Aite report shines spotlight on industry


The US card industry is in turmoil, with rising
delinquencies and a wave of pro-consumer regulations only adding to
profitability pressures. A new report chronicles the struggles that
payment players are grappling with and also recommends courses of
action that may see them through. Charles Davis


A new report by Aite Group portrays what the US payment consultancy
describes as “a general sense of helplessness” across an industry
struggling to reconcile a host of pressures, from regulatory issues
to interchange fees and security risks.

The new report, The Card Industry: Between A Rock And a Hard Place,
is based on in-depth interviews with 23 leading US issuers, and
contains a concise summary of all that plagues the industry.

The industry insiders interviewed for the report are split on what
constitutes the top issue facing the card sector. Aite Group
believes this split reflects a general sense of futility across an
industry struggling to overcome its internal contradictions.

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A multitude of challenges

“While card industry insiders agree that the industry faces
difficult challenges, they don’t necessarily agree on which one
should be the priority for the industry as a whole,” said Adil
Moussa, an analyst with Aite Group and author of the report. “This
is rightly so, as each industry segment faces separate challenges.
Card networks, for example, must fix data security issues, but they
must engage all industry stakeholders – including processors and
security experts currently not allowed at the PCI [Payment Card
Industry] table – in order to formulate a technological response to
the data security threat.”

Some 34 percent of respondents mentioned business issues as the top
challenge to the card industry. Those business issues included
credit default, difficulty for the industry to sustain growth,
handling the damage to their reputation, and – from a vendor
standpoint – the commoditisation of payment processing.

Another 30 percent of respondents said that data security issues
and fraud were the biggest challenges to the card industry as a
whole. Finally, 4 percent said the top challenge is related to
technology, indicating that the industry is still looking for ways
to effectively use emerging channels like mobile phones.

A final third of respondents saw greater regulation as the biggest
threat facing the business, citing the new administration in
Washington and the economy as catalysts for further attempts to
restrict business practices.

Debit a bright spot for issuers

When asked to rate the future prospects for various lines of
card-related businesses, the respondents said that debit card
issuers enjoy the brightest prospects among all other stakeholders.
Of respondents, 74 percent see debit card issuers as benefiting
somewhat from the current economic conditions or being relatively
immune to them. While credit card spending has fallen, debit card
spending has continued to increase, albeit at a lower pace than in
the past. At banks that have both a credit and debit card
portfolio, debit card interchange helps banks compensate somewhat
for the decrease in credit card interchange revenues.

Half the panel (52 percent) said that card networks have bright
business prospects.

Though consumers’ greater reliance on debit cards as opposed to
credit cards is not good news for the networks, especially when
consumers use PIN debit, the fact that card networks generate
assessment fees on signature debit card transactions makes them
relatively agnostic to the competition between debit and credit
cards. Also, card networks are usually in a strong position to
increase their revenues by hiking fees that constitute the pillars
of their business model, unlike issuers, who face consumer wrath
for doing so.

This year, for instance, the authorisation fee, a fee charged on
both credit and signature debit transactions that networks charge
their acquirers, almost tripled. Card networks have more than 40
transactional fees that they charge to acquirers, and that
acquirers pass along to merchants (such as Visa’s risk
identification service charge or MasterCard’s gateway access

As far as the card industry in general is concerned, 57 percent of
those surveyed think it does not have bright future business
prospects. The other 43 percent, on the other hand, believe that
the card industry has a bright future in spite of the recession and
regulatory pressures. The opportunity to displace paper payments
still offers tremendous room for future growth.

Delivering security and value

Aite’s Moussa concludes that card networks need to make fixing data
security issues their top priority. First, they must realise the
ultimate solution will be a technological one, he wrote. Second,
card networks need to deliver more value to key stakeholders and
merchants first and foremost.

“There are many reasons behind merchants’ uproar over interchange,
but the fundamental driver is the dramatic success the card
industry has achieved in driving consumer usage and merchant
acceptance,” wrote Moussa. “Card networks have created great value
for merchants over time, helping introduce tremendous efficiency
and security in the purchase process. Even so, card networks must
realise that the marketplace is pressing for a second act. Card
networks have developed a sense of entitlement because of their
past contribution, which would entitle themselves and their issuers
to a fair profit margin.”

But their audience is relentless: merchants simply want more, and
at a lower cost.

Whether merchants’ lobbying for regulating interchange succeeds or
not is somewhat outside card networks’ control. Regardless of the
regulatory outcome, card networks won’t get away with their
imperative to create new value for merchants, and also for other
stakeholders they directly or indirectly serve. It is urgent that
card networks switch from a defensive mindset to an offensive

Finally, Moussa said card issuers must hone in on their best
customers and take better care of them, rather than take out their
frustration over new regulations by raising interest rates and
further penalising revolving households.

“By not treating this segment any differently from the rest of the
cardholders, we believe that issuers risk opening the door for
other issuers to snatch them away with better offers,” he

“Conversely, by holding the line on fees and interest rates with
loyalty cardholders, issuers may be able to position themselves as
the firm of choice when other issuers anger their best