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Tectonic pressures on the consumer payments landscape
Consumer payments in the US has been primarily tied to two of the most lucrative categories in the consumer financial services landscape — traditional credit cards, and traditional demand deposit (checking) accounts.
However, new forces stand to reshape the consumer payments industry, forcing difficult changes on some payments providers and creating opportunities for others:
- The economic model has been disrupted. Both credit and debit card issuers experienced sudden and dramatic regulatory changes (UDAP, Card Act, Reg E) that will dramatically reduce the profitability of their businesses.
- The aggregate demand for credit has shrunk as consumers deleverage and replace consumption with savings. Supply of credit has also shrunk, as card issuers are more cautious in the way they manage exposure. Overall, the direct cost of extending credit is higher, and it is likely to stay that way.
- Consumer attitudes are changing. For example, they are increasingly mindful of the hidden costs of unlimited flexibility, and many are looking for opportunities to bring control and predictability into their financial lives.
- Pressure to reduce interchanges rates, particularly the high rates on premium credit card products, threatens to reduce yet another significant source of revenue, or at a minimum will provoke increased steering of toward lower cost forms of payment to create the same effect.
- New payment technologies are emerging, providing new functionality for consumers, and introducing new players on the scene who will sometimes create new capabilities for banks to offer their customers, or the ability to better serve customer segments who have been “under-banked” in the past. In other cases, these new technologies will create threats to the direct relationship they have with their customers.
Implications: tactical priorities
In the short term, credit card issuers and retail bankers are preoccupied with fighting the short term fires that were ignited over the last year. For example:
- Credit loss mitigation efforts are well underway but need to be sharper and more productive
- Compliance with regulatory demands and deadlines is immediately followed by new tactics to minimize or offset the loss of revenue
- Partnership contracts based on obsolete economic assumptions need to be re-negotiated
- Reduced margins, as always, create pressure to reduce costs and search for operating efficiencies.
Longer term implications
However, the implications of the changing landscape will require a deeper response than merely tactical fixes. The disruption to the economic model that has made these businesses thrive will cause structural changes will continue to play themselves out in years to come. As traditional drivers of profitability evaporate, winners in the new world will be those who are able to capitalize on the new rules of the game.
We see customer relationship as the new frontier:
- Card issuers will focus more on optimizing the value of their existing customer portfolios, and acquisition efforts will be more focused
- Leaders will increasingly turn to strategies grounded in existing retail bank relationships, and new approaches to leveraging the DDA relationship to discover new sources of growth and new drivers of economic value.
- New propositions will be introduced, including integrated and “hybrid” products, linking payments more decisively to the broader retail banking relationship, and providing new, better liquidity solutions for customers.
- New approaches to credit risk management will capitalize on the full range of advantages that accrue to brands who are successful in building relationship equity with their customers.
- New pricing strategies and methodologies will emerge, reflecting the potential for superior margin realization with engaged, loyal customers
- Customer valuation and resource allocation will reflect the impact of payments on Customer Lifetime Value, not just current year, and across the entire customer relationship, not just the card product
- New value exchanges with merchant partners will be tested, creating new opportunities to differentiate value to customers
Novantas helps banks, networks, and other payments providers use the payments relationship to realizing full potential of customer relationships
- Analytically based insight into customer behaviour and preferences
- A deep understanding of product and customer economics
- Relevant, actionable programs and propositions — both optimization and innovation