the card value proposition and up their game.
Staying Alive – Rethinking the Card Value Proposition
The credit card is still one of the most profitable products in banks’ stable of offerings, but the market faces significant headwinds in the years to come. This profitability has certainly come at a cost as many issuers have relied heavily on rewards to attract and retain customers while also witnessing the rise of non-banks as competitors here to stay.
Broader payment choices geared towards providing greater ease and simplicity threaten the continued profitability of the current credit card business model. Younger consumers in particular pose a long-term threat as their preference for debit over credit - especially as a default payment method in digital wallets – continues to grow as more non-traditional players enter the market.
Still Profitable but Time for a Reset?
Credit cards generated over $5.7 trillion in payment volume in 2020 in the US alone, per the Nilson Report, and many are focused on the bounce-back growth post-pandemic. Meanwhile, according to Federal Reserve reporting, while the average ROA for US card issuers was a seemingly robust 3.5% in 2020, these returns dropped steadily in the previous decade from 5.4% in 2011, despite an overall favorable economic and credit climate for issuers.
The customer value proposition of credit cards – convenience, the ability to make large purchases and earn generous rewards – has not really changed in the past 10-15 years. Customer loyalty has largely been purchased through ever more generous rewards programs. A recent CFPB report noted the average annual cost of providing the rewards had grown from about $130 per account in 2015 to over $170 in 2019, making the revenue earned on these types of accounts critical to help offset rising expense.
Highlighting the Challenges
Digital Payments either on the web or via mobile apps continues to grow at a rapid pace, reaching a total of $4.1 trillion globally in 2019 according to Statista, and is expected to continue this trajectory at a double-digit pace in coming years. Non-bank/Fintech solutions such as Apple Pay, Samsung Pay, Venmo and others are working diligently to make card issuers less relevant and disrupt their direct relationship with customers. Issuers will continue to face pressure to acquire and retain their position as the default payment method in a digital payment solution – or risk losing even more customers.
Customers – especially younger ones - are also increasingly choosing debit over credit when spending. Meanwhile, this same group is also taking on less credit card debt and when they do, having the flexibility to select repayment terms is important. A recent Federal Reserve study indicated the youngest consumer generation in 2016 held 30% less debt compared to their counterparts in 2004 and this trend has likely continued in the past few years. Lower debt equals lower interest income and lower profitability.
Faster payments between accounts have also presented a growing threat to credit card issuers. While the US remains a laggard internationally, most of the nation’s largest banks can facilitate more real-time vs. near-time payments; and in 2023 the Fed will launch FedNow geared towards modernizing the US payments system. With the emergence of these newer technologies, faster payments could eventually begin to replace credit cards as the type of payment transactions are transformed. And this trend will worsen if merchants, trying to save on interchange fees and receive funds instantly, decide to incent customers to use alternate payment solutions.
How Can Issuers Up Their Game?
Addressing these challenges to profitability and long-term viability will require issuers to revisit the card value proposition. We have seen some issuers begin to offer installment loans as an additional financing choice and offering more immediate ability for consumers to utilize earned value from loyalty cards– which can work well for both parties. But there are some other steps to be considered as part of this re-think.
Provide additional flexibility and personalization - While issuers offer a variety of card options with different rewards, the choices and features are typically preset; with airline miles, hotel points and cashback being examples. But customers – especially younger ones – seem to be yearning for more flexibility in their product and reward features. Consumers want flexibility but also simplicity in their daily use.
Get the Customer Experience part right - Often the most basic things become the most important. While issuers believe consumers want targeted offers showing the issuer “knows” them, same-day resolution of issues and complaints is a top tier expectation and efforts should be made to reduce response/resolution times to meet customer expectations while also providing the ability to interact – chat, mobile, online - in the way the consumer chooses.
Wow the customer with instant gratification – Expectations for immediate rewards continue to grow and can have huge implications for the payments industry to provide the technology and merchant selection. While contactless credit cards have become the norm for many issuers, non-traditional providers such as Apple Pay are posting rewards to customers' accounts daily – which can then be used on transactions the next day. Meanwhile, others are providing the real time capabilities customers demand through merchant reward models.
Re-imagining the Operating Model?
It almost seems as if the suggestions above are table stakes. Issuers who truly want to compete in the future may have to take bigger steps. Take data. While it may be collected throughout an organization, many do not have a single enterprise view easily accessible to those who need it. Customers expect their bank to “know” them, but if the deposit, personal lending, and credit card businesses have minimal cross-over, then the data is often fragmented making marketing and product decisions much more difficult to identify and execute. Operating costs can then increase as redundant functions must be maintained across the institution.
Organizational leaders need to rethink the way their businesses have been structured in order to deliver the desired customer experience in the future. Determining which payments products will best meet future customer expectations and what skills employees will require will lead many organizations to reimagine their operating model. Effectively integrating advanced data and technology into marketing and product development will be the catalyst to spur more robust collaboration across organizations and service offerings.
None of this is easy but credit card issuers are still far more profitable than banks at large. Embracing the challenge of improving the value proposition, connecting more directly with their customers, and transforming their operating model can be the formula for thriving in the years to come.