Disruption in the Payments World

May 7, 2008


Boston, MA, USA May 7, 2008

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.  

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

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Michele Pace
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Chris Williams
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Yumi Nagaoka
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Table of Contents

Boston, MA, USA May 7, 2008


Executive Summary 3
Introduction 5
The Tornado: Interchange 7
  Rewards -- The Last Straw 11
The Aftermath 15
  Ability to Surcharge 15
  Right to Discriminate 16
  Price Caps 17
  The Likely Outcome 17
The Rising Threat of Alternative Players  19
  Criteria for Success 20
  Rifts in the Payments Barrier 22
  Nontraditional Competitors Entering the Fray 25
  Traditional Incumbents 26
  Alternative Takes on the ACH 28
  Online Payments and the ACH 30
  Potential Impact of Alternative Payments 33
Decoupled Debit 35
  Decoupled Benefits 37
  Decoupled Challenges 40
  Current Initiatives 41
Conclusion 44


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