Disruption Coming for Credit Cards

After several years of vapour and speculation about e-payment alternatives, the time may be right for wide scale disruption in the credit and payment universe.  The payment space has been undergoing subtle evolution with the growth of social networks and mobile devices, yet to this point no ‘killer apps’ or new material competitors have emerged.  This may be about to change as some previously sleeping leviathans exert their influence.

The Canadian Competition Tribunal recently dismissed a request by the Retail Council of Canada (and others) to apply a surcharge to customers who use premium reward credit cards. This is a victory for consumers, banks and credit card associations. However, it may also accelerate the creation of a ‘Plan B’ to break the monopoly of the traditional credit card and payment paradigms.

The Canadian experience is just one salvo in what has been an ongoing global conflict waged by retailers to change the transaction processing model.  It follows the landmark 2005 class-action lawsuit filed in United States by merchants and trade associations against Visa, MasterCard, and numerous financial institutions.  That suit – which claimed anti-competitive practices by the credit card cabal – had appeared resolved with a preliminary settlement in 2012, but the story continues as the case is now under appeal due to the dissatisfaction of many plaintiffs.  Expect further disruption from large retailers as they pursue all options to free themselves from the margin drag of card processing pricing practices (see this article published by Deloitte).

Interchange rates have been a source of irritation for retails since the inception of credit cards. With the launch of new premium reward cards in the latter half of the last decade (Visa Infinite, MasterCard World Cards) retailers were faced with further margin compression on each transaction.  This is due to the significantly higher processing fees related to these cards (partially passed to consumers through higher rewards), exacerbated by the aggressive upselling of these new card among cardholders.  Cards also continue to displace cash transactions (cards represent 14% of transactions, with payment volume growing at 7%). Credit cards are increasingly being used for smaller value transactions where margins can be razor thin.  This pressure has inflamed pre-existing tensions with retailers and has led to their serious pursuit of alternatives.

Managing cash isn’t free.  The credit systems in place today and the associated reward programs deliver definite value to retailers.  However when a key party to the overall chain of transactions feels the relationship is unbalanced in a way that is damaging their margin, expect change.  This is even more likely when those unhappy parties have the determination and resources of a global powerhouse like Walmart.  Proprietary store cards like those offered by Target and Sears (useable only in store) are not new, but with the current context they may be the lead edge of a coming shift in the payment landscape.  It should be no surprise to see other mega-retailers take similar charge of charge-cards, or to go further by joining with other disgruntled retailers in common cause to create a payment association with more favourable terms.  Canadian banks demonstrated this approach themselves with Interac, working cooperatively with competitors to create a debit payment processing platform.

Another potential scenario for retailers would be to get behind emerging mobile and online payment methods (E-wallets, electronic P2P, prepaid, etc.) in a meaningful way.  Although a relatively small portion of overall payments in Canada (just over 1% of the total value), these transactions represent the greatest rate of growth (30% compound annually since 2008).  The E-payments market will continue to become commonplace as the connected generation enters their primary consumption years (the front of this wedge is now considering marriage).  Once these alternatives become seriously supported by the cornerstone of large retailers – the rate of change could be quite significant.  The catalyst for this support may be the growing margin pressure from interchange rates.

Three other potential disrupters include the owners of the mobile and online pipelines (cable, telephony companies, etc.); owners of the mobile platforms (Apple, Samsung, Blackberry, etc.); and social networks (Facebook, YouTube, Twitter, LinkedIn, etc.).  Each group could leverage their significant respective strategic positions to enter the payment and lending space.

After a spectacular implosion in the discussions between Canada’s financial institutions and telecom/cable providers in the potential to partner in the mobile payment space – with no expectations to revisit negotiations over the near-term – one has to believe that the holders of the mobile pipeline are still considering ways to drive transactions through their domains in the quest for new revenue sources.

Alternatively, the platforms themselves may enter this space.  Recent product launches have disappointed in the mobile space.  Product innovation has been outpaced by innovation among the apps that can be placed on these devices.  Banking and lending apps could appear to be an enticing source of potential revenue for platform producers feeling the squeeze as uptake of new devices slows.

Lastly, users may create their own alternatives.  Social networks take on the personality of their constituents and have the scale to create their own solutions.  Many of these networks are anti-establishment and aspire to mutually empowering their members.  In an environment of dissatisfaction with credit card practices and banking fees, there appears to be fertile soil in these networks for payment and lending alternatives.

With all of these potentially disruptive players emerging, coupled with the resources and disgruntlement of powerful retailers, it is time for card issuers to revisit their competitive positions.  It would be prudent to enhance the value that their products deliver, and to focus on building firmer connections with their cardholders.  As alternatives emerge from the payment ether, the loyalty of their customers should not be assumed. Neither should card issuers assume that their competition will be coming from traditional financial institutions, or that the competitors who emerge will be playing a game they recognize.


Tim Crowder

Principal - Mission Marketing

twitter: Tim Crowder@MissionMkt

Jul 30, 2013