The oldest Millennials turn 38 this year, any company still working on its “Millennial Digital” strategy has already missed that boat.
The oldest Gen Z is 22 in 2019, building strategies for this emerging segment is the critical task facing companies today. Gen Z consumers expect relevant, engaging and personalized content, offers and communications from brands they engage with, and for the most part they get it. But rarely, if ever from their banks and other financial institutions.
Under threat from emerging challenger FinTech brands in every part of their business, banks and the wider traditional payment industry are investing a lot of time and effort in trying to engage digital consumers. But their most powerful engagement asset, payment cards, remain underused and increasingly commoditized by offering a limited number of generic, static card value propositions, which miss the needs of these new consumers:
- Cash back for everyday spend (gas and groceries)
- Travel points/miles for frequent travelers (hotels and dining)
- Entry level card
- Debit card
To maintain relevance and engagement for Gen Z consumers and those that come after, issuers will need to solve for two things simultaneously:
- Compelling, personalized and dynamic hyper personalized value propositions
- New economic models to sustain rich value propositions for card users as interchange fees erode
The answer to both of these lies in a systematic and structured partnership model between both established and emerging digital brands in both services and hardware and the payments industry. This allows for the sharing of costs and benefits in creating relevant card value propositions, making the economics of rewards economically viable in an environment of lower interchange rates.
The bigger challenge will be the ability to serve consumers with the necessary personalization of these value propositions with legacy technical infrastructure not built for this level of personalization or the ability to dynamically adapt and change to consumers needs. The companies that solve for this challenge will be the real winners.
Your father’s credit card is … err the same as yours
Smartphones and payment cards are two innovations that enable a large part of modern daily life. This is especially true for Gen Z who have grown up with basics like eating, travel, entertainment and communication all dependent on smartphones and the ability to remotely pay for stuff.
We are used to the the continuous evolution of smartphones (how did we live without 5 cameras!).
In comparison payment cards have changed little in almost 20 years in terms of their core value proposition. Yes you can use them in more places and in different ways, put them on phones and use them online. There is more variety in terms of form factors design and materials (rings, key fobs, metal etc.) and security is better, but these are peripheral to the core value proposition from the issuing bank.
Payments as a critical link between issuer and customer
As the most frequently used bank product, payment cards represent a critical bridge between the issuing bank and their consumers. On average a US banked consumer is paying with a card almost every day. How often do you check your balance, apply for a mortgage, open an investment account or take a loan? The frequency of these is measured in years, payments in hours.
Payments keeps issuers brands relevant, with an ongoing flow of user data and reasons to communicate or otherwise engage with a consumer keeping their brand front of mind so when it is time for that mortgage they think of “their” bank first. To have this reduced to a commodity will lead to an accelerated erosion of the brand and relationship between banks and their consumers and the subsequent ability to serve customers profitably.
Commoditization of payment cards
The basic functionality of credit and debit cards became commoditized decades ago, and as long as it is accepted by merchants and works, consumers could not care less whose brand is on it.
Credit card issuers were forced to differentiate with propositions built around usage and loyalty. Use your credit card more and earn rewards like cash back or some sort of points/miles. You also get some benefits with your card, stuff you probably aren’t aware of or use like auto rental car insurance, payment protection or concierge services. Finally you get short term discounts, perks and special offers. This value proposition has barely changed since inception over 20 years ago.
The payments industry has not kept up with changing consumer needs and in response are becoming commoditized. Historically the majority of consumers have chosen the credit card that comes with their bank account. Increasingly though consumers are seeking the highest rewards rates at any moment of time. Comparison sites like Nerdwallet and Creditkarma have helped accelerate this process. The average US credit card customer now holds almost 4 cards with around half of the cards in the market being inactive (the definition of active being merely 1 transaction in the last 12 months so the reality is a far smaller proportion are really used).
The economics of paying for these rewards and benefits is getting harder. It costs a credit card issuer around $200 to acquire a new customer. Interchange fees are only expected to go one way through a combination of regulatory and merchant pressure. In the US, banks receive on average 150 bps, relatively high compared to 50 bps in Australia, a heavily regulated market. It costs around 125 bps points on average to fund current card incentive levels in the US.
Implications of the combination of interchange pressure and commoditization are that consumers will ultimately have less choice and poorer rewards and benefits as issuers cut costs. Over time competition will reduce as the largest issuers leverage economies of scale to fund benefits and rewards and smaller issuers are squeezed out of the market. Investment in innovation will reduce as the economics won’t sustain it. This will lead to poorer market outcomes for all.
To maintain the growth of card usage vs cash and maintain brand relevance credit card issuers will need to solve for both increased engagement especially with new to market consumers as well as economic sustainability in a world of eroding interchange.
Driving engagement and differentiation
Over the next 5–10 years Gen Z’s will be hitting the workforce, moving to new cities, renting their first apartments, then buying them, independently traveling and getting married and having kids. That’s a lot of changes in a short time. A really smart credit card should be able to serve the needs of that 22 year old through that entire journey
Gen Z consumers have been trained to expect personalization from the services they use. From Amazon to Netflix and an infinite number of other brands we are all used to “because you watched/bought X we thought you might like to watch/buy Y” with the exception of our bank.
If we look at some common categories of credit card rewards you can see substantial gaps between what most cards are offering and what Gen Z consumers are actually using.
Gas/Petrol — don’t own a car use Uber, Lyft, Lime, Zipcar etc.
Grocery — prefer home delivery e.g. Instacart, Goodeggs, Amazon
Dining — eat in e.g. GrubHub, UberEats, Amazon, Doordash
Hotel Chain Travel — stay at Airbnb’s
Media consumption — smartphone OTT services
Gen Z consumers expect personalization and relevance, issuers especially in the US, support a very limited number of generic card offerings typically including a cash back (everyday spend), travel (international spend), and an entry level card.
Issuers have not universally ignored these changing needs and there have been some notable efforts to meet them. The best known is Capital One’s Uber promotion which launched in April 2015 and gave both new and existing Quicksilver customers 20% back for every ride for a year.
This was groundbreaking for two reasons, first it was a long promotion, a hybrid of a card benefit which are typically permanent and a short term offer. Secondly it was for a relatively unknown and unused service. At the time less than 2% of US credit cards had been used on Uber. The promotion self selected for exactly the target market Capital One wanted, young urban affluent and technically sophisticated consumers. Capital One later repeated this with Spotify.
It can’t just be about ride sharing
Uber and or Lyft have become almost ubiquitous credit card benefits across the market since the Capital One promotion. Ironically Uber itself has gone one better and launched its own credit card with incentives clearly aligned to the broader Gen Z/Millennial target group. It includes food delivery (UberEats) and AirBnB specifically included and double cashback for online purchases as well as discounts for digital streaming services and mobile phone insurance — a compelling addition given Gen Z spend on average 10 hours a day connected via their smartphone.
It’s a smart value proposition and probably one of the best in the market currently for this target audience, but the bar is set pretty low and issuers will need to do a lot better.
The next big expansion opportunity for issuers in the digital economy will, I believe, be food delivery and health and fitness.
Future of food and credit cards
Dining discounts have always been a major part of many cards. One of the biggest changes in dining is the increasing role of delivery. Food delivery shares many of the attractive characteristics of ride sharing but has been relatively underutilized by issuers to date.
Its mobile based, a frequent purchase (with active consumers typically ordering at least once a month), a high growth market disproportionately used by Gen Z’s. It’s a consolidated market with three major national players in the space, GrubHub, Doordash and UberEats, providing for strong partnership potential.
Where food differs is in its mass appeal (everyone eats and eating out/in is a very common activity), but it’s highly personalizable — I like pizza you like tacos. It’s also a lifestyle activity with strong emotional and social ties and one in which consumers are more than likely happy to publicly talk about. It’s rare for people to post their bank statements online, relatively common for food. This means consumers are more likely to have an open dialogue giving banks opportunities to engage in ways that talking purely about finance would not.
Amex has taken an early lead in linking their value propositions with food delivery with its recent Gold Card revamp providing an open ended cash back of up to $10 per month with GrubHub and other food brands. It is my expectation that food delivery will become as common a card benefit as ride sharing is today.
Future of health and fitness and credit cards
Sport and fitness acts even more as a social lubricant than food, providing open conversation and small talk subject matter, the frequent stuff of social media posts. It’s for this reason banks spend disproportionately on sports sponsorships.
Interestingly though sports and health and fitness related benefits are almost totally ignored by mainstream issuer portfolios. Why this would be is a mystery to me personally given the status of sports and fitness in everyday culture especially in the US. You need to get a sports specific card affiliated with a major league of some sort e.g. NFL, NHL etc. and these don’t necessarily offer the best all round value prop so are unlikely to ever be someones primary card.
Towards smarter hyper personalization
As smart and well designed as the Uber Visa Card is for the audience in comparison to legacy offerings it’s still a relatively blunt instrument with everyone getting the same proposition. That may not matter for Uber, for whom the card is likely of most value as a loyalty play in their war against Lyft. As long as cardholders select them for their ride sharing it may not be important if it’s not the users primary card at all but acts more as a membership loyalty card.
Issuers seeking to be the primary card will need to work harder to ensure that level of engagement with consumers over the long term. Ultimately cards will need to be able to offer personalized value propositions that dynamically change and adjust to consumers own preferences, habits and needs over time linked to the value of the customer.
This is going to demand new infrastructure for issuers and potentially new business models to support it. The largest issuers can always of course build their own infrastructure but these companies are already overwhelmed by the ongoing demands of managing legacy infrastructure and the never ending catch up with technology innovation and digitalization. Smaller issuers and new challenger brands won’t want to invest in generic technical capabilities but rather look to outsource the technology whilst focussing on the propositions. It’s my belief in the next 5 years or so that we will see green field technology platforms available on a shared bases provided by 3rd parties like Marqeta and Visa capable of supporting dynamic personalized value propositions.
Beyond discounts to experiences
Real engagement will also take more than just discounts on products and services. These are easily replicated and become commoditized themselves as the Capital One/Uber proposition has shown. Real engagement with consumers will come when issuers can not only personalize discounts but experiences as well.
Food provides rich potential for personalized experiences including exclusive dining opportunities, new restaurant openings, special menu items, regular specials e.g. pizza night packages the first Friday in every month, special events e.g. birthday meals, chefs visiting your home to cook, food events coupled with sporting events (food delivery at venues is becoming increasingly common), full service dinner parties for friends — an infinite number of possibilities.
Similarly health and fitness provide an enormously rich environment for issuers to create highly differentiated experiences and leverage their sport sponsorships.
Visa’s NFL or Olympics sponsorship could be extended to virtual training and competitions across millions of people through integration with Fitness trackers (Apple, Garmin and Fitbit all have API’s available to integrate into partner apps and publish consumer data with consumer consent). Bank of America could extend its Chicago Marathon sponsorship through virtual training and a virtual marathon with leader boards and prizes — completed through walking or running over many weeks making it inclusive. Amex, with its strength in international travel could do the same with special training programs on a wearable for travelers in hotel rooms, creating leaderboards by city and globally to gamify the experience and bring a social angle to the isolation of business travel. Not only does this bring an exclusive experience to these brands consumers but it gives a legitimate reason to communicate with them on a very frequent basis. A for more compelling platform for engagement than spend and fraud alerts alone.
Solving for economics requires partnerships
The top 10 banks in the US collectively serve over 80% of the banked adult population of the US. They have the name, mobile number, address and deep data on these customers spanning in most cases over a decade. The potential power of banks as a channel to market is the key to solving the long term economic sustainability of card value propositions as interchange declines.
Digital content brands will typically fund between $5–25 per new customer. For an issuer these funds can be passed to the consumer and represent a significant pool of consumer value, especially when integrated with the banks own spend. Top 10 issuer in the US reach anything between 50–125m cardholders, with the majority of even established apps reaching only 5–25m users there is a substantial latent and recurring channel value available for issuers on an ongoing basis as consumers are engaging with multiple apps and constantly adopting new ones.
For a device manufacturer channel margin can absorb anything between 10–30% of retail price. Again these can be passed to the consumer as incentives for example to use a mobile wallet on a smartphone or smartwatch. Banks business models are based on long term customer lifetime value not hardware or content margins. Both content and service and hardware partners represent a pool of funds that are free to the banks and create value for all stakeholders.
Royal Bank of Canada provides an example of an issuer just beginning to build a more meaningful proposition in health and fitness. They offer their customers discounted Fitbit’s (with Fitbit Pay) and reward customers for hitting step targets with RBC Reward Points.
AIA Vitality in Singapore in Singapore has a paid membership program offering monetary rewards for hitting health and fitness goals along with discounted fitness trackers and health checkups. Insurers are not known for their sophisticated benefits platforms but in this case AIA is by far ahead of the broader banking sector.
The infrastructure problem
Established banks are struggling under the needs to manage legacy infrastructure whilst keeping up with technical innovation. The gulf between new digital first companies and banks with all the customers is vast. Many traditional banks are struggling to utilize API’s, it’s just not how their infrastructure has been built. The operational and cultural differences are arguably even greater — speed, decision making and focus not being very easy in large complex established companies, least of all banks.
Real change however won’t happen until the big banks are able to meet the demands of hyper personalization. A challenger digital bank with 1–2m customers will not create the critical mass needed for wholesale change. I believe new outsourced models will evolve to serve banks and consumers needs. These will be a combination of new players and established ones. What Marqeta is doing in the prepaid space is an adjacent market that could support similar innovation into credit. How Visa and MasterCard in particular use their considerable resources to create new issuing infrastructure for their customers presents the greatest opportunity for change at scale.
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