Innovate or stagnate, credit card providers warned

Credit card providers need to hop on the mobile payment bandwagon or experience a further deterioration in their already grim situation, experts warn.

In the span of two years, the card payment industry has been transformed from one of the most profitable lending channels to one of the least, noted a report released by financial analyst firm Deloitte & Touche LLP.

Credit card issuers are battling record net loss rates, driven by rising consumer bankruptcies and stiffer government regulations, said Pat Daley, leader of Deloitte Canada’s payment practice.

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In the next three to five years, Daley said, an ever-growing number of consumers will log on to social networking sites, such as Facebook, to shop. They will use smart phones or other mobile devices, such as the iPad in conjunction with services such as PayPal to conduct transactions.

Together, these indicators suggest the days of a profitable standalone credit card business model are coming to an end, said Daley.

Somehow, credit card issuers need to find a way to hitch a ride on the mobile bandwagon before it’s too late.

“They should develop some sort of e-wallet platform or partner with current enablers. I’m inclined to believe issuers will go for a combination of both methods,” Daley told

Hard times

The net loss rate for card issuers went up from below four per cent in 2004 to nearly six per cent last year.

The government is also looking into legislation that would further regulate the industry.

This is being partly driven by retailer complaints that issuers are charging them exorbitant interchange fees (payments made by retailers to a card user’s issuing bank for each transaction).

Proposed regulatory measures would lead to greater visibility into fee structures, enabling merchants to negotiate interchange fees and offer discounts based on consumer payment type.

Deloitte highlighted several key changes to consumer payments in the past four decades.

For example, in the 1970s payment channels were either bank branches or point-of-sale. Payment modes were mainly cash, magnetic stripe credit cards, paper cheques, and wire transfers.

These mechanisms were typically funded through deposit accounts.

Fast forward to 2010, and we see the Web, tele-banking and mobile options added to the payment channel mix.

Chip bearing cash and debit cards are pervasive, RFID-enabled proximity payment devices, contactless payment devices and electronic tokens are also increasingly being tested.

Funding is now also coming through methods such as:

  • Pay before – pre-paid e-wallets
  • Pay now – chequing accounts
  • Pay later – credit or line of credit

Slow move to mobile

Technology will eventually merge electronic money transactions and mobile payments, experts say.

However, it doesn’t seem this transition will happen any time soon.

“When will we see widespread adoption of mobile payments in Canada? That’s the $64,000 question,” said Rob Burbach, senior analyst, financial insights at IDC Canada in Toronto.

The technology and cooperation between stakeholders on a new transaction model is as yet in the early stages, the analyst said.

For one thing, disparate industries, such as card issuers, merchants, broadband providers and developers would need to come together to develop standards, such as those created for the credit card and debit card industries.

Earlier this week, MasterCard Worldwide announced the launch of a global research and development unit that will develop contactless, mobile and Internet payment products.

The research and development team will experiment on improvements to existing technologies, such as the company’s PayPass contactless application and the MoneySend mobile and Web funds transfer service.

“We will be focused on delivering what’s faster and more efficient than ever before,” said Ajay Banga, MasterCard president and chief operating officer.

Motivation for mobile

However, purveyors of mobile banking would have to address issues other than just rapid access to cash, according to Vincent Kadar, president of Telepin Software Inc., an Ottawa-based mobile money transactions platform provider.

Existing systems appear to be adequate for Canadian’s needs, Kadar said in a recent blog tiled Mobile banking is gaining traction, but does anyone care?   

He recalled a survey that asked some 6,000 Canadians why they hadn’t enrolled in mobile banking. 

It elicited responses such as: “I don’t see the point,” “I get everything I need from online banking,” and “my banking needs are not that urgent that I can’t wait to access my account through the phone, ATM, or the Web”.

He noted that as far back as 2005, there were already 51,000 ATM machines in the country or about one ATM for every 665 Canadians.

Point-of-sale devices for the period exceeded 300,000 or almost one POS device per 10 Canadians. As many as 65 per cent of these devices allowed cashback during a debit purchase.

Embedding a marketing model into mobile transactions, Kadar said, could be viable strategy.

“To encourage use and retention of all these services, rewards programs and promotions need to also be encouraged and introduced.”

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