First Published on 22nd June, 2017
Ai Editorial: It is imperative for the industry to assess how to manage co-brands in a challenging enviornment of regulated interchange and the evolution of card free mobile payments, writes Madeleine Anderson.
I recently had the pleasure of moderating a panel populated by some esteemed co-brand credit card industry experts at the Ai Co-brand Conference in Atlanta.
Over recent years, interchange fees have become an increasingly controversial issue in the US, as a result of regulatory changes and antitrust investigations. The Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act was implemented in 2011, capping debit card interchange fees for larger banks at 22 cents + 0.05%. Credit card interchange is not covered by this ruling.
Credit card interchange fees in the United States currently average approximately 2% of the transaction value. This is amongst the highest in the world. By contrast, in the European Union, fees are capped at 0.3% of the transaction value for credit cards and to 0.2% for debit cards. (This cap does not apply to corporate cards).
Our initial discussion was around whether the panel anticipated any changes to regulated interchange within the credit card industry in the foreseeable future. The response from the panel (and the audience) was a resounding no. During his campaign, President Trump frequently stated that he has plans for regulatory financial reforms, including dismantling the Dodd-Frank Act. The general consensus therefore was that the Trump administration is unlikely to introduce reforms around credit card interchange fees.
It would be remiss of us to focus purely on plastic. We are gradually approaching the day when tapping your mobile phone or smartwatch on a retail terminal will replace the need to remove your credit card from your wallet. Whilst the threat to interchange is unlikely to come from regulation initially, it is highly likely that disruption will come from other sources:
1. Large merchants’ ability to negotiate fees
According to CMS Payment Intelligence, merchants have saved more than $8 billion annually as a result of the Durbin Amendment (excluding the effects of subsequent network fee increases and processor absorption of savings). In addition, the legislation has provided merchants with a framework with which to reduce credit card interchange fees.
Merchant groups claim that interchange fees are much higher than necessary. Whilst technology and overall efficiency improvements have been made, this has not led to a reduction of interchange fees. Issuing banks have responded by suggesting that reduced interchange fees would result in increased costs for cardholders, and a potential loss of rewards on cards already issued. In the co-brand world, interchange fees are frequently used to fund rewards.
Whilst significantly lower interchange fees have been implemented in other countries, such as Australia, savings enjoyed by merchants have not been passed through to consumers. In Europe, this has resulted in rewards programmes closing down, or benefits being reduced.
2. Mobile wallets
The 5th Annual MasterCard Digital Payments Study found that digital wallets were mentioned in 75% of tracked conversations had by social media users regarding new payment methods. Whilst awareness is high, mobile payment usage remains relatively low at present (about 1% of total retail sales in the US in 2016).
Barriers to usage include consumers' continued loyalty to traditional payment methods and patchy acceptance among merchants. Consumers would like to both store their loyalty cards on their wallet and use their phone to make payments. As loyalty programmes are integrated and more consumers rely on their mobile wallets for other features like in-app payments, adoption and usage are likely to grow. Android Pay, Apple Pay and Samsung Pay support loyalty card integration in their mobile wallets, but many major retailers appear to be resistant to loyalty and/or payments integration, to boost adoption of their own wallets.
3. Emerging technologies
The study also highlighted that consumers are also thinking about what comes after mobile wallets. Amongst emerging technologies, the use of wearables for payments attracted the highest amount of interest on social media, followed by the Internet of Things (IoT) and smart assistants (digital assistants such as Amazon’s Alexa, chatbots such as Facebook Messengers).
The panel believed that co-brand objectives are unlikely to change fundamentally, in light of any reduction in interchange fees. What is likely to change is the blend of revenue streams, how customer benefits are funded, the introduction of new revenue streams and cost reductions.
Consumers have generally ended up worse off in other markets. Costs have tended to shift from retailers to customers instead of card partners choosing to innovate.
So, what might we expect to see in the future? Amongst other things:
· Changes to financial models for co-brands
· Revenue streams from new sources/partners
· New/alternative payment methods replacing plastic, with revenue flows coming from monetizing data
· Increased focus on cost reduction – funding, servicing, bad debt and fraud costs
· Security developments to overcome end-user adoption of emerging technologies, including biometric authentication and tokenization
Be complacent at your peril!