Credit isn’t what it used to be, and that’s OK. In many ways it’s better, faster, more personalized and more responsive to spend trends in an unpredictable market.
With buy now, pay later (BNPL) upending many traditional notions around credit, and as more FinTechs offer consumers an expanding menu of innovative credit choices, designing a successful card program may seem as if it’s getting more difficult by the minute. But luckily, it’s getting easier to execute those programs quickly and inexpensively by using platforms to handle all of the back-office tasks.
As i2c Vice President of Global Product Development Dan Hanks sees it, building a successful post-pandemic card program in 2022 involves catering to the needs of two prime user personas: the transactors and the revolvers.
Sounding like a pair of late ’70s punk bands, these two consumer groups have fundamentally different ways of using credit. To grow each requires specializing — and experimentation. Hanks defines transactors as people who pay off their credit card bills every month, while revolvers generate interest by making partial or minimum payments.
“Transactors tend to be more rewards-focused. Interest rates, other features, fees, are less important for them,” he said. “They’re looking at rewards. For the revolvers, it’s a mix of things — it’s the APR, it’s your interest rate, it’s fees, it’s other promotional offers too.”
Pointing to offers like 0% APR on new purchases for 12 months, balance transfers and the like, these are designed for revolvers. A few years ago, it stopped there, but the old boundaries are vanishing.
Hanks said in just the past year, a few big changes on the rewards side have created new challenges for issuers. For one thing, rewards have gotten a lot more plentiful.
“Partly, I think this is an offshoot of what happened after COVID on the issuer side,” he said. “I was on the issuer side for a large bank at the time. Everybody expected, from a credit risk point of view, that the world was going to end. The economy was shutting down, people were going to stop paying their bills, everybody got very conservative as you’d expect.”
However, that didn’t happen. In fact, the exact opposite happened.
“Delinquencies dropped, charge-offs dropped, but balances also dropped because a lot of people took the money that they got from stimulus payments and paid down their credit card debt,” he said. “So, it was good from a credit risk point of view, but not from a growth point of view for issuers. You want the portfolio to grow, generate interest, all of that.”
To generate more value for issuers’ card portfolios, card program design innovation is needed to kick-start that, and it’s happening right now in the issuing space.
See also: Amex, i2c Launch Payments Platform for FinTechs
Ditching the Credit Rulebook
Through most of the red-alert portion of the pandemic, major players began tossing out the traditional credit rulebook to grab up as much of that stimulus spending as possible. Before COVID-19, most issuers tended to try to stay away from a 2% reward rate, Hanks said, because Visa and Mastercard’s interchange rates generally hover around that point.
“Banks were always very reluctant. But last year, Wells Fargo was probably the most prominent coming out with a 2% cash card, no caps, no limits, no fine print,” he said. “TD Bank, Synchrony, there are other banks that have been coming out with this.”
Up against those names, it’s hard for smaller players to compete. That’s where creating cards for niche groups becomes a valuable strategy, and one seeing more usage in 2022.
“On the revolver side, what’s going to change is what’s coming,” Hanks said. “The Federal Reserve is raising interest rates. That greatly affects the profitability for a bank offering 0% for 12 months, 0% for 18 months. Those get much more expensive because you have a cost of funds as a bank.”
Accordingly, those offers will wane — and quickly, too. Banks just have to compete differently. Hanks said that all comes down to meaningful differentiation of credit products for niches. For some, virtual cards are the way to stand out from the 0% APR crowd.
“As soon as you get somebody to apply and you approve them, you want to get them spending on your card,” Hanks said. “We’re seeing a lot of interest in virtual cards. Basically, as soon as you are approved for the card, seconds later you get an email with your card number.”
With the ability to provision virtual cards to any smartphone or wearable eWallet, a consumer can conceivably apply, be approved, provisioned and start spending right in store. Virtual cards provide agility and flexibility — two of the most in-demand elements of any successful pandemic-era card program.
Virtual cards can also be programmed for single use, and users can even have a new virtual card issued for every transaction for greater privacy and security. Again, flexibility and agility are key.
Related: i2C, Qatar’s KARTY Form Digital Wallet Partnership
Hybrid Credit Emerges
How card programs are marketed matters a lot, obviously, as do form factors and tailored offers that shield the value of card portfolios while giving users incentive to spend their way.
“Now we’re into the phase of your phone, your watch, your Garmin, your Fitbit and so forth,” Hanks said, recalling the evolution of card use to present day. “Physical plastic is still very important, a lot of people still use it, but you can see the direction it’s going. Five years from now, just holding your watch up is going to be even more common than it is today.”
For issuers on the i2c platform, one promising development taking wing this year is hybrid credit products that combine revolving credit with installments for a “super app” approach.
“Think of it as a combination of revolving and installment loans,” he said. “What we’re seeing are, again, ways to differentiate yourself, especially for the revolvers, the people who know they are going to pay interest and interest.”
In this way, the cardholder spends as they normally would and earns rewards, but is then offered the choice of rolling available credit and rewards into things like installment loans for big items. Another example of differentiation this year is no late fees.
Hanks said i2c client Petal is doing this, noting, “The late fee is your largest fee, your largest fee income if you’re the issuer. They’re set by the government under the Card Act.
“You can’t charge more, but you can always charge less. We’ve seen some issuers doing that, especially products targeting revolvers, often for younger people and the like, either getting rid of fees completely or partially.”
He mentioned Apple Card, Citi’s Simplicity and Discover as all marketing no-late-fee options now, showing again how the biggest players are reinventing issuing for credit’s new normal.
“For me, [2022] is the year of differentiation. It’s issuers large and small trying to find those ways in a very crowded marketplace to stand out for consumers,” Hanks said.
Read more: Payments Processor i2c, App Developer Swell Team to Create Integrated Financial Platform
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