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 reports.
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.
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 fee).
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 one.
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 said.
“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 customers.”