The credit card ranks alongside the internet and the mobile
phone as an innovation that has transformed the way we live,
interact and transact. Some have argued that the credit card was
the last real disruptive or step-change innovation in the industry,
and that developments such as contactless or prepaid cards are
simply evolutions of existing processes and capabilities.
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However, innovation does not have to be of the disruptive variety –
the cards industry has continually innovated incrementally through
the application of new technologies and by developing its product
set and offerings. Recent industry innovations centre on marketing
issues including: personalisation through card design; new
technology applications such as chip cards and contactless
payments; new applications for existing processes and capabilities,
such as prepaid travel cards as replacements for traveller’s
cheques; and evolving operational models.
The key issue, however, is how to leverage this innovation for
profit.
Innovation – the key profitability
driver
Ken Howes, director of strategy consultancy Edgar,
Dunn & Co (EDC), made a compelling case for why innovation is
essential for success. In Europe, payments account for over 10
percent of total card revenues, but there are several forces
presenting a threat. Core revenues such as interchange, card fees,
foreign exchange charges and ATM disloyalty charges are under
attack; the Single Euro Payments Area will accelerate payments
commoditisation; and new and emerging non-banks already threaten to
disintermediate traditional banks in some parts of the payments
value chain.
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By GlobalDataIn Howes’s view, sustainable competitive advantage is derived from
three generic strategies: customer intimacy, product/service
leadership and operational excellence. EDC research shows that
customer intimacy is currently seen by card issuers as the primary
basis for competitive advantage, with a minority of issuers in more
mature markets trying to compete on price or product leadership as
differentiation becomes more difficult.
Howes said that the three generic strategies drive types of
marketing innovation. Customer intimacy requires innovation in
approaches to targeting, including new segmentation models,
customer value management and personalisation, such as that offered
by Spain’s La Caixa, which offers more than 1,000 credit card
personalisation alternatives.
Innovation – pushing development
Product and service development require innovation in product
features, loyalty programmes, branding and pricing. For example,
Turkey’s Garanti Bank leverages its own merchant relations to
support its cardholder loyalty programmes at the POS. Operational
excellence indicates innovative approaches to distribution
channels, such as the internet as a sales channel and partner
organisations. An example is Bill Me Later, the online payment
method offered through Chase Bank, which leverages existing
acquirer relationships and merchant websites as a sales
channel.
Howes noted that there is no single payment-related technology
focus for the future, with various technologies competing for
retail bank attention, global adoption and investment
funding.
However, EDC research also indicated that new technology adoption
is relatively unattractive to retail banks, which focus on cost
reduction benefits rather than incremental revenue opportunities,
and that if the banking sector procrastinates, others will drive
change. This is already happening in the prepaid arena, where banks
are tailing behind in taking advantage of the innovation
opportunities on offer.
He concluded that innovation across the whole payments value chain
is essential to create sustainable competitive advantage, and that
therefore innovation will move from the core payments product
itself to the broader customer value proposition, of which the
payment facility itself is a core, but not the only, element.
Louise Brett, head of UK customer and channel strategy practice at
business advisory group Deloitte, examined the factors driving and
constraining strategic innovation. She noted that while the climate
for an innovations ‘perfect storm’ is being generated by regulatory
change, customer demand, competition and market trends, there has
been little sustained breakthrough cards performance in the
European Union. The most common reason for companies’ failure to
innovate is their inability to change their current business model
and to make clear and explicit strategic choices based on their
unique strengths and weaknesses, market position and opportunities.
The best innovations happen when the rules of the game are broken,
and that decision depends on understanding whether the company’s
strategy is, for example, to shift market share or to create new
markets, and on understanding that the rules can be broken at any
stage in the value chain.
Brett noted that the trick for strategic innovators is not to play
the game better than the competition, but to develop a different
game by emphasising different products or services, and that a
clear and coherent idea of how you are going to play/change the
game is essential for survival.
Innovation – contactless payments
In the view of Francesco Burelli, principal consultant of industry
consultancy Capco, both prepaid and contactless cards represent
disruptive rather then incremental innovations, offering
opportunities to reach new segments, but also opening the door for
new entrants to break into ‘card’ payments. He stated that
cross-industry business models will emerge as prepaid and
contactless enable non-financial services operations to
disintermediate the daily spend of consumers.
Capco’s industry forecasts indicate that the contactless payments
opportunity to be worth $600 billion to $800 billion globally for
small value payments alone, with petrol retailing, transport and
convenience stores taking the biggest share. Burelli noted that it
was essential that the value proposition is fine-tuned to actual
customer needs for the innovation to be profitably adopted.
Burelli also said that, despite some notable successes, innovation
uptake is a slow process, and it should not be assumed that
contactless payments will become widespread in the short term.
However, contactless payments players take a more bullish
view.
Arne Pache, vice-president at MasterCard Worldwide, sees major
opportunities for the company’s contactless PayPass product. Its
benefits for issuers include displacement of cash and expansion of
payments footprint; broader acceptance leading to more usage and
higher gross dollar volume; improved customer ‘stickiness’; and
being a key differentiator. For consumers, it provides a faster,
simpler way to pay for purchases. For merchants, it provides a
faster check-out time and higher average spend.
Pache considers PayPass – with over 13 million cards/devices
globally and over 46,000 merchant acceptance locations – to be one
of the industry’s most innovative products launched in recent
times.
Guido Mangiagalli, head of new channels at Visa Europe, said that
Visa had launched extensive contactless payment programmes using
its Wave and Pay technology in Asia-Pacific, the US and Europe. In
London, the first cross-banking contactless project is being
piloted; participants are Barclays, RBS, HSBC, HBOS, Egg and
Nationwide. The Visa/Barclays Oyster card will be the first card in
the world to provide transport payment, contactless low value
payments and chip and PIN functionalities all in one card.
Across Europe, there are trials in France, Turkey, Sweden, Spain,
Switzerland and Iceland. Visa is focusing on global
interoperability. The aim is to secure global agreement to an
interoperable contactless chip strategy and a roadmap enabling
convergence of magnetic stripe and EMV chip-based solutions, which
would enable the leveraging of worldwide infrastructure while
facilitating regional customisation.
Innovation – prepaid cards
Technology and market changes are driving innovation in prepaid
cards, both in functionality and offerings.
David Parker, a consultant with UK industry consultancy Pepper,
looked at the steps for building a profitable prepaid card
programme. Market forces are driving innovative applications across
the consumer-to-consumer, business-to-consumer,
business-to-employee, business-to-business and
government-to-citizen channels, providing multiple segmentation
variables and thus opportunities for targeted offerings for both
financial and non-financial organisations.
Parker predicted growth in all open-loop prepaid segments. However,
he noted that fee-based revenue can vary substantially between card
programme types, while costs tend to be broadly similar, and
therefore profitability is variable. He believes that building a
profitable prepaid programme centres on creating a defined
programme targeting a specific segment with a real added value
proposition, using a programme partner structure that fits
organisational expertise, combined with cost-effective distribution
(see graph).
He also advocated considering how prepaid fits within an overall
product/card strategy that integrates debit, credit, charge and
prepaid, noting that there exists a challenge for organisations to
get prepaid to deliver a customer-centric card strategy as opposed
to a silo profit and loss-driven solution.
Innovation – engaging the customer
Traditional channels are becoming less relevant for the acquisition
and retention of customers; the web has created a new tech-savvy
generation responsive to the creative marketing techniques of the
Web 2.0 environment. The web represents a lucrative source of
profitable accounts if organisations use innovative techniques to
engage meaningfully with these customers.
The importance of trend-tracking in this environment was
highlighted by Caroline Hawkett, senior manager of new product
development at Visa Europe. Visa has identified three ‘super
trends’: ‘stop-go lives’, in which time-saving and flexibility are
top priority; ‘living life to the full’, in which rising affluence
and individualism drive choices; and ‘professional consumers’, in
which empowered consumers become increasingly demanding and
sophisticated in their shopping patterns. Hawkett said that this
segment insight should inform product development and marketing
tactics to reach these customers effectively.
Hawkett also pointed out the importance of personalisation and
stimulation to these segments – a theme that was taken up by James
Pendley, CEO of card design specialist
Serverside Group. An explosion in user-generated content and
social networking sites is unleashing consumer creativity and, to
survive and thrive, brands must empower consumers and embrace
online card personalisation and viral marketing tools.
Cards marketing needs to embrace the Web 2.0 environment, the key
elements of which are: consumer engagement and dialogue
(blogging/interactive forums/feedback); allowing customers to
express themselves with/through a product (personalisation,
branding); and viral marketing techniques that traverse online
communities and encourage people to become ‘brand
evangelists’.
Innovation – card design
Striking examples of innovative cards design were provided by Pablo
Fourez, senior business leader of mass market group at MasterCard
Worldwide, who noted that cards design can help position and
differentiate products, drive preference, and increase usage and
even acquisition.
Multiple special effects such as 3-D, thermochromic colour changes,
glow in the dark, translucent, holographic and even fragranced and
tactile effects can be incorporated into card designs. Fourez said
that card design is the single most important factor driving
preference after financial considerations: more than 75 percent of
consumers are interested in the product.
Serverside’s Pendley also pointed out that profitable account
acquisition has shifted to the web. With average across-the-board
acquisition costs per active account at €70 ($92), web-acquired
customers represent a significant 92 percent saving; more
importantly, they generate 79 percent higher spending, an excellent
example of the importance of leveraging innovation for profit (this
theme will be revisited at the next Cards Innovation Summit in
2008).
