US consumers are being encouraged to adopt new methods of payment through online, prepaid and mobile solutions. As a result, the cards and payments market is undergoing healthy growth. Restored customer trust and convenience are two key factors and banks, merchants and the government alike are all for it
The US has the world’s largest payments market, and one of the highest levels of card penetration. In 2014, the US accounted for 86.0% and 87.7% of North America’s transaction value and volume respectively.
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Electronic payments have steadily gained ground in the US, and in terms of transaction volume they have overtaken the once-dominant cheque. The decline in cheque transactions gathered pace in the last ten years, largely due to a surge in the conversion of cheques into automated clearing house (ACH) debits.
The shift towards electronic payments has also been aided by contactless technology, which was launched in 2004 and is now gaining significant momentum. US consumers have a variety of contactless propositions to choose from, as all major payment networks – Visa, MasterCard, American Express and Discover – have contactless cards available to consumers.
Focus has also increased on mobile payments, with the launch of solutions such as Apple Pay and the Starbucks mobile wallet. Competition in the industry is likely to intensify further with the launch of Android Pay and CurrentC later in 2015.
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By GlobalDataIn a highly competitive and mature market, banks and card issuers are facing changing regulatory, competitive and customer dynamics. While card issuers are subject to rising regulatory requirements and increased competition, consumers’ behaviour has also changed; they are becoming increasingly value-driven and are looking for benefits beyond traditional products or services. This has put increased pressure on profitability, forcing issuers to reassess products, costs and revenue streams.
Credit cards market recovering
The US economy and employment levels were badly hit by the global financial crisis of 2008-2009, forcing many consumers to default on credit card payments. Banks subsequently recorded high volumes of bad debt. Most banks cleaned their customer bases and deactivated bad credit accounts; the number of credit cards in circulation fell as a result.
Employment opportunities have improved with US economic growth from 2010. Supported by a strengthening economy and low credit card delinquency, banks have again started to focus on credit card business, albeit adopting a more cautious approach in terms of issue.
In addition to targeting consumers with high FICO scores, banks and card issuers are now also offering cards to consumers with low credit ratings. For consumers with bad or fair credit histories, the average percentage rate (APR) is higher than normal, and the cardholder is required to make a security deposit with the bank to obtain a credit card.
Banks’ profitability under pressure
Profitability in the cards and payments industry fell following regulation on interchange in 2011. In the US, checking account and debit card market conditions changed dramatically with the enactment of the Durbin Amendment. The regulation’s interchange rate caps created a significant revenue shortfall for large banks, forcing them to lose revenue and rework checking account pricing strategies.
Banks are now combating further revenue erosion by increasing checking account minimum-balance requirements, increasing fees, and limiting reward programmes. According to Bankrate, the proportion of free checking accounts in the US dropped from 76% in 2009 to 38% in 2013.
However, the Durbin Amendment applies only to financial institutions (FIs) with assets of more than $10bn. With the large banks’ emphasis shifting from debit to credit cards, an opportunity exists for smaller banks and other financial institutions (FIs) to expand their debit card business.
Guidelines for prepaid card issuers
In November 2014, the Consumer Financial Protection Bureau (CFPB) proposed a comprehensive range of consumer protection for US prepaid cards. The proposals require prepaid card issuers to limit consumers’ losses when funds are stolen or cards are lost, investigate and resolve errors, and provide easy and free access to account information.
The proposal also includes strong protections in connection with credit products that allow consumers to pay to spend more money than they have deposited into the prepaid account. Under the proposed rule, if consumers choose to use a credit product related to their prepaid account, they would be entitled to the same protections that credit card consumers receive today. The regulations are anticipated to restrict the fast-growing prepaid cards market.
Improved payment infrastructure supported the growth of payment cards
The number of ATMs increased at a CAGR of 1.24%, from 430,100 in 2010 to 451,876 in 2014, and is anticipated to increase further over the next five years, at a CAGR of 0.72% to reach 469,850. Banks are also expanding their ATM networks to increase banking convenience.
The number of POS terminals recorded a CAGR of 0.83%, rising from 9m in 2010 to 9.3m in 2014. With the increased number of POS terminal installations at retail outlets, the potential of card-based payments in the country is also expected to grow. POS terminal penetration – calculated as the number of POS terminals per 100,000 inhabitants – also rose from 2,896.7 in 2010 to 2,908.9 in 2014. This is expected to expand even further over the next half-decade, to reach 3,047.6 in 2019.
The number of merchants installing mobile POS (mPOS) is gradually increasing in the country, primarily as more merchants see the benefit of switching from traditional POS terminals to ones with more features and mobility. Additionally, as it can help improve the customer shopping experience and also free up floor space for product promotions, mPOS had gained prominence among both small and large retailers in the United States.
According to the 2013 Yankee Group Technology Roadmap report Revolutionising Retail With mPOS: "mPOS devices are transforming the retail industry in a way that few technologies have done before. Retailers which have eschewed cumbersome cash wraps in favour of a mobilised checkout are already reaping increased savings, sales and customer satisfaction."
Early adopters such as Apple have received a lot of attention for taking card payments with iPod Touch devices in retail stores. Other early adopters of mPOS devices include home improvement retailer Home Depot, which began issuing mPOS devices to its US staff in 2010, according to Bloomberg. Home Depot’s mPOS devices combine inventory management with payment card acceptance.
E-commerce offers growth prospects for card payments
The growing market for e-commerce in the US is a primary factor for the expansion of the country’s payment cards market, especially for credit and debit cards. Although cash on delivery is emerging as a preferred mode of payment for online shopping in the US, credit and debit cards still dominate due to promotional offers, such as discounts and coupons offered by credit and debit card issuers.
The benefits offered by online retail, such as low cost and high convenience, are expected to further increase US credit and debit card ownership, encouraging consumers to experiment with cashless purchases. However, e-merchants and regulatory authorities should concentrate on increasing consumer confidence in the safety of online retail.
The increasing young and urban populations have a strong inclination for mobile devices and online media use, giving a platform for e-commerce companies to reach more potential customers. The growth in online shopping is expected to create opportunities for growth in the cards and payments industry over the forecast period.
Banks and card issuers such as American Express, JPMorgan Chase, Citibank, Wells Fargo and Capital One offer benefits such as cashback, reward points, discounts, purchase protection insurance, extended warranty, zero card fraud liability and flexible repayment options, to encourage online shopping. The anticipated growth of the e-commerce industry is anticipated to have a positive effect on the US cards and payments industry.
