Business | Banking
End of plastic card payments imminent?
Credit card industry faces a challenge from online payment methods that utilise the norms and standards it orginally set
- By Sriram Natarajan, Special to Gulf News
- Published: 00:00 June 13, 2011
- Image Credit: Bloomberg
- A cashier swipes a Visa card. Visa, MasterCard and American Express now must contend with the likes of PayPal and Google Checkout in an increasingly online payment environment.
Dubai: The American Heritage magazine, in its March 2007 issue, listed the invention of the credit card as one of 50 seminal events in the US economy's 400-year history.
Today, we all live by the convenience and utility of the general-purpose credit card. It has become part of everyday life across the world, including the Middle East.
After building on a global infrastructure and a codified set of rules and standards that provided payment system integrity — and its by-product, public confidence — the credit card industry now realises that there are payment technology upstarts who are ready to take advantage of the infrastructure and challenge existing players with innovative, alternative payment products.
Digital products
Encouraged by cards' success in replacing cash transactions, industry leaders now face an existential challenge of the card in its plastic form being replaced by digital products that are not only cheaper, but are also easier to use. This vision has met with a fair amount of success: "alternative" payments have seen fast growth in recent years.
The end-of-year shopping season in 2010 displayed an important tipping point in consumer use of "alternative forms of payment". For the first time in economic history, internet sales on cards exceeded the spend on cards in the "real world".
Through the years we have seen the emergence of several payment providers that provide consumers with additional payment options beyond the traditional brands of Visa, MasterCard and American Express. Alternatives such as Bill Me Later, Google Checkout and PayPal have shown remarkable growth in the last three years. Alternative payments continue to gain share in the on-line world as against traditional payment methods.
Consumers in the Middle East are expected to adopt alternative payments in line with global trends. Research has estimated that 75 per cent of on-line users have an alternative payment account and 20 per cent of all on-line payments are alternative payments, a figure expected to grow to 30 per cent over the next four years.
With internet penetration in this region higher than world average (at the end of 2010, it was recorded as 29.8 per cent, compared to 28.7 per cent in the "rest of the world"), this region may even take the lead in the on-line payment revolution.
Alternative payments continue to increase their share at the expense of both credit and debit cards. A payment method requires two things to succeed: acceptance by a critical mass of merchants and adoption by a larger mass of consumers.
So far, it is only in the on-line world that alternative payments have made an impact. However, the rapid growth in adoption and a technical killer application may increase its share in the physical world too.
Consumers to benefit
Alternative payment providers bring in a lot of ingenuity and entrepreneurship to the payments system. The most significant beneficiary in the process will be the consumer, as innovative companies dedicate themselves to creating and offering multiple new choices.
It's easy to get caught up in the excitement around alternative and mobile payments, especially with all the developments that are happening in the world of mobile phones. Smartphones now account for about 20 per cent of mobile sales and their proportion among all mobile phones has reached ten to 15 per cent.
Some of the biggest names in mobile network operators have teamed with banks and branded card networks to pave the way for mobile payments. Other branded card networks and big banks are forming alliances and promising to introduce their own version of the mobile payments in future.
Changes needed: facing up to competition
By recognising the threat posed by the new payment providers, payment card issuers will try to stay profitable by focusing on the following areas:
- Operating Flexibility and Scale: Issuers will have to focus on reducing overall cost of issuing a card, not just their allowable costs.
- Diversified capabilities: Banks with diversified payments businesses will be better positioned than their competitors.
- Sales and service in the digital world: Service quality and convenience will become a differentiating factor to retain customers.
- Fraud protection: Alternative payment providers will find it challenging to protect users from fraud trends that they cannot anticipate.
- Redefine: Banks can simplify the pricing and charge extra for additional value.
The writer is the chief operating officer of Quatrro, a risk management consultancy firm.
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