The brandless credit card: how banks can maintain relevance in the face of disintermediation

Key Takeaways

  • Credit Cards are being disintermediated by new digital payment models (e.g. card on file, eWallets…) that render underlying transactions invisible, removing the card from the customer interface

  • Credit Card products need to bolster their value proposition beyond the transaction by leveraging existing digital channels, such as their mobile app

  • Customer value will only be derived if the Credit Cards group facilitates a tight value exchange between bank and customer, effectively using data to help customers achieve their day-to-day goals

The Brandless Credit Card

When it comes to methods for carrying out everyday financial transactions, consumers are spoiled for choice, with a plethora of newer digital payment methods on offer. The problem is that many of these methods make the underlying transaction invisible, removing banks from the customer interface. Digital wallets, online subscription services, and P2P payment apps are the tip of the iceberg when it comes to offerings that let consumers transact without seeing or thinking about the underlying cards or bank accounts they’re using.

In the short term, these services can benefit banks through increased stickiness, as most customers find it annoying to switch the card they already have on file with one of these services. However, in the long term, the loss of key touchpoints with customers has serious consequences. As banks lose visibility, they cede opportunities to build deeper, more loyal customer relationships to the point that they risk becoming “dumb pipes” that simply process transactions for other companies. The trend towards invisibility also gives bigtech an even larger opening to launch financial products that compete directly with banks’ own offerings.

While it carries a huge risk of disintermediation for banks, the rise of digital payments is also a massive opportunity. Global payments revenue reached $1.27 trillion in 2017, and banks still control a large share of the pie. Those that take action now to strengthen their customer relationships via digital channels will be able to prosper, staying relevant even as payments become increasingly invisible. Here’s a closer look at the biggest threats to banks’ customer interface and how banks can counter them with a stronger digital strategy.

Three threats to banks’ interface with the customer

1. Digital Wallets

Many different players offer mobile wallets in the U.S., including bigtech companies (Apple Pay, Google Pay, Samsung Pay), fintech companies (PayPal), and even credit card companies (Masterpass, Visa Checkout). Among other features, mobile wallets enable proximity mobile payments, in which a customer transacts in-store by bringing their smartphone close to a point-of-sale (POS) terminal, without swiping or having to enter their PIN.

Besides reducing friction, proximity mobile payments make transactions more secure because they don’t share the consumer’s card number with the terminal. This feature may become increasingly important as customers’ concerns over security and digital privacy grow. Digital wallet providers also have an important data advantage over banks and credit card issuers: the ability to see transaction data across multiple cards. This lets them build a more complete picture of the customer that can then be used to personalize digital experiences, further reinforcing the customer relationship.

For bigtech, issuing a mobile wallet can be a first step toward offering their own financial products to compete with banks. Armed with transaction data across multiple cards as well as consumer data collected via their other products, they would be able to offer a seamless experience across channels that financial institutions might find difficult to compete with.

While digital wallets have caught on more slowly than expected in the U.S. and Canada, a look at payments trends in other countries shows the writing on the wall. eMarketer projects that in 2019, 81% of Chinese smartphone users will make a proximity mobile payment. Late entry to the field by banks and credit card issuers has allowed the two leading Chinese digital wallet services, Alipay and WeChat Pay, to amass 90% market share in the country. The financial payout has been considerable: The duo processed a whopping $41.5 trillion in transactions in 2018.

2. Order-ahead, delivery, subscription, and merchant loyalty apps

Surprisingly, the most used mobile payments app in the U.S. is not Apple Pay or Google Pay. It’s the Starbucks app, which 23.4 million Americans used to order their lattes and frappuccinos in advance in 2018.

The fad for ordering ahead isn’t limited to coffee shops. Toronto-based Ritual recently raised $70 million in funding to expand its order-ahead business to other U.S. cities. Delivery service Postmates is planning its IPO soon, and competitor DoorDash may not be far behind. These specialized apps join a slew of other delivery services that streamline the customer experience by making transactions invisible. That includes Amazon Prime, whose 100 million-plus subscribers nationwide can have almost any Amazon product shipped to them in two days with the click of a button.

While banks may benefit in the short term from having a card on file with these services, in the long term they stand to lose out. These apps often distribute their own incentives and rewards, building a customer’s loyalty to the app rather than the payment method on file. Since customers order through the app itself, these companies gain a data advantage, too: the ability to track SKUs included in a purchase, not just the dollar amount and the merchant it was owed to.

From this perspective, non-delivery digital subscription services such as Netflix, Hulu, and Spotify pose a similar threat. Besides rendering banking transactions invisible, they also collect rich information on customers’ media preferences that can be used to personalize experiences and build relationships for the long term.

3. P2P payment apps

P2P payment apps like Venmo, PayPal, and Square Cash have largely replaced cash as the easiest way to pay back the friend who picked up the check at dinner. They’re so common and convenient that users still flock to them despite security concerns voiced by many experts. Unfortunately, similarly to cash, these apps give banks no indication of where customers are sending their money and for what — while the apps themselves gather this useful information with ease.

What can banks do about it?

Mobile wallets, subscription services, order-ahead apps, and other digital innovations aren’t going away. To maintain their relationships with customers, banks must adopt strategies to take back some of the touchpoints they’ve lost in digital channels — or open up new ones entirely. Here are a few strategies banks can consider:

  1. Offer their own products and services. This strategy has been particularly successful when it comes to P2P payment apps. In the U.S., more than 100 banks currently offer Zelle, which processed $119 billion in transactions in 2018 — almost twice Venmo’s total. In Norway, DNB Bank’s Vipps P2P service is so dominant that a staggering 60% of the population are users. Success stories like Zelle and Vipps show that when banks commit to digital innovation, they can build on existing deep relationships with customers for market-leading results.

  2. Work with existing players to increase visibility. Some banks have successfully partnered with fintech and bigtech firms to increase branded touchpoints within payment apps and wallets. For example, in 2017 PayPal agreed to show Citibank and Chase cards more visibly within its digital wallet app and also allow users to spend their Citi and Chase rewards points in wallet transactions. More recently, Chase repaid the favor by allowing PayPal and its subsidiary Venmo to make instantaneous transfers to users’ bank accounts. When banks and fintech companies work together, both sides can win.

  3. Leverage existing digital channels to personalize communication with customers. Customers flock to fintech apps because tech companies understand how to build seamless, personalized experiences powered by customer data. Banks can get in on the game by better utilizing the rich customer data and digital communications channels they already have. By breaking down silos between different lines of business and incorporating third-party data sources, they can build a holistic view of each customer. That view can then help them target timely, relevant content and offers that can be delivered through existing “owned” channels like the bank’s mobile app. By cutting through the mass marketing noise to communicate directly with the customer, banks will keep their products top of mind and top of wallet.

At face value, the loss of banks’ interface with the customer is a scary prospect. However, banks already have the tools they need to fight back. By forging the right partnerships and leveraging their existing digital channels, they can rise to the challenge and emerge with stronger customer relationships than ever.

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