Almost weekly, a challenger bank launches a new debit card. Or, a firm from outside finance launches a card as an initial foothold into providing financial services and products to its customers. Consumer preferences are changing, too, as younger customers prefer to use debit over credit. New research shows the challenges credit card issuers are up against and provides a framework to compete in an increasingly competitive market.
The Deloitte US consumers credit card payments survey, run in August 2019, queried over 2000 respondents in the United States who have at least one credit card and one debit card. The report illustrated how issuers have used rewards to compete and the impact that has had on expenses, while the average balance customers carry on their cards has dropped.
Competing using yesterday's tactics
Credit card issuers have relied on expanding rewards programs to stay competitive in today's market. In 2018, consumers made at least half of their credit card purchases with rewards cards, which is why costs associated with rewards have shot up significantly.
According to the Consumer Financial Protection Bureau, the average issuer rewards expense per rewards card increased from $139 in 2015 to $167 in 2018. The CFPB found that high-cost rewards cards and aggressive sign-on bonuses are driving the increase in rewards expenses. Rewards expenses are growing at 30 percent year over year.
This environment has raised the bar, leading consumers to expect generous rewards programs.
Consumer preferences are evolving
Consumers expect a lot from their rewards programs and they're willing to switch to get more from their cards. One-quarter of consumers surveyed are willing to switch their credit card provider over the next two years to obtain better rewards elsewhere. In particular, younger people – 34 percent of Gen Z and Millennials – are more likely to switch.
Card issuers don't only have to contend with switching -- the ways consumers utilize their cards are also changing. In particular, there's a shift among younger consumers away from credit cards. Deloitte found that 52 percent of Gen Z and 41 percent of Millennials in its survey would prefer to use debit cards most.
Deloitte asked about specific digital apps -- for instance, 42 percent of Millennials who use Apple Pay in the survey use debit cards, compared with only 23 percent of Gen X survey respondents. The pattern is similar for Google Pay, with 41 percent of Millennial users of Google Pay preferring debit cards compared with 29 percent of baby boomers.
"With younger consumers’ use of digital payments only expected to grow – 44 percent of Gen Z and millennial consumers expect to use their phone for most of their payments in the future – the need to revisit the credit card value proposition for the younger segments has possibly never been greater,” the report said.
What card holders really want
Major credit card issuers are responding to the changing market. For example, American Express now offers an installment payment option called Plan It - Pay It that's finding a home with younger consumers.
69 percent of surveyed respondents said they would find a credit card that offered personalized features appealing. Rather than traditional reward categories, younger customers showed more interest in customizable rewards, like clothing and apparel (chosen by 41 percent of Gen Z customers versus 23 percent of Gen Xers) or music streaming (chosen by 21 percent of Gen Z customers versus 3 percent of Boomers).
“Card issuers should account for these generational preferences when they design their rewards programs. Our survey findings suggest that customers would also find value in flexible reward structures, which are more like currency, enabling easier redemption across product categories, and that could be used outside issuers’ offerings,” the report said.
The path forward for issuers
In addition to more personalization, the Deloitte survey demonstrated an opportunity for issuers to improve the customer experience. Consumers want more same-day resolution of their complaints and issues.
In a similar theme, there's also room to excite people more with instant gratification. There is innovation happening -- Apple Card launched with daily crediting of reward points. Apple Card holders can use these points for purchases the following day.
Consumers want to pay easily and enjoy their lives, and there's an opportunity for credit card issuers to expand their business models beyond payments and credit products. Looking to the Chinese market, credit card issuers could consider aggregating consumers’ shopping experiences in a financial superstore app.
They could create a platform that enables customers to:
- access financial products, like personal loans or car loans, from different banks or other financial institutions
- conduct other purchases, such as buying train or movie tickets, booking flights, paying utility bills
- manage personal finances, including budgeting
- request and receive financial advice.
Banks and credit card companies are positioned well to spearhead the financial superstore app concept. More than half of survey respondents said they would be interested in using this kind of financial superstore app. And, more than 75 percent of consumers surveyed consider banks and credit card companies to be the best positioned to offer a financial superstore app.