Future Directions in Payments: Issuer Challenges and Opportunities

The ongoing and rapid transformation of payments affects us all and raises especially tough challenges for retail banks, networks, merchant acquirers, payments companies and private equity firms.

Ten years ago the U.S. payments ecosystem was mature, with participants, consumer expectations, and rules well-established and understood. Today, every component of the payments world is undergoing dramatic transformation, with bank and non-bank card issuers facing new competitive threats. Tech-savvy consumers are setting new expectations for ease, convenience and value. At the same time, a diverse set of innovative competitors that extends beyond the borders of the financial services industry are rewriting standards and inventing new business models which will challenge banks’ traditional debit and credit card economics.

Payments and related account fees provide ~50% of Retail Banking (pre-tax) profits, yet most financial institutions do not have a clear picture of what the likely threats to transaction counts and economics are, and as a result, are also lacking robust plans to fend off these threats. What must banks now do to win in the digital payments space while adoption rates
are still low?

In this paper, we present a view of the most tangible threats to issuer economics and/or transaction counts, with suggestions for how to respond to this environment. The good news is that banks today retain important advantages that should allow them to prosper, despite challenges from new technologies and nimble non-bank competitors.

To be a winner, we believe banks must:

  • Continually work to secure and retain top-of-wallet status
  • Aggressively protect customer relationships and experience
  • Implement robust information strategies, recognizing data is the strategic lifeblood of customer and merchant relationships

Future Directions in Payments: Issuer Challenges and Opportunities