Disruption in the Payments World

The consumer payments world is in transition. The current euphoric era for many issuers will be disrupted and quite possibly eliminated over the next three years.

Celent expects some major shake-ups to occur in the payments industry in the near future. A new report, , examines the storms brewing that could have dire consequences for many issuers and offers insight into strategies that could help them weather these storms.

First, Celent expects that interchange rates will begin to decline. The evidence is mounting against the issuing business, and lawsuits will continue to add pressure to act. Free rewards programs will be the first real casualty as issuers are forced to reevaluate their card portfolios and justify high-cost programs. In the long run, the card industry will be forced to return to a fee-based system that aligns the cost to the beneficiary. This will likely persuade consumers to seek their free lunch elsewhere, and the door to other payment methods will be opened even more.

Second, Celent expects that a large payments company will throw its hat into the ring and launch an alternative network that will rival MasterCard and Visa. Lastly, credit-only or credit-centric issuers are expected to diversify their payments mix (a necessity during this economic time and consumer trend to debit) and focus on building their debit payment options by way of decoupled debit programs.

As a result of these events, issuers will have many things to consider over the next five years. To hedge against these changing times, Celent recommends the following strategies:

• Diversify the payments mix. Regardless of the actual impact, one thing is quite apparent: banks will have to view their payments package as a whole and formulate a long-term strategy that not only includes multiple payment products but is flexible to work with the changes that lie ahead.
• Scrutinize rewards funding. The way issuers fund their rewards programs should be heavily scrutinized. They need to consider a Plan B if they are funded largely by high interchange rates.
• Rethink the debit card and DDA relationship. Those with weak debit card programs need to consider customer stickiness attributes and the tactics they can use to either make their debit card more attractive or entice their customers to continue to use their cards.

"Without question, the consumer payments world is in transition," notes Ariana-Michele Wittlake, senior analyst with Celent's banking group and author of the report. "Not only will issuers have to revisit their lending strategies, but they will have to grow more innovative in attracting and retaining cardholders as their revenue sources become compromised by competitive threats, lower interchange, and the general consumer trend to consolidate payments to low-cost channels."

In this report, Celent discusses the likely impact interchange, alternative payments and decoupled debit will have on payments, particularly on credit card payments. In addition to this analysis, Celent offers insight into how banks can benefit from these events and how others can hedge their risk from them.

The 48-page report contains 13 figures and two tables. A table of contents is available online.

Members of Celent's Retail Banking research service can download the report electronically by clicking on the icon to the left. Non-members should contact info@celent.com for more information.