Article Financial Services

Credit Cards – Better customer outcomes, better business models

Categories: Financial Services
Posted 28 October 2020

For Generation X and Baby Boomers, credit cards have always been front-of-wallet. The accessibility of borrowing, the additional security on purchases and the flexibility of repayments saw the credit card market grow massively in the 20 years between 1995 and 2015.

However, the credit card market is starting to see some headwinds. From changing consumer preferences to the rise of digital payments, a new generation’s attitude to credit to the regulators guiding customer-first responses to perpetual debt, the world is changing and credit card providers need to adjust their business models and move with the times too.

By addressing the customer-centricity of their credit card offerings, rather than focusing on out-dated naming structures (i.e. balance transfer, money transfer, purchase etc.) and long introductory duration offers (i.e. 20 months 0%), credit card providers can provide simpler and more rewarding credit card propositions that are tailored to the next generation of consumers. 

Let’s take a look at some of the challenges credit card providers are facing in 2020.

The phasing out of the physical wallet

There was a time not so long ago where there was a prestige to what colour and brand of credit card you pulled out of your wallet to pay for dinner. To the point where black and platinum became products in their own right, rather than just colours of plastic.

For many consumers in 2020, their actual wallet stays at home and the only item that is taken with them to the local shop, restaurant or petrol station forecourt is their smartphone.

This change means that rather than being front-of-wallet in a leather purse or card carrier, the battle has moved to being front-of-digital-wallet. This moves the business challenge from brand recognition and card prestige to one of customer rewards and value of use.

If you know that active use on your Tesco Bank card will mean £50 off your family shop, whereas the benefits on your Barclays platinum card is 5% cashback on a family night out… you know which card you’ll be choosing.

The preference for debit cards

In the Deloitte payments survey 2019, they broke down payment instrument use on Apple Pay by generation, now whilst baby boomers and gen Xer’s used their credit card 50% of the time, this dropped to 40% for millennials and to 26% for Gen Z.

This illustrates a change in the appetite of the younger generation to apply for and pay using credit cards with a much larger skew towards debit card use in the two younger generations (42% and 46% respectively).

However, this doesn’t mean that these groups aren’t seeking out credit, it is just that credit cards may not be their first option. Especially when they are habitual Ecommerce shoppers who will understand the propositions and use-cases of the likes of PayPal or Klarna to finance their larger ticket online purchases. 

Competition from other lending products 

In some high street bank head offices there will be a loans team that sits separately from credit cards, who sit separately from the current account team who deal with overdrafts. All of these functions are dealing with lending, but it has been productised away from the consumer need, towards the bank’s organisational structure.

Is there a difference between a 24 month purchase credit card and a 24 month loan? Well, of course there is, but only to the bank and the people managing that lending. In both instances the consumer needs £5,000, gets £5,000 and uses it to pay for something.

This complexity of proposition, product set, nomenclature and small print has fed into the growth of online lenders and point of sale finance options, as simplicity and ease-of-access is held up above the actual viability of the interest rate, duration, fees, payments terms etc.

In some countries around the world, analysts are suggesting that the growth of this type of lending is a direct contributor to the slowing of growth in the credit card market.

Digital payments 

Real time digital payment solutions have the potential to dramatically disrupt the credit card space over the next 10 years, as consumers and vendors become increasingly interested in the mutual benefits that this method of payment could provide.

At this point in time, credit card issuers benefit from interchange fees (transaction fees that are paid to the card issuing bank to cover handling costs, fraud and a range of other risks). If in the near future, merchants reward customers for using direct digital payment solutions, thus circumnavigating the need to pay interchange fees on card transactions, there could be a real risk posed to credit card providers in terms of revenue. 

The advent of open banking and its effect on the digital payments space could have serious knock-on impacts to the credit card market. Ultimately, merchants want access to the funds paid for goods and services instantly and if the consumer recognises the benefit of supporting the merchant in this way, then changing consumer behaviours could place revenues at risk.

Customer rewards

As mentioned earlier, generic reward offerings like ‘5% off a family night out’ won’t really appease ever-savvier shoppers going forward. Consumers expect personalised offers and personalised rewards, they want their own preferences to be reflected in the choices they make. 

This could mean that reward offerings move from categories like petrol, groceries and hotels, towards streaming services, fashion and gaming, but equally could see categories removed entirely from a static proposition, to a flexible application of accrued points to any number of life-moment-specific payments.

Ultimately, a new generation of consumers who have been digital natives since day one, will vote with their feet based on simplicity, ease of access and net benefit to them in their daily lives.

Waracle have built mobile applications and digital solutions for credit card providers across the UK with a focus on building features sets and services that empower people to take control of their credit. If you would like to discuss your credit card proposition with our team of experts, we would love to hear from you.