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Changes in the Payment Card Market

By Richard Huff

Big changes are coming to the payment card market when it comes to credit/debit cards, gift and prepaid cards, HSA and FSA cards, loyalty and membership cards, and healthcare ID cards. These personalized cards link consumers to various financial and healthcare systems worldwide. The various payment methods used by customers when purchasing from an organization represent a communications channel worth paying attention to. To keep in step with the evolving methods of customer interaction, organizations need to keep up to date with the latest changes going on with these cards, modify customer communications channels for consistency, and effectively communicate changes to their customers.

In the United States, a payment network, such as Visa or Mastercard, connects the retailer or service provider to the card-issuing institution. With each transaction, the networks charge an interchange fee based on the purchase price. Currently, when a customer uses a card with the Visa logo, the merchant must use the Visa payment network and pay Visa the interchange fee. The Credit Card Competition Act of 2023, currently working its way through Congress, aims to reduce credit card interchange fees by giving merchants a choice when it comes to the networks they use. The legislation requires card-issuing banks to offer a choice of at least two networks, one of which is either Visa or Mastercard, by which transactions can be processed.

The intent of the legislation is to reduce consumer costs by introducing competition and driving down the interchange fees. Proponents say merchants may pass those lower costs onto consumers, leading to an improved customer experience. However, the legislation does not require merchants to lower their prices and they may choose to keep the savings. Opponents point out that, if credit card issuers lose out on interchange fee revenue, they may diminish their rewards programs to make up for the loss.

Consumers have changed how they use payment cards in the past several years. Due to the fact that fraud remains the biggest challenge facing the retail industry, card production has changed over time as well. Increased payment card fraud pushed card networks Europay, Mastercard, and Visa (EMV) to promote EMV chips as a more secure transaction method. During a transaction with a card reader, the EMV chips transmit unique codes for each purchase instead of the credit card number, as opposed to the magnetic stripe having the credit card number encoded on the stripe and passing the full number to the reader with each swipe. Fraud liability regulations placed the liability for losses on any merchant that did not switch to EMV technology, which rapidly increased adoption. According to Visa, there was an 825% increase in the number of businesses accepting EMV cards between 2015 and 2019.

Beginning in 2024, newly issued Mastercard credit and debit cards will no longer be required to include a magnetic stripe, with a plan to completely phase them out by 2033. The elimination of the stripe opens up new card design opportunities using the back of the card.

The COVID-19 pandemic also had a major impact on how consumers used payment cards. Sheltering in place, consumers transitioned many aspects of their personal and business routines online, including purchases of household goods, office supplies, and food. A study by Arlington Research found that about 40% of consumers shopped via a brand’s website for the first time during the COVID-19 pandemic, and nearly half of those consumers plan to continue to make purchases on those sites. It took 20 years for ecommerce to garner 10% of the retail market, but in 2020 alone, ecommerce sales increased by 43%, rising from $571.2 billion in 2019 to $815.4 billion in 2020.

Once the addition of EMV chips addressed counterfeit fraud at the point-of-sale, criminals moved online to conduct card-not-present (CNP) transactions. Datos Insights estimates that in the U.S., CNP fraud losses will exceed $9 billion in 2023 and approach nearly $13 billion by 2026. To mitigate CNP fraud, credit card issuers have adopted 3D Secure authentication (3DS), which is a new security protocol for validating online card transactions and verifying card users’ identities. “3D" refers to the “three domains" involved in verifying each transaction, which include the credit or debit card issuer, the merchant's bank, and the payment platform that processes and verifies the consumer's transaction. While the major credit card issuers have implemented 3DS into their payment processes, businesses have been slow to adopt the new protocol on their web-based platforms. 3DS adds steps to the check-out process and consumers are more likely to abandon a shopping cart if the checkout process is too complex. Until the new protocol is mandated, retailers need to balance the additional security against hassle-free transactions.

Another major change is the emergence and increased adoption of alternatives to payment cards for consumers. Following the pandemic, the retail market saw a rise in the popularity of Buy Now, Pay Later (BNPL) offerings. Similar to layaway plans, but leveraging digital payments, BNPL loans represent a way for consumers to spread out their payments into equal installments over a set period of time. Retailers often offer BNPL plans with no interest to increase sales.

Digital wallets offer another alternative to payment cards. A digital wallet is a financial transaction app running on a smartphone or tablet. The application stores the payment account information and allows consumers to make purchases without using cards or cash. The app is connected to the consumer’s financial account and transmits data through encrypted communications. From 2022 to 2026, global digital wallet use is predicted to grow at a compound annual growth rate (CAGR) of 12% online and 15% at point-of-sale (POS). In the United States, 32% of online transactions and 12% of POS transactions are made using digital wallets, which provide enhanced security through information encryption. However, if an unauthorized individual gains access to the mobile device, they could potentially access the digital wallet, putting all the personal information and financial assets at risk.

Customer experiences can be hampered by inconsistencies between platforms and communications channels. Multichannel interactions have gained popularity in recent years as customers flip between websites, mobile apps, and in-person shopping. To keep up, organizations must present the same experience between channels. A customer’s choice of payment method is just as important as the channel used by the organization to communicate back to the customer.

Payment methods are inexorably linked to customer communications. The methods and channels used for payment open new opportunities for customer communications. As payment methods evolve, organizations must change their customer communications management processes to keep up. The processes through which customers pay for goods and services are a critical aspect of the overall customer experience. Difficult checkout processes or inconsistencies between channels can quickly cause customers to abandon the transaction. Organizations need to maintain a balanced approach by supporting new payment methods while maintaining consistency.

Over the past two decades, Madison Advisors' industry-neutral expertise enables enterprise organizations, service providers and technology providers to achieve their strategic objectives around today’s evolving customer communications management (CCM) requirements.
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