The Future of Credit Cards - why are cards a huge untapped opportunity for banks?

Even though technology, consumer behavior, and finance are always evolving, credit card products from banks have largely stayed the same. Of course, some things have changed: signatures are being replaced by biometrics, some retailers don’t even require us to queue to pay, and new models for repayments, such as Buy Now Pay Later (BNPL) are growing exponentially.

Back in the 1980s, Access, who are now Mastercard, ran an ad campaign that positioned their credit card as a flexible friend. The offering? A credit facility with a charge card that was there to help people spread the cost of everyday items. Fundamentally, this is the same offering as we see from banks today.

Innovation in cards today

While credit card products from banks haven’t changed a great deal since the 80s, a new school of challenger brands are beginning to reshape the face of short-term lending. From BNPL to instant activation with virtual cards, credit is getting more flexible and fast paced.

Let’s take a look at some of these innovations in more detail:

More ways to pay

We aren’t tied to physical, plastic credit cards anymore. Solutions like Google Pay and Apple Pay digitize the physical wallet, enabling payments through mobile and wearable devices. Some providers, such as Curve, allow users to aggregate all their accounts through one app. Payments and withdrawals are made from a single card. Customers can then repoint their transactions to different accounts if they wish, after the payment is complete.

Digital-first credit solutions, such as Zilch, are bringing credit to customers faster. Instead of waiting 3-5 working days for a plastic card to arrive, a virtual card is available as soon as customers are accepted, which can be added to digital wallets and used straight away. 

Smarter financial management

It may have been novel in the 80’s, but a credit facility that’s solely tied to a plastic card is inflexible by today’s standards. A range of non-plastic credit products from the likes of Klarna, Paypal Credit, and Monzo Flex, are reshaping lending. “Credit card issuers offering perks like longer grace periods, payment holidays, or snoozable payments are popular with a financially savvy generation.” explains Simona Das, Senior Product Manager at 10x. “Customers want the option to convert payments into a series of instalments with lower or no interest rates attached, without opening a new lending facility.”

According to YouGov, 44% of global consumers are more likely to use a credit card for budgeting purposes, compared to a year ago. “With modern credit facilities, customers can impose spending limits on certain categories, such as retail or eating out, in order to help budget effectively.” Simona adds. Monzo’s Flex product blurs the boundaries between credit and BNPL. Customers can flex transactions from the past two weeks into an interest free credit payment, enabling them to spread the cost of everyday items while making interest rates work in their favor. 

Data-driven rewards

Airline miles, hotel points, cashback, and other rewards are standard credit card perks. Interestingly, Europeans are the least happy with their card rewards, a recent YouGov survey recently found out.

But challengers are doing their best to change this. Zilch offer consumers voucher codes based on where they spend. Alongside their BNPL capability, this offers customers a consolidated way to get the best price, combined with a flexible way to pay. Monese, a digital current account provider, integrate with Avios, offering customers a way to earn travel rewards without a credit card. Alongside this, Monese also offer weekly discounts for a changing roster of retailers, saving customers money on everyday items. 

How can banks close the challenger gap and transform their cardholder lifecycle?

"New research from Built From Mars founder Peter Ramsey suggests challenger banks are innovating faster, deploying updates 4.6x more frequently than incumbents, with legacy debt as one of the blockers to innovation."

While the comparison between digital-first challengers and incumbent banks is hardly new, there’s a clear distinction between the two when it comes to credit products. Traditional offerings are structured similarly, with little personalization, while new players’ are providing flexible functionality that speaks directly to customers, making financial management easier.

Legacy technology, a well-known pain point, prevents banks from making advances and taking credit products beyond cards. The customer experience is everything in modern cards, as our interviewees attested, with the effective use of data in real-time key to moving away from a one size fits all approach.

There’s no overnight fix here for credit card divisions – digital transformation from the core outwards is needed for banks looking to catch up and compete. Despite the challenges associated with moving away from legacy technology, it’s an achievable goal for banks. Market conditions are driving credit card usage, which may make for an opportune time to start driving change.