A steady procession of changes with far-reaching implications has overrun the credit card market, raising serious questions about the viability of card issuers’ old business model. Mohamed Dabo takes stock of these significant changes and asks how credit card issuers can step up their game in this brave new world
Credit cards are still a highly profitable business, even though many issuers have relied too much on rewards to attract and retain customers.
The future, however, looks less bright as a whole multitude of challenges loom over the credit card business. These include the growth of digital payments, changing consumer behaviours, the threat from big techs and non-traditional players, and the rise of faster payments.
It is likely that changing consumer behaviour, competition from debit cards and bank transfers, and security concerns will intensify in the coming years. A good appreciation of these challenges is the first step towards reviving the relevance of the credit card business.
Preference for debit cards
A recent survey by the Deloitte Centre for Financial Services finds that Millennial and Gen Z consumers may pose the biggest challenges to the credit card market. Younger consumers typically prefer to use debit cards over credit cards, especially when choosing a default payment method for digital payments.
The survey shows that 52% of Gen Z and 41% of millennials prefer to use debit cards most. Furthermore, younger consumers overall are also taking on less credit card debt compared with their predecessors.
Consumers’ addiction to generous rewards
Consumers have now become accustomed to generous rewards. Deloitte finds that nearly three-quarters of consumers surveyed say that rewards, discounts, and other offers are the most important reason for using credit cards.
In addition, one-quarter of consumers surveyed are willing to switch their credit card provider over the next two years to obtain better rewards elsewhere. Again, younger consumers—34% of Gen Z and millennials— are even more likely to switch.
Declining credit card spending
Consumer behaviour has also changed regarding credit. According to The Nilson Report, outstanding credit as a proportion of total credit card spending has been steadily declining over the past 15 years.
Clearly, if consumers use credit less and less, it will negatively impact the interest income component of credit card revenues.
Alternatives to credit card financing
Additionally, new alternative options to credit card financing are emerging.
PoS financing solutions allow retailers to offer fixed-term instalment loans to consumers to finance their purchases at the physical point of sale or on the digital checkout windows.
In addition, buy-now, pay-later (BNPL) options, which often include interest-free periods are aimed at customers choosing PoS loans over credit cards.
Account-to-account-based faster payments are also another trend that poses a risk to credit cards’ relevance. Faster payments solutions could eventually displace credit cards from the act of paying. This would result in credit card issuers losing interchange fees.
Preference for debit cards
Of course, debit cards are the closest alternatives to credit cards. In the Deloitte survey, nearly two-thirds of consumers say they would likely switch to debit cards if they were offered the types of rewards credit cards offer.
Again, younger consumers seem more likely to prefer debit cards for digital payments. For instance, 42% of millennials who use Apple Pay in the Deloitte survey use debit cards, compared with only 23% of Gen X.
How credit card issuers can elevate their game
Authors of the Deloitte survey identified key areas where credit card issuers can act to take their business to the next level.
The first is to revisit the credit card value proposition. Issuers should view the challenges as a chance to redesign the credit card value proposition and their role in consumers’ lives for the digital era.
Consumers are also looking for flexibility in choosing their product features: 69% of surveyed respondents said they would find a credit card that offered personalised features appealing.
Among other things, card issuers should account for generational preferences when they design their rewards programmes.
In addition, card companies must get the basic customer experience right. Sometimes the most basic elements can create lasting impressions.
Customers across different age demographics consider same-day resolution of issues and complaints an important service from their credit card provider. As a result, card companies should aim to reduce their response time in line with customers’ increasingly discerning expectation.
Furthermore, card companies must excite customers with instant gratification.
Incumbents, i.e., the established credit card issuers, are keeping pace with some of these expectations. These include, for example, by issuing contactless credit cards. However, non-traditional players are gaining the first-mover advantage with others, such as daily crediting of reward points.
Integration, security and strength
Consumers are increasingly looking for quick and hassle-free shopping experiences. Nearly half of surveyed respondents rank ease of use among their top three most important attributes when thinking about how they’d want to pay in the future.
Security is also a major factor in ensuring card issuers continue to remain relevant. Through data use, analytics and data insights, card companies can create a service that is efficient and convenient.
Finally, organisations should shift to keep up with constantly evolving customer demands by redesigning and delivering new products.