The future of credit cards
 

I work in the fintech space and am a frequent FT lurker. I very much believe that the 40-year old "credit card" as we know it today will be, in Silicon Valley terms, "disrupted" at some point in the not so distant future.

Despite all of the rewards for premium cards, there is certainly still a lot of ugly with this product for many people. For one, it is specifically designed to keep anyone who actually revolves in debt for a non-obvious length of time with high interest and nontransparent card terms.

Even for those of us who do not revolve, I frequently come across a lot of pain points with using credit cards (high friction to online purchasing (esp. with mobile), lack of basic card security in the U.S. with EMV-less chips, frustrating/unintuitive consumer-facing user bank portals, broken credit scoring/rating system, etc.)

Just as Apple reinvented the mobile phone, I predict there will be a reinvention of the credit card sooner or later.

I'd be curious to hear what other FTers think about the future of credit cards. What would the perfect card look like in terms of rewards, design, agreement, etc.?

I'm reminded of Charga-Plates ...

http://departmentstoremuseum.blogspo...rge-cards.html

That direction was from merchant to middle-man/bank ... I've been reading about phone/swipeapps the eliminate the bank, send percentages to local non-profits ...

They will be here for the long haul but look at Google wallet, PayPal and even bitcoin as disrupters. Then there are 'pay anyone from your mobile phone' apps by banks.

The future of credit cards
 

As a consumer who does not run a balance, somebody will have to give me a good reason to abandon the [very valuable] rewards I earn for paying with plastic (not to mention free 30-59 day float) and move to a "mobile wallet" system with no rewards and fewer consumer protections.

People who pay off their bills on time aren't idiots... We won't make a move unless the grass is greener.

I'm not suggesting credit cards will go away - more that some unknown company in the not so distant future will come in and make it much, much better i.e. the next Apple or Tesla of the consumer credit card.

I find it interesting that whenever I read about "the future of payments" there is always an assumption that the market is homogenous. And worse, that that homogeneity is basicaly composed of upper-middle class, technologically savvy, white people in California.

By this I mean that there is a complete disregard for the fact that the vast majority of people in the world who use payment technologies other than cash are using debit. And of those, the larget network is China's UnionPay. If you want to know where changes and innovation are going to happen, that's where you should be looking at. Instead, I find endless articles being written about "mobile payments" and how the smartphone is going to replace the silly plastic cards in our wallets. It is an attitude that compeltely ignores the fact that perhaps if you travel outside of the Bay Area you might come across a merchant or two that aren't equipped to handle you just waving your iPhone at the register.

I think China UnionPay is dramatically changing the nature of payments. They've very openly thrown down the gauntlet at Visa and Mastercard in their bid for dominance of the payments market. Already they're the largest card-issuer, and it is only a matter of time before their impact and influence is felt in North America and Europe. And because of that, I think the future is likely to be debit, and not credit.

Some good points, but there are different markets for credit and debit card users. Yes, the markets are intertwined, but credit card users are generally looking for a short-term loan, while debit card users are mostly looking for convenience. Debit card is nothing but a check that doesn't have to be written at the register.

You cannot compare credit cards with things like mobile phones. The first is a payment method, the second is a device. Big difference.
Adding rewards to a cc is nothing more than an incentive to USE the cc payment method, while upgrading the features of a mobile phone or changing its function is making it "better."
You can make the payment method more safe by adding layers of security, but that does not change the method.

If you don't like the high interest and nontransparent card terms, use another payment method such as debit cards, PayPal or mobile methods.

Conclusion: there will be no "re-invention" of the credit card as there is nothing to "re-invent". The only thing you can do is either change the incentives that come with credit cards or come up with other payment methods.

“Jane, you ignorant slut.” (SNL circa late 70’s: http://www.youtube.com/watch?v=ttqgwlCsXZM )

A counterpoint if you don’t mind. There is also a lot of beautiful with this product for many people. A byproduct of the design mentioned above is that for those who actually pay off their balances in full every month and for whom it is not an incitement to riot (spend impulsively) it can be incredibly rewarding. Many of us here at FT have reaped these rewards, often at little or no cost other than a few moments of our time.

I’ve experienced little pain associated with credit cards. These days one Visa or MC card can be used nearly universally, in person or online, with little liability for fraudulent activity and occasional (actually welcomed) fraud alerts, when spending seems out of character, which are easily cleared with a brief phone call.

My only significant gripe with credit cards is overseas customer (non)service call centers although even that is a self-induced phenomenon. (Now that AmEx has eliminated Secure Messaging, attempting to get a Bonus Bump is basically impossible. You could talk to someone for whom English is not their first language for 2 hours and they still would not understand what you are trying to accomplish.)

I don't revolve. I mostly get cards for the signup bonuses. I've learned how to work the current credit scoring system so I don't want credit scoring to change. I would like larger signup bonuses and/or increased opportunity to churn cards at a faster rate. For ongoing rewards I would like a 5% or higher cash back on all purchases so manufactured spending is worth my time.

As a non-US citizen...
 

Many years ago in Sweden something called "Cash" evolved (all but gone now) which were free cards that could be used a specific merchants with lower fees for the merchant and was charged with $x and used until empty. Unlike debit or CC they weren't tied to a single person.

Now however there's a couple of apps for phones used to buy things. There's "Swish" which is for bank transfers but unlike bank transfers are instantaneous and you are identified by your telephone number. Not usually used by companies but great for transferring money between friends or splitting bills.

Then you have the SEQR/BART apps which must be tied to a MasterCard or Visa but you use QR codes created by an app in your phone to actually pay (and the QR code is scanned by a device in participating stores). The SEQR app is reversed where you scan a QR code and authorise it with a pin code.

I've even been to stores where I paid the bill with a paypal invoice sent to my e-mail adress. In the long run that wasn't a bright idea (and they changed it) but still. I regularly pay for Spotify using Paypal.

Still, I prefer my CC when buying trips (and receiving the travel insurance tied to it) rather than using any of the disruptive ways I could pay for my trips. Going to the store I usually have my CC with me, and there are no benefits from not using it that I can think of.

Hasn't it already happened? Wasn't it called the debit card? (Debit cards, especially ones running on the same payment networks as credit cards, came decades after the spread of credit cards. Now look how many people use them instead of credit cards now that they can be used almost anywhere that credit cards can?)

But here's the thing. You can disrupt things all you want, but if you disrupt the compatibility, you don't get very far. The iPhone was able to disruptive because what was new was the user experience, but it still let you call the same phone system in the background and access the same internet in the background.

Credit/debit card processing networks are worldwide and have to use worldwide standards. So at that level, it's hard to disrupt the technology by yourself (as one company).

Now, if you take that away, cards are not primarily technology any more: They're financial instruments. And when the financial industry tries "disrupting" things, we get 2008! :eek:

All alternative payment systems are very fractional disruptors, because not that many people want a payment that doesn't work everywhere they already use their credit/debit card.

The Apple iPhone worked from the start for calling any number in the world. And new payment system has to be just about as compatible (in the payment world) to have a good chance of succeeding.

Look at how long EMV is taking to spread out around the world, and it's just a change to the card-terminal interface (everything on either side of that is staying the same).

So exactly what aspect of the credit/debit card that is technology do you expect to be disrupted? :confused:

(Much more likely is regulatory disruption, like in Australia: Domestic transaction fees for everyone. :eek:)

I don't have any specific expectations of what disruption would look like...

It could be as incremental as a new credit card issuer (i.e. similar to the rapid emergence of Capital One in the 1990s) with a better customer-facing experience and UX. Something similar to what Bank Simple (www.simple.com) is doing now with debit and "card as an app" but for credit.

It could be as complex as developing an entirely new closed-loop payment network to compete against the likes of Amex/Discover that could do away with the bulky 16-digit card number system that was never designed for online payment in an increasingly online world.

It could be an entirely new consumer credit product with a completely different structure and terms than traditional revolving credit lines that gives the other half of America that would otherwise revolve a little more breathing room.

Or maybe we'll be paying with our elbows in 10 years. ;)

This is a good line of thought - thanks for the post. It definitely made me think, and it makes me realize that, due to the internet, disruption is just a lot easier today. The adoption of a new payment scheme can be much faster, because we have the internet to facilitate it.

We've all seen the Android phones with Google payment on them at checkouts at edgier stores, and you can use PayPal and Square and things at some places. These options would have had NO traction without the internet.

So whatever comes can take advantage of the network effect much faster than credit and debit cards did when they emerged.

And my feeling is, the push for new payment options will come from the merchants - not the banks or consumers. The merchants are eating the fees here and enabling the credit and debit card networks and the perks and rewards. When they find viable cheaper options, they'll push them. When Google Checkout was free for merchants, there were tons of promos from those merchants.

Now that many merchants can discount for cash or debit, the cost to their businesses is clearer. Once some start actually doing it, it'll pave the way for cheaper but still safe payment mechanisms.

This is a very good point, and I'm glad you brought it up. I've been thinking about this thread the whole day, and what I was forced to realise was that there are at least 4 players involved right now: the consumer, the merchant, the financial institution, and Visa/MC/Amex/Etc. In addition, many other players have decided they want to join the game (Amazon, Google, PayPal, the phone companies, etc.) With everyone pushing and pulling in different directions, it'll be very difficult to get a standard that everyone will agree on.

I can only speak as a consumer. As a consumer, primarily I want the following: a method of payment that allows me to pay for anything, anywhere in the world without having to use cash.

For the most part, that exisits today. I can carry a Visa card, and it is very likely that I can pay for just about anything, anywhere. But there are still problems. For example, last week I was in Mexico City and needed to buy some supplies at an OfficeMax. Pretty straight forward transaction. Except at the POS their system would not accept my EMV-enabled Amex card. They can accept Amex, just not my Amex because of the EMV chip.

A few hours later I was shopping at a high end mall visited by many tourists and expats. I went to pay for my purchases at one store, and the man at the counter informed me that they only accepted "national" cards. His terminal could not process transactions from foreign cards.

So there are still limitations, and room for improvement, to the method we use today. Anything that comes in the future has to address this problem. There has to be a more uniform, standardised method. What works in Toronto should also work in Mexico City and in San Francisco and in Nairobi and in Moscow.

But as you say, to what extent do consumers have the power in this market? It was the networks (Visa/MC) that pushed for EMV with merchants kicking and screaming all the way. The banks are not known for innovation themselves these days. They'd rather throw tons of rewards points at the consumer and charge the merchants for them. And as I said, consumers just want to be able to pay. But the merchants? They're the ones bearing the cost, for the most part. Whatever comes next has to make it easier and especially cheaper for them than dealing with cash or cards as we know them today.

I feel like the Coin card that's coming out in 2014 could be disruptive and part of the "future of credit cards". As someone with 7-8 cards that bulk up my wallet, the chance to have all of those housed in one smart credit card is exciting.

I don't know how I feel about using my phone as a primary payment method, and others must feel the same, since NFC payments have failed to take off (at least so far).

I've always been wary of centralized data. That is, all my information loaded in 1 place. If that's compromised, you'll be hurting...

Yup, that's why I would never do that Coin card.

If the EU Commmission gets its way, there will not be much room for disruption. They want to limit merchants' fees to a tiny amount, which will not only wipe out all credit card benefits, but will probably extend the time merchants will have to wait for their money - but, foremost, it will make it impossible for any "disruptor" to enter the market. There won't be enough to earned in relation to the risk they would have to take.

The EU as a single market (which it isn't quite yet) isn't the only market. It's still viable to disrupt the US, African or Asian markets.

IMHO, the EU take is more correct than the oligopoly empowering approach on display in the US.

First, in many EU lands the cost of taking credit cards is already zero or close to it (e.g., France). In large part this is because the governments believe that card payments cut down on tax evasion and also because they want to push technology out into all parts of the economy. The MiniTel was another effort in this direction which was overtaken by newer technology. But, it looks as though the card effort is working.

Use of cards should be a close to zero cost, if not zero to the merchant as a way to enhance overall efficiency. Electronic transfers should be lots cheaper than handling cash because they cost much less to do.

In the US we have a silly system where the banks get to profit from an inefficient card system that allows them to skim off big profits for doing very little.

It is nice that the skim funds all those miles bonuses on cards (nice for FTers anyhow) but, overall, it is a drag on the economy.

Banks and upstart companies have been playing with technology for lending since the beginning of time - both in terms of finding better risk splitters (the only way to bring down borrowing costs for consumers sustainably) - and in finding ways to make being a customer more attractive.

Drive thru teller windows, the credit card itself, ATM machines. Loans made outside of a bank. All disruptive. Of course the system will change in some way. It always has.

We're living through a secular shift away from checks and cash fueled by payment terminals.

Though the biggest change was the unwinding of interstate banking regulations which led to the megabanks we have today.

And some people will try to lend too freely to risky groups and get burned as well. A tale as old as time.

Tell us something new. This obsession with 'disruption' is getting old because it's really nothing new.

Do you have any sources to back this claim up? The EU Commission is introducing the legislation exactly because they deem the costs way to high and want to slash it by more than 90%.

This is great news to Visa and MC - it assures them that noone will be able to attack their market share with lower fees or special perks.

For the most part, the current cards payments system are already very convenient and fast for in person

The frictions you mentioned are mostly not a technology issue.
e.g. US banks taking its time to move towards EMV.

In addition to Credit Cards, there is Debit Cards that functions both over the ATM network for cash and Visa / MC / Discover / AMEX network that allows you to shop in person and online. And now even Prepaid cards that are designed to replace your regular bank account.

After the Durbin act, debit card interchange rate now are in the 0.05% range.

I do agree that online shopping could have been easier. The process can't be shorten too much though as anything that needs to be shipped, even if you don't have to key in that 16 digit card number, you still have to key in a shipping address.

:DOr, more likely, their profits will drop dramatically.

In any event, for a recent summary of merchant costs in various countries see this story from the Christian Science Monitor. http://www.csmonitor.com/Business/ne...urts-consumers

You will note there is a wide range in Europe with some (e.g., France) pretty low and some (e.g., Spain) pretty high. US rates are among the highest.

By the way, there was a long thread on FT a couple of years ago which got into merchant costs in France for taking cards and several French merchants, including an MD (in a small town), chimed in (gotta be amazed at FT's reach :D) and the Doc advised that his merchant cost was zero or so close to zero it didn't matter as a matter of government policy.

This is the same thing I hear from friends in France who run small businesses. It is part of the same government push to provide high speed internet access in the smallest villages. High tech for all! So the country folks don't get left behind.

[QUOTE=biggestbopper;21939627]In any event, for a recent summary of merchant costs in various countries see this story from the Christian Science Monitor. http://www.csmonitor.com/Business/ne...urts-consumers

Thank you for that link. While interesting, but it is for a very specific case:

"Here's a look at what a $50 supermarket transaction costs with a Visa card cost in various countries, based on calculations of interchange fees based on October 2010 data available on Visa’s site."

France, according to that chart, has 0.5% - about double of what the EU commission wants to impose as the max. And this is according to Visa - we don't know if there are intermediaries who add charges of their own, and we don't know what protection against fraud is provided at that rate, and how fast the merchant receives the money.

Furthermore, you have to keep in mind that this is for supermarkets, which have very low profit margins in Europe (except for non-food items). So, for the longest time, supermarkets simply did not accept credit cards - only when the rates came down a lot, they started do accept them.

As the rates charged by payment networks vary by the type of business, you can not deduct from 0.5% for supermarkets that this is the rate any French business with any level of fraud and any payout-speed would pay.

Another thing to keep in mind are different fraud rates. They are much lower in Europe than in North America. This can influence the disagio rates as well.

I drove by a Tesla a couple months ago, it was on fire. Yes I am serious. 167 outside Seattle

I know what you mean but don't see it happening anytime soon.

No rewards and I would just pay cash.

I suspect the concept of the credit card / debit card will remain, but the means to use it will, I expect, go biometric.

This means you have no physical card to worry about, you just press your thumb and perhaps type in a PIN at a POS terminal (which will have to give you the option of which virtual 'credit card' to use e.g. your AMEX, your VISA etc.

We are talking about the future so this just means POS terminals will need to be updated and all countries will need to be connected to faster networks.

You still get the 'benefits' of each card - you just no longer have a physical card anymore.

And this would work in an "offline" situation how?

(It's seriously limiting to not be able to use credit cards just because the connection is down. There's often a backup method, but it needs either raised digits on the card so they can dig the old card machine out of the closet, or someone writing down all the info from the card as if they were taking a card order over the phone. I don't see how a finger subsitutes for either of those.)

I can think of plenty of situations where cards are currently processed "offline". Starting with, of relevance to many FTers, the online portable card machines for buying food/drinks/etc in coach on several legacy airlines. And then there's all those unattended rural gas statiion in France (where only "offline" chip and PIN cards work).

I thought we were talking about the future?

For this to work, in the future, there will need to be high bandwidth 'over the air' network connections globally for all this to work. There will be no option to be 'offline'.

We're not there yet.

We're talking uninvented technologies then. No technology can reach everywhere in the world including deep inside buildings, in caverns (where there are tours you might want to pay for), parking structures including underground ones (where you might want to pay for the parking fee), etc. Even if satellite internet becomes super-affordable, that's still line-of-sight to the satellite. Going "over the air" when there is no air (just lots of rock, concrete, etc) doesn't help.

And the question is, will a tehnology that works wireless to everywhere in the world including underground and deep inside all buildings be developed while you and I are still alive? :)

No such thing. The perfect solution is always a subjective matter.

You forgot to mention space. What if I was on the moon and wanted to make a payment there. I'd be stuck.

I do understand where you are coming from though. You still don't have EMV cards in the US as default so I understand your scepticism.

Here in Europe, we're looking to the future, past EMV. I guess if I visit the US, I'd still need to use quaint ol cash.

Actually, that brings up a simple wish that I have for the future of credits: As universal acceptance of them worldwide as I have in the US.

In the US (admittedly with cards issued there), I am able to mostly live in a "cashless society". I just about never run into real restaurants (I don't use food trucks) that don't take credit cards in the US, but I run into plenty of them in many countries in Europe (including some in major cities such as Zurich). I go for many months not using cash for absolutely anything except my apartment building's laundry machines (without having to go out of my way to find a merchant that takes credit cards, the way I sometimes have to do in parts of Europe).

And then in Japan, once you get out of the big cities (for example in the Mount Fuji "Five Lakes" area), it's hard enough to find hotels that take credit cards (its only a small subset of them that does).

Not every technology *needs* to be disrupted. Visa/MC/bank debit payment systems work reasonably well for the vast majority of users. For everyone else, there's always cash.

And the EMV thing is a reaction to variations in laws about liability for unauthorized charges, not a feature for the end-users.

Well I'd argue the Target breach has shown that basic card security is desperately lacking in the U.S. Apparently a simple EMV chip and pin would've prevented any potential losses in the first place. Now that fraudsters know just how vulnerable U.S. merchants and cards are, I predict more frequent and damaging attacks like this through the weak and outdated merchant IT systems.

OP, what is fintech? Fitness based on tech? Facebook into eches?

Been working in SV for ages, never heard anything like that.

Must be a new slang.

Nope, this wouldn't have prevented any losses. Card data (even without the chip details) does still have value as some ATMs and credit card machines are not yet equipped with chip readers and fall back to magnetic stripes.

I think youngmoneyhack meant the entire EMV system, not just on the card. i.e. credit card machines as well.