Episode 14: The Competitive Shifts Shaping the Credit Card Market

Craig LaChapelle: Welcome back everyone, to Extra Credit, to our second podcast of the year. We are very excited to focus this month on technology and competitive dynamics facing card issuers in different segments. We really think it builds on our December year-end episode and our last episode, where we talked first about performance in the credit markets year-end 2022, as well as consumer behavior trends. And then finally on our last episode where we had our guests, Kathy and Michelle opine on market forecast trends and how issuers are reacting.

So we're going to go a little bit deeper and focus again on how the issuers are competing amongst each other, and how technology is shaping that competition. So to that end, we're excited to have David Shipper, Strategic Advisor in the Aite Novarica retail banking and payments practice, where he focuses on cards and payments.

David's experience spans digital operations, fraud, marketing, profitability and more at both large regional, as well as community, banks. He's looked to by mass media and industry publications when they need to make sense of developments in the payments world. For people who are unfamiliar with Aite – David, can you share a little bit about the firm and your role there?

David Shipper: Sure. Aite Novarica is a research and advising firm. We’re based in Boston, MA, but we have a global view. Many of our advisors are in the US, and we have also some in the EU as well, and we focus on financial services, research and consulting. I'm in the retail group, and my focus is mostly on card issuance. So debit and credit and some prepaid as well. Before joining, I've been in banking my whole career, so I really bring that focus into what I do here. So when our clients are looking at anything, I can help not just from at a high level of what's going on in the market, but we can also often help a little bit deeper than that, and help to design strategies and figure out how to deal with those issues.

Josh Turnbull: Perfect. Thanks, David. And I've relied on Aite for, gosh, almost 20 years to help me make sense the world. So excited to have you and your perspective on today.

We will start as we normally do with a little bit of trivia. And I think we settled on payments trivia as the category, and true to the word ‘trivia’, these questions are indeed that. I don't think anyone should be reasonably expected to know the answer to these, so no pressure.

DS: All right.

JT: We'll start with the first one. Question #1: The first ATM in the US debuted under the name ‘Docuteller’ in Rockville Centre, Long Island, on June 27th, 1967. The name Docuteller is long gone, as is the name of the bank introducing this ATM, which is it? A) Fleet Financial, B) Chemical Bank, C) First Interstate Bank Corp, or D) Dime Savings Bank.

DS: Oh my gosh, wow. It's a guess, I'll just say Chemical Bank.

JT: Excellent guess. That is correct.

DS: Perfect!

JT: Second question… in 1977, Citibank introduced the Choice Card, one of the first cards to appeal to consumers with which two features? So pick two from this list: A) a cash refund, B) automatic payment for the minimum due, C) 24/7 phone support, D) no annual fee.

DS: 1977… I'll say no annual fee and cash refund.

JT: Excellent.

DS: Really? Oh!

JT: Yes, I think you're bending the curve already for trivia on the podcast here.

CL: Josh, look for these references to be cited in the next Aite report.

[Group laughs]

JT: Alright, third question. In 1950, businessman Frank McNamara was mortified at the end of a meal, realizing he'd forgotten his wallet and needing his wife to come bail him out. This incident spurred him to envision and launch the world's first multipurpose charge card. Which was it: A) Carte Blanche, B) American Express, C) Diner’s Club or D) Barclaycard.

DS: Diner’s Club, C.

JT: It was Diner’s Club. Excellent. All right, final question. In 1996, a Supreme Court ruling in Smiley versus Citibank upheld a lower court ruling preventing what: A) states from limiting late fees and other penalties, B) banks from charging application fees, C) oil companies issuing their own charge cards, or D) states from capping interest rates.

DS: What year?

JT: 1996.

DS: I'll say B.

JT: No, it was A) states from limiting late fees and other penalties. But, excellent. Definitely in the top tier of trivia responses.

DS: Thank you.

JT: All right, so let's move from that, David, into why we brought you on and talk a little bit about the cards world here. So first question: credit cards really serve two functions in they're a convenient payment method for everybody, and for some, a way to make purchases on credit. You spend a lot of time thinking about some of the competitive dynamics in the card market in both of those areas. And so just to start us out, I'm curious as to what you see as some of the headwinds on both of those fronts?

DS: I'll tackle the first part first. If you think about a convenient payment method, I really don't think yet that there's anything that's more convenient than a card. You can be on the phone, you can pull it out and you can swipe it and everyone knows how to use it. We've all been trained. So as a convenient payment method, I think it's probably the easiest way to make purchases.

But you start to see things like Zelle and Venmo, Crypto, PayPal, Cash App… all these different options coming into the merchant. And people will test them out, probably not initially because they're convenient, but because they just want to try it. And if they find that it's convenient because they can easily open that with their app or something like that, then I think it definitely has the opportunity to compete with cards for those payments among certain people. And that could grow, and I do think that that will grow. And a lot of those do really well when like a card's not accepted, or maybe a handyman, for example, they don't want to take a card and pay 3%. So they say, can you just Zelle me the money or something? And I think those alternatives are doing pretty well there, but mainly because of the merchants pushing people to use that, not because it's necessarily more convenient.

And then on the other side of that, when you think about purchases on credit… BNPL is probably the first real threat to the credit card at the point of sale, or just in general, and I think it's performing very well. I haven't seen data, but I've definitely heard banks talk about seeing increase in payments for, you know, if they see somebody paying a BNPL purchase, they sometimes see a slowdown on that specific card. So people are moving over some transactions. I don't know the volume, but I think that there's definitely a threat there.

The other thing I'll mention is that we have a lot of companies like Plaid that merchants can integrate to. Where in the past, a utility company or some other company might say OK, you can add a bank account and then the person has to go and look for their checkbook and do all of that. Or I can just send her a card number, which is something that's sitting next to me, probably in my wallet. They're going to choose the card, but now with Plaid or other providers that do this, you just log in and it connects your bank account and makes it a lot more easy to make payments like that. So I think we're going to see some shift and some threats in in that area as well. I think they're just making it a lot easier to make an ACH payment than was possible in the past. So I think cards in general, when you talk about competitive threats, there's quite a few coming, or are already here.

JT: I'm curious... most of those things that you mentioned, I think of those – and maybe wrongly – as something that I would use in an online transaction, where I'm shopping online or something other than the checkout line at the grocery store. Do you see most of those competitive threats or headwinds happening in kind of non-face-to-face transactions and migrating face-to-face, or is there anything that you're seeing interesting starting in the face-to-face world?

DS: Yeah, I think you're right. It's definitely more of a threat card not present when you're doing something online or something like that. But with the merchant terminals, you're seeing a lot of those jobs options pop up as well. So I think they'll perform better in an online environment, taking transactions from cards; but they're testing out card present and they'll get better at it and people will try it out. And either it'll stick or they it won't. It's hard to say, but they’re moving into both card present and card not present.

CL: Great. Hey, David, let me jump in on something there. You'd mentioned that there are in fact a few, if not more, emerging competitive threats to credit card both a lending tool but also a transaction tool. In your conversations with leaders at banks, are there any areas where you're think they might be overly concerned with a competitive threat, and it's not as big as they think it is? And conversely, are there blind spots or areas where they are not concerned enough from a competitive perspective?

DS: Yeah, I think it's interesting because if you ignore the top five or ten banks and go lower, they're usually looking higher than themselves. They're usually looking at, what is XYZ bank doing, or even locally like the branches around me – what are they doing? But I think where they often miss is in these kind of threats where, how am I going to make sure my customer or my card holder continues to use me? How am I making sure that I'm top of wallet, top of digital wallet?

And another thing I don't think they're paying enough attention to is the threat from all of the startup card programs. I mean, there's a lot. I think I have a list of about 500 or more, and that's globally, but maybe some of them have hundreds or thousands of cards. But there are a lot of individual card threats coming after customers as well. So I think what a lot of financial institutions are doing is looking at larger banks to see what they're doing, and kind of mimicking or trying to compete there, when they should be sometimes looking smaller, and seeing what are what are the small guys doing that could take my business?

And on that front, if you think about what they're not looking at, I don't think that there's enough attention on ESG and sustainability. Because this is something that some startups are successfully marketing. Not a lot of financial institutions are promoting sustainability, snd I think that's a mistake because I think consumers really want that recycled card or planting trees, all of those things. And you could debate about what the value of those is, but I think it's important to customers and it's being overlooked.

CL: Thanks David. Let me give you a scenario or situation. Let's say the board of a bank issuer reaches out to you and says, hey, David, we'd love your insight. We want you to join the board. But in that case, if you were to jump on the board, what are the two or three questions that you'd have the executive responsible for payments and cards be prepared to answer in in his or her board updates?

DS: My first question is always the meat and potatoes kind of stuff. What is your performance, your card penetration of your customer base or of your checking accounts, what is your activation on those cards? What's the usage? I think I would ask, how are you competing there? How do you compete against your peers? How are you improving those numbers? Because to me, we can talk about pie in the sky stuff and everything that's shiny, and we often get caught up on that, but if you're ignoring the basics, then you're leaving money on the table, or you’re leaving volume. And so I think I would start there, first of all, and find out if they’re looking at the basics and managing that, because I think that's really important.

And then next I would go to the digital strategy. What are you doing to be more digital – to be top of the mobile wallet, or to provide features online that customers are looking for? You know, card controls and push provisioning, being able to push your card from the mobile wallet to the digital wallet… I think that's really important, and those kinds of things are what people in the next few years are going to come to expect.

The last thing is something I think a lot of people overlook, and we don't talk about it really because it's not really a research topic. But when's the last time you reviewed your contracts? Do you manage your contracts, a year or a year and a half out? You should be negotiating renewals or looking at other vendors and analyzing your invoices. You can find sometimes hundreds of thousands of dollars in errors in those invoices, and I think it's another thing that just gets overlooked. And again, kind of like the meat and potatoes stuff, it's easy wins, right? So I think that's probably where I would start.

JT: David, I'm curious on on your second point with the digital strategy… I think it'd be easy for someone who's not huge with a massive technology budget, and also not a fintech – so somewhere in the middle – to feel like you're always one step behind in terms of that digital strategy, and the capabilities that you have. What's your advice for folks who find themselves feeling that they’re never going to have the newest app or the newest function? What do they do?

DS:  I used to tell people when I was managing cards, man, I'm so glad I don't manage online banking – because they just have to keep up. They are always so many new things coming out. And in the last few years, that's been the case for cards and payments. There are all these new technologies and things being tested. And usually you can go to your vendor first, and a lot of card processors and other vendors are offering some solutions on these type of things, because they know that it's important. But you'd be surprised at the number of options that are available today. And if you're a really small financial institution, a lot of people will say you know, just use an API and you can connect. And I think we oversimplify that for a lot of financial institutions. I think it's a little bit more complicated, or at least it kind of can be overwhelming.

So for financial institutions that feel like they're too small, like they can't keep up, I would look for vendors to supply a lot of that – either current vendors, or there are companies that focus just on push provisioning. There are companies that offer just these type of features they can integrate with card processors or with your online or mobile banking. So I think I would recommend that they look at what's out there because there are a lot of options to make that simple.

JT: OK, that's interesting, and it almost takes you to third point of looking at the contracts you have in your vendor landscape too, I suppose, if whoever you have isn't doing it for you.

So David, moving away from the bank issuers for a second… you mentioned your list of 500 some-odd folks that that you're following or are aware of. There's been this proliferation of fintech-driven cards coming onto the market, and effectively renting a bank's access to the card network. Some of your peers have commented on some of the regulatory pressures facing multiple participants in that model. So I'm curious what you see as some of the pressures, and what do you expect to see play out – or what are you watching for, at least in that space?

DS: Yeah, it's interesting what's happening. For a bank to partner with these startups and these ideas… it can be pretty attractive in the sense that you're boosting volume, you get to be associated with a very exciting project or company, and I think over the last few years, banks have very willingly gotten into those relationships. And I'm sure they do a lot of due diligence, but I think they're just now starting to learn that if you're going to go in on this, you need to go all in. As a financial institution, if you're going to enter these relationships, you really need to be ready to go in as a business line; because managing one is going to be a lot of trouble. You really want to build the ability to manage multiple, or to look for multiple opportunities, and there's benefits to that. You get the volume out of it, you get incentives, you can get some fees out of that relationship.

But what I’m seeing a lot – at least lately – is with FTX crashing and companies declaring bankruptcy, a lot of those card programs are under more scrutiny, and you've seen some that have just been closed – and I don't want to name names – but where the financial institution, it seems, pulls out, or maybe the processor gets nervous. So when you think about crypto programs, there's going to be a person who wants to launch a card program for a crypto company. There's going be more limited options out there I think.

And I think people are just nervous, and some of that has to do with the price of Bitcoin. You know, if Bitcoin goes to $200,000. Everybody's going to want those, and be happy and excited about them. But right now, I think there’s a lot of scrutiny. And when the financial institution gets into that, they are responsible for that underlying program. They need to make sure there's controls in place, and compliance, and they need to know not only the client, but the end customer. So I think there's just a lot of pressure, and regulation and requirements that those banks are going to have to deal with if they continue moving on those relationships, or partnering with some of those companies.

CL: David, this is going be an unfair question, so steel yourself. Do you think there is a number of BIN sponsors out there where it reaches a competitive equilibrium? Where supply and demand are balanced, where those BIN sponsors can essentially operate a profitable business while fulfilling all the demand in the market?

DS: Oh, I don't know what the number is, but if you look at if you look at a lot of the startups, the smaller card programs that are obviously not banks are just launching cards. And in the disclosure, at least in the US especially, they have to name who their financial institution is. And you can see who these banks are that are doing most of these, and it's probably 10 or less that have most of the deals. Actually I would say just a handful have most of the deals. I don't know a number. But there's a point where you can manage all of them, and you have processes in place, and you know the business and you know what you're doing – and at that point, you can keep adding more and it doesn't add too much complexity, just based on what I'm seeing. I'm sure there is a number, but I think if you look, there's a handful of banks that are probably already there and getting value out of those.

CL: Thanks.

JT: So David, to build on that last question – and some of the earlier responses on the competitive dynamics – the past business cycle has seen some of the regional banks get out of the card business, but then back into the card business. We just talked about the proliferation of non-bank providers. When you think about who's giving cards to consumers, and who consumers are going to for cards 5-10 years from now, how does that landscape look different than it does now?

DS: Really good question. There are a lot of startups – I mentioned 500+ that I have a list of – and many of those are credit, many are debit, but everything is fragmenting. So where ten years ago it was just banks and maybe online companies or fintech-type companies that offered a card… now there are some card processors that will allow someone to launch a card program for hundreds of dollars, or thousands at the most, just to get it off the ground. And that comes with a pre-approved bank relationship up to a certain number of cards. So we're seeing is a fragmentation. There are a lot of companies out there testing ideas. They're making cards for teens, special cards for people with disabilities. Merchants are looking at their relationships and thinking, can I launch this? You're starting to see more merchants launch a card program to their customers.

So I think in five or ten years, that's going to become even more common, where I potentially could find a card that's right for me, and could apply and get that card and use that card, which is almost custom built for somebody like me. And I see a lot of companies trying that. So you have cards for the affluent. You have cards that link to cryptocurrencies. If you don't want to spend your cryptocurrency, you can get a credit card that uses your crypto as basically a secured credit card and locks that up, so you can get a credit line without spending your crypto. There's health and wellness card products. And so I think that fragmentation is going to continue to where in 5 or 10 years, there’s going to be a card program probably for everybody, and it'll be hard for the large financial institutions to keep up with that. They'll focus on what most people want – like they want cash back, or whatever at the time. But you'll also see maybe thousands of card program options out there that are just taking a small customer base and making enough money to. And I think we'll see more of that.

CL: So David, let's bring this home and talk a little bit about debit cards. So we've talked a lot about credit cards on this podcast, but you did mention earlier the strong relationship, or the potential, in the debit card population of a bank as a source for card growth. Now, if we look at what's going on in the debit space, whether externally influenced or from a competitive perspective – overdraft fees have been scaled back, and it's changed the underlying profitability model. Additionally we're seeing some economic weakness – in the US, but also globally – and we sense and believe that it's changing how banks are thinking about their debit card population, and specifically their deposit population.

So to that end, for listeners who may be credit card-focused, what's important from your perspective to know about developments in the deposits and debit business?

DS: Yeah, if you look at someone that's in payments that manages a debit card program, often – and because overdrafts are such a sensitive topic – you know that it generates income on the overdraft fees, right? You just know that if the person's opted in and there are some companies that still promote getting people to opt in to overdraft fees… they don't focus too much on the overdraft fees when you're managing the debit card. You know they know it exists, but that's not part of their bottom line in a sense. It might be for the financial institution, and they may know that debit card usage can impact that, but the debit card leaders are looking for getting usage and making sure that they're providing something that people want, so that they open checking accounts and come into the bank or credit union.

So the biggest developments for a debit card program right now, in my opinion, is some of the card network changes… for example, online pin lists. So if you make a transaction online, in the past it was always a credit transaction, and then Pinless came out after Durbin, so that the merchant could choose to send it through the network or send it through credit. But it was always optional, right? Not all pin networks supported online pin lists and financial institutions could also opt out of that if they felt like it was too much risk. Now, it's just not possible to do that anymore. So we'll see an increase in pin volume from an online source.

And also, another one of the card networks had gotten in trouble a little bit for steering transactions towards the signature or credit network versus the pin network. And so that also has kind of been undone. So I think the debit card – especially for an unregulated bank – has become a little less profitable, because you see more volume go to the pin.

And they have to manage that, right? Cause pin looks low risk for the most part. And so you have to know, ‘oh, that's an online transaction, so even though it's through the pin network, I need to maybe score that or monitor that a little bit differently.’

We also talked a lot about the all the startup card programs. A lot of those are debit cards. And I like to look at the debit card once more than the prepaid like GPR products, but those as well.

One of the things I think they've always struggled with is they can get somebody to open an account because they have some really cool idea. They're giving debit rewards or something like that. But I've always sensed that they've struggled with getting that direct deposit and getting that person to take this as their main primary account, because even if we don't use branches, we like branches, we just like to have one around. But I think that those companies with everything that's out there, I think they're going to learn.

And they're going to get better at capturing that direct deposit and making that the primary relationship. So I think financial institutions should really pay attention to people who are leaving and going somewhere else. Like they see, you know, transfers going to another bank or one of those kind of programs. I think they should pay attention to it because that is going to be a growing threat over the next few years as those debit card programs figure out how to capture as much of that relationship as they can – because the checking is really, in my opinion, the center of the account relationship. That's the customer relationship. If you have the checking account then you have a better chance of getting all the other products. And so I think banks need to pay attention and make sure they're growing and maintaining. Not having a lot of attrition on the checking accounts.

CL: Yeah, great. Great perspective. So, David, we are about out of time. I just really want to thank you for spending your time with us, educating us on your perspective, really appreciate it. And I’ll say it's given me a few more ideas about future podcast topics, so thank you on that front as well.

JT: And things to watch, as well. Thank you very much, David. This has been great.

DS: I've enjoyed it. Thank you.

JT: Thank you.