What is the future of credit cards? Borrowing money is becoming more personal
What most of us are after as consumers is convenience. Convenience of price, access and use. In other words, if someone is selling a product that's easy to get, use and comes at a good price, chances are we'll buy.
Financial products are no different, really. They come packaged the same way most products do, with colourful labels and logos, promises of bell and whistle features, and of course, varying price points.
The overriding point is that our day-to-day banking - one of those typically mundane tasks that sits in the admin basket - is said to be easier with new technologies. While part of the attraction is indeed ease, some of it is simply about the possibility of something different.
Who’s leading the payments revolution
- Consumers are changing
- Banks and lenders are looking for an edge
- Neobanks and start-ups are shifting the goals
Perhaps it’s no surprise. Financial providers are seeing consumers change their behaviours in all facets of life and surely want to meet their tech-savvy tendencies head on. In some instances, banks like CommBank build the technology they need to gain a market edge, in-house. Of course, others don't have a tech-led innovation team on hand, and so look outward for help, tapping into tools and interfaces from tech experts to advance their services.
But in our modern marketplace convenience is being pushed in new ways, largely because of advances in technology. The streamlining of the banking experience can come in different forms, too, including easy to use mobile apps, simplified application processes on websites and one-on-one customer chat services. For some of us this might mean applying for a home loan online, or accessing credit through a buy now pay later service to pay for new sneakers, or maybe it's simply moving money from one account to another with a swipe across your mobile phone. Anything seems possible now, and at greater speed.
Additionally, there are new tech-oriented players moving into the finance space that begin with the platform, less so the content. These newer ‘neobanks’ are therefore able to launch a financial product virtually, and without the typical development and compliance redtape faced by their predecessors. Finspo is one such player that comes to mind, which aims to speed up and personalise the home lending experience.
There are advantages to both the traditional way and the digital-first way, though some form of hybrid model that uses customer insight and regulatory experience, together with new tech-led ideas, seems an increasingly sound route to follow. In some ways, the format is what’s changing most of all, which is crucial to the consumer’s experience.
Experience and personalisation matters
There are some other factors to consider here. In a world that’s now hyper aware of physical contact, cash as we know it is disappearing. This means going cashless is the more popular way to make a transaction in the marketplace, and surely this is affecting how consumers view payment formats overall. In fact, a recent ME Bank survey showed that 35% of Aussies would be happy to go cashless by 2022. And perhaps it surprises few that adults under age of 40 are very much onboard with this, based on ME’s research. That cohort says cash is inconvenient, they don’t like carrying (physical) wallets, that it’s easier to pay digitally and you guessed it, it’s unhygienic, too. Still, debit and credit cards remain the preferred methods of payment, according to ME.
Credit cards have taken a few hits, but don’t seem to be losing too much ground overall. Yet, in some instances it is being presented this way. For example, Afterpay, a prominent buy now pay later service, says BNPL usage in Australia has surged by 174% with Gen Z and 110% with Millennials since Jan 2020. Its recent report on consumer spending habits suggested that credit card spending has remained static among Millennials and older generations, and also fell by around 7% for Gen Z. Fair enough.
Recent Mozo research also supports the uptake of BNPL in 2021. Yet, these platforms are not a replacement for a credit card, our report concluded, but rather are regarded as money management platforms. Younger customers especially like the ease of access to BNPL apps and the overall user experience. In a sense, the newer technology affords a fresh take on what is still essentially borrowing money. Credit remains important to consumers but maybe the delivery of that credit is equally important, as alluded to earlier.
Now, the volume of money lent via credit cards is down of late, which is perhaps to be expected with lower consumer sentiment and the Covid-related lockdowns of 2021. APRA reports that card lending decreased by $1.9 billion, or 6.3 per cent in July, reflecting “longer-term structural decline in this form of lending”. Keep in mind that personal loans also took it on the chin, while there are certainly fewer people requiring home loans than when the economy is functioning properly. We need to keep all of this in perspective when considering where credit cards are headed. Some headwinds are temporary.
Besides consumer trends, Senior Data Analyst at Mozo, Mitch Pollard notes that regulation of credit services also plays a role. He says that the payment structure of buy now pay later services, for instance, does not technically fall under the current code and licensing regulations. However traditional credit cards are bound by such rules, including the requirement to hold an Australia credit license and adherence to the National Consumer Credit Protection Act. These requirements set the scene for the way credit is issued. Of course, many of the ongoing features of credit cards are simply longstanding product designs. So, yes regulations set the boundaries but maybe there’s room to further improve upon the products.
“The thing is, regulations aren't overly prescriptive with the format a credit card has to take shape in,” says Pollard. “They don't say your credit card has to have a certain annual fee, or have an interest rate between 7% and 25%, or have at least 35 days interest free, cash advance restrictions. These are just standards that have developed over time and card issuers just tend to follow them.”
Breaking the mould
Given that many cards follow a similar design, they might equally look unattractive against new payment formats. Here, Pollard notes the tie between card fees and lender profit strategies. He says that the typical profit model structure of credit cards in Australia means that high point earning cards usually come with hefty annual fees and steep interest rates. Conversely, you can’t expect a lot of bells and whistles on your card when it's offered as a low cost option.
However, a few cards are trying to break this mould, he says.
“We've seen the NAB StraightUp card and CommBank Neo card come out, bridging the gap between a very simple to understand BNPL offering and a traditional credit card,” says Pollard. “We're also seeing data being used in new ways to tailor credit card experiences to distinct customers. A card issuer might have a range of retailers they have built partnerships with, and based on this they might offer a discount, a cashback or bonus points per dollar at that particular shop.”
Furthermore, card issuers have had a good grasp of their own customers' spending data for a while, so the new open banking regime - which, put simply, lets customers decide who gets their data, for what and for how long - has the potential to offer insights into new and potential customers.
For example, it will give lenders the ability to analyse a credit card applicant’s income and spending very quickly. Such data can help a provider offer a tailored purchase rate and credit limit base, for a start, but also lets them tell a customer how many rewards points they could expect to earn based on their spending habits.
The shift to better formats began a few years back with digital wallets and shortly thereafter, before buy now pay later products such as Afterpay and Zip took hold. They’re more attractive to the eye, sure, but also more easily accessed through our mobile phones. Big name players are also involved. Take Mastercard, which recently shifted its strategy with its new Gemini credit card - offering users rewards in the form of cryptocurrency. The selling point is that unlike most cards that pay rewards out monthly, Gemini cardholders receive their crypto rewards as the transaction occurs (on most purchases). So in brief, cardholders see a digital card in their Google wallet, say, with crypto rewards digitally tallied as they spend, giving the benefit of any appreciation in the price of their rewards from the moment the transaction occurs.
Pollard says open banking might also help a card issuer assess a customer on an ongoing basis, where they could access data feeds relating to every aspect of a person’s finances as it changes.
“So if you've been out of work for a while, the lender might consider pulling back your credit limit,” he says. “Or if you’re earning more, they might be able to suggest a bump-up to a higher privileged card.”
Raising the bar: creating the best credit cards they can
- Are traditional card types enough?
- Perhaps the overall card experience expands
- Better data seems crucial to personalising cards
At the very least, customers might start to demand better value credit cards. According to Deloitte Canada, technology continues to reorient customers and as we know, this began years ago with the advent of Google’s search capability, Amazon’s speedy shopping and delivery experience, and the clean look and feel of Apple’s various digital marketplaces. All of these innovations have led the charge toward better consumer experiences across the board. Or at least, the demand for better experiences.
“A couple of years ago you could offer a card with some bonus points, a simple app, and some a decent annual fee, and it would be enough to keep most customers happy,” says Pollard. “I think customers expect more now, they want personalised offers, discounts on subscription services, they want the app to do a lot more too.”
So by the end of this decade it seems likely that carrying a plastic card to tap at a dedicated point of sale or even making mobile payments, will be replaced by a secure voice command or a facial expression. Indeed, many of the ‘connected everything’ devices still emerging today will become commonplace by 2030, says CommBank. Perhaps more importantly, financial products will be replaced by what it calls "context relevant finance".
Business consultancy McKinsey agrees that the key to improving credit innovation is in-depth data, and from a wide range of sources, too. For example, credit behavior and demographic data are widely available among established financial institutions and include loan information from lenders, deposit data with banks, other current-account information, and point-of-sale transaction data. Meanwhile, non-financial companies now have other internal sources of customer data, says McKinsey, such as product usage, interactions with customer-relationship management, call records, email records, customer feedback, and website navigational data.
And, in some instances the two sides may meet, as we have seen in recent mergers. Pollard says that the Apple Card is a classic example of a non-financial institution working with a traditional lender (Goldman Sachs), and this structure is already quite common in Australia. Consider Woolworths credit cards issued by Macquarie Bank and the Kogan credit card issued by Citibank.
“These arrangements take advantage of their company's customer base and brand reach, and offer their customers specific perks, whether that's discounts on Woolies groceries, or bonus cashback percentage from Apple Store purchases,” he says.
“I think one thing that Apple has gotten right with their product, and others will look to emulate, is a focus on a simple offering, clearly explained, with all the information a customer could want easily accessible. That's why it appeals to young people. The credit card market has been crowded with Super Platinum Diamond class type cards, with complicated points earning structures, annual fee exceptions and so on. Apple has stripped that back and simplified where they can.”
Trust factor - bridging the gap with open banking
The road splits here, however, because trust and new technology don’t always go together. Firstly, overall trust level for big banks is up, according to a recent study by fintech, Frollo. Trust in digital banks isn’t as strong, however.
“Specifically, consumers are more trusting of traditional financial institutions to handle their personal information and transaction data,” says Frollo. “While digital banks, neo-banks and technology companies have some of the highest levels of distrust when it comes to information security and privacy.”
This finding illuminates a slight problem for the future of lending in the fintech space, where many consumers tend to be going for some of their financial services but perhaps not for a basic credit card. Frollo suggests that the open banking environment will be important to bridging the gap as it hands control back to the consumer. Simply, such customer empowerment associated with open banking should improve market competition and, in turn, allow fintechs to get more innovative with products and offer improved prices. Ultimately, this should translate into better customer experiences and greater levels of trust, according to Frollo.
But what remains to be seen is how much more the credit card can actually evolve in this open data environment. Streamlined application processes via faster technology should lead to more examples of instant credit given more easily to the customer in a shop, and in real time. This sounds appealing - if you’re good with your money. But what else might change?
3 quick considerations:
- User-centric design
- Technological speed
- More attractive payment "ecosystems"
Apple’s new card, which can sit in your digital wallet, may ultimately offer the best insight into the future of cards. The app looks attractive, easy to manage and track, and is possibly the sort of experience that many young people want especially. Apparently signing up takes just five minutes and is done without affecting your credit score. When an application is approved, and the card’s terms and conditions are accepted, only then an inquiry is made on the customer’s credit. This seems ideal for someone who wants credit fast, but perhaps more to the point, a person who is wholeheartedly into Apple as a brand and its many products. It’s no small thing that Apple also offers a digital ecosystem that many people feel comfortable in.
So, perhaps the next step for others in this space is to build an equally appealing, easy to apply for and use card, wrapped up in a much more alluring customer experience.