The credit card market is transitioning to the next phase of competition, one where issuers not only compete to acquire new customers but one where issuers must compete to acquire every single transaction. This shift will have profound implications for financial institutions, networks, merchants, and all others in the credit card payment ecosystem.
Despite tremendous investments to drive top-of-wallet behavior, credit card issuers are struggling to get attractive returns. They are offering ever richer incentives to acquire new customers (sign up bonuses of $500-$1,000 have become the new norm for high-value prospects) and upping the value of their rewards programs to retain and engage the current base. Yet, it isn’t working: only 50% of credit card customers used the same primary card over a 2-year period, based on our analysis of a proprietary dataset of 4,000+ active credit cardholders. Customers that switched primary cards generated almost 2X as much net revenue per card, driven by both higher spend and revolve. Revolvers are more likely to switch primary cards – suggesting availability of credit as a driver of behavior. Unsurprisingly, the availability of rich rewards is also a driver – cards with richer rewards gained a disproportionate share of switchers. In the short-term, this lack of customer loyalty benefits issuers who are willing to pay a premium to drive top-line growth.
Looking ahead, the rise of digital payments could be a game-changer for the credit card market, ushering in a new wave of industry dynamics as the battleground shifts from card-based competition to transaction-based competition. Imagine a scenario in which an app recommends — or automatically selects — the ‘best’ card to use at a given merchant while the cardholder is at the point of sale. In this new phase, the very notion of being top of wallet takes on a whole new meaning. Switching behavior will only intensify and there is material risk that issuers get cherry-picked for the benefits that are the most valuable to consumers but are also the most expensive for issuers to provide.
So how should issuers prepare for this next phase? We argue that they need to fundamentally rethink the product construct, with personalization becoming the new core. If customers are going to make transaction-level decisions, then the value proposition also needs to be delivered at the transaction level and in real-time. This includes features such as additional credit lines, promotional APRs, bonus rewards and even product warranties being offered at the point of purchase, depending on the customer’s propensity to take up a specific offer. This, in turn, will be informed by what customers care about and how they value one feature versus another, built around meaningful personalization. It also requires clear thinking and explicit tradeoffs on being a card/payment account in a third-party’s digital wallet versus owning the wallet and the wallet checkout experience itself. Being top of a consumer’s wallet will still represent the Holy Grail for a credit card issuer, but what it represents and how to get there will fundamentally change.