Key Trends Shaping Card Payments


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What Every Card Issuer Needs to Know

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Key Trends Shaping Card Payments

  1. 1. Key Trends Shaping Card Payments What Every Card Issuer Needs to Know provide the cardholder options to use their P lastic cards have experienced little rewards with the push of a button on the card innovation over the decades. While the back- itself. A few issuers are also exploring hybrid end technology supporting card transactions cards that include both PIN Debit and Credit has evolved, the plastic card has remained on one plastic. And, mobile payments are essentially unchanged. However, the race to ushering in the age where transactions differentiate is heating up. From more become interactions. Vast storehouses of aggressive rewards to customizable card mobile transactions will be leveraged to offer graphics, issuers are trying to reinvigorate the real-time offers to highly targeted customers traditional card in an all-out sprint to capture via their smartphones. the cardholders coveted top-of-wallet status. While these new features are compelling, they Mobility Turns Transactions lack meaningful innovation to change the paradigm. into Interactions Traditional cards are slowly yielding to some The Consumers are trading in their old cell break-through innovation. In just a few short phones and often dropping their landlines in years, many plastic cards will also include a favor of the convenience and computing micro-chip for greater fraud protection. power of today’s Smartphone. In fact, 90 Alternative cards are also being tested that million U.S. adults had adopted Smartphones Key Trends Shaping Card Payments 1
  2. 2. In fact, 90 million U.S. adults had adopted innovation by PayPal. The day now existsSmartphones in 2011; that figure rose by 15 where a PayPal customer can walk into amillion to 105 million users in 2012. merchant without any payment cards andProjections are that Smartphone ownership will conduct a transactions with the simple press ofgrow by 10.4% CAGR reaching 172 million a cell phone number and PIN. MoreU.S. adults by 2017 (Javelin Strategy & concerning is that the customer can fundResearch, 2012). Today, more consumers his/her PayPal account with ACH therebyown a mobile phone than landline phones – a striking any interchange income the cardtrend likely to accelerate. This shift in behavior issuer would forcing financial institutions to reconsidertheir traditional distribution channels. Card issuers can protect their consumer relationships through a combination of cardCard processing is one category bearing design, features and rewards offerings. Whilewitness to the change. Cardholders are a consumer can fund a PayPal account viabeginning to access new form factors at ACH, they lose the ability to capitalize on thatcheckout thanks to mobile developments transaction with meaningful rewards.ushered in by the Smartphone. Square card Additionally, the zero liability that credit cardreaders (and their counterparts) can be found payments provide gives consumersin micro-business across the U.S. Consider reassurance that if their account isthat Square alone is processing $4 billion in compromised they have the ability to disputetransactions each year and growing. For the the transaction before it hits their bankfirst time, micro-businesses can now accept accounts. However, banks and credit unionscard transactions where before they were will need to compete in mobile payments iflimited to cash or checks. The bottom line for they want to protect their cardholdercard issuers is higher transactions and relationships. For most, partnering will be keyinterchange income. to leveraging the technology as most small to medium banks and credit unions lack theSmall business is not the only benefactor. ability and scale to develop a solution withinConsumers now have more options at their shops.checkout thanks to the Smartphone.Innovations like 2D Barcodes at Starbucks,Google Wallet, QR Codes and many others Hybrid Cards Differentiateprovide a fun and interactive way for on the Traditional Modelconsumers to process payments. And theutility provided with these options help While mobility provides a new checkoutconsumers manage and track their purchases experience, hybrid cards or multi-function(e-Receipts, loyalty tracking, etc). Merchants cards build off the traditional card design withgain the ability to offer instant couponing and new combination features. Some card issuershighly targeted offers to drive new business see these new cards as a way to combatwhere they were once limited to inefficient print attrition and diminishing wallet share sincechannels. both the credit and debit are ported onto one plastic. Consumers often have multiple, oftenMobility is changing the game, and the result conflicting, factors to evaluate when selectingfor financial institutions is greater real-time the card of choice in a purchase transactioninteraction with product delivery and account (available balance, size of purchase,servicing. Consider that by 2015, U.S. willingness to incur debit and so on). In theconsumers will process upwards of $220 case of hybrid cards, one plastic can meetbillion in mobile payments (Aite, 2011). But, most needs.there are serious challenges with mobility.Banks and credit unions must now compete Hybrid cards have been deployed in Australia,with alternative payment providers that Brazil and France with limited adoption rates.threaten to usurp the coveted consumer However, these regions have very differentrelationship. Consider the payment markets with consumer preferences and card usage characteristics varying significantly. Key Trends Shaping Card Payments 2
  3. 3. The U.S. market is following with the common consumer-level attacks such asintroduction of Fifth Thirds DUO card being fraudulent use of lost or stolen cards,the most widely publicized. Fifth Thirds hybrid counterfeit cards and skimming.card provides credit and PIN debit transactionoptions. However, cardholders can only earn Recently some of the card brands signaledrewards points from credit transactions, and their intentions to support EMV-enabledcannot transact using signature-based debit. payments in the U.S. Their reasoning is clear: chip cards are fundamentally more resistant toCiti, in partnership with Dynamics Inc., has fraud than magnetic strip cards. Aite Groupbeen testing a different hybrid card. Dynamics reports that card fraud in the U.S. already costsproduces and manufactures intelligent the card payment industry (primarily issuers)powered cards that use programmable mag $8.6 billion a year, and industry experts arestripes with simple consumer interfaces. concerned losses will rise as fraud migrates toVarious models are available from dual- the U.S. from smart card-enabled countries.account cards (similar to Fifth Thirds DUO Equally compelling is that Aite estimates thatcard) to redemption-based cards that let U.S. payment card issuers missed out oncardholders use their rewards points at nearly $4 billion in 2008 charge volume andcheckout. The key differentiator is a push- approximately $78.8 million in interchangebutton smart card that allows the cardholder to fees because of problems cardholders hadselect what account he/she prefers to use at with their cards while traveling abroad. Now,checkout all designed on the plastic itself. more than ever, issuers have a compelling reason to take chip-cards more seriously.Mass adoption of hybrid cards is not likely tocome soon. Much investment and innovation The fraud savings associated with EMV cardsis being redirected to mobile-based payment should cause issuers to take note. Considertechnologies such as NFC payments, and the U.K. Payment card fraud losses in the U.K.various cloud-based payment alternatives. dropped from 18 basis points to 12 basisAnother challenge for hybrid cards is their cost. points between 2001 and 2008 after the U.K.Current estimates by Auriemma Consulting rolled out EMV in 2001. More recently, totalGroup peg hybrid cards as being 10 times fraud losses on U.K. cards dropped 17more expensive than issuing a standard percent between 2009 and 2010.plastic. Yet, despite these challenges, hybridcards may become more common for niche Visa and MasterCard have taken steps togroups (e,g., heavy credit users who need accelerate the migration to chip-based EMVaccess to debit on a limited bases might prefer cards. Visa intends to institute a U.S. liabilitythe DUO card). shift for domestic and cross-border counterfeit card-present point-of-sale (POS) transactions, effective October 1, 2015. Currently, POSChip Cards Add a Layer of counterfeit fraud is largely absorbed by cardSecurity issuers. With the liability shift, if a contact chip card is presented to a merchant that has notFor decades, the plastic card has remained adopted, at minimum, contact chip terminals,unchanged with the magnetic stripe being the liability for counterfeit fraud may shift to theprimary transaction method linking the card merchants acquirer. Visa provided a carrot toaccount on the plastic to the POS terminal. The merchants. They will eliminate thesmart chip imbedded in the plastic securely requirement for merchants to annuallystores account information and the issuers validate their compliance with the PCI Datapayment application, and it performs Security Standard for any year in which at leastcryptographic processing for validating the 75 percent of the merchants Visa transactionscard number and certain static and dynamic originate from chip-enabled terminalsdata used in the transaction. This provides astrong form of card authentication validating Card issuers should realize that chip cards likethe legitimacy of the payment type being used. EMV come with a price. The typical cost of aThe result is stronger protection against magnetic stripe card is about $0.15, whereas, Key Trends Shaping Card Payments 3
  4. 4. on average, EMV cards can cost between processors to identify a long-term plan to$2$4. Though this is a considerable ensure risk mitigation.difference, financial institutions should see theinitial costs of the chip card offset over time by Conclusionthe reduction in fraud. Card issuers have much to consider as theIssuers should begin building their EMV market for card payments continues to evolve.strategies. The risk of fraud and potential for From new technologies to new alternativelost transaction and interchange income for payment providers, issuers must innovate andoverseas travelers should compel issuers to partner with the right long-term providers toaction. Consider your cardholder segments to remain relevant. Relying solely on theidentify low-hanging fruit; are there frequent traditional magnetic stripe card is not ainternational travelers in your card portfolio? winning strategy in this new age of paymentIf so, consider an EMV prepaid card to meet processing.their needs today. Then, work with yourAbout Quatrro Processing ServicesQuatrro Processing Services provides an innovative approach for your credit, debitand prepaid card processing needs. Our portfolio processing solutions aredelivered by a non-legacy platform that offers a flexible and customizablealternative. Quatrro also offers an integrated suite of managed services across theentire risk cycle spanning credit, fraud and portfolio management. By leveraging ourAnalytics and Transaction Monitoring solutions, your organization can moreeffectively manage your core competencies resulting in increased cost savings,streamlined operations and improved business processes.For more information please visit: Key Trends Shaping Card Payments 4