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Contactless Card Rollout May Not Hurt Mobile Payment Adoption, But Probably Won’t Help Either

(New York, NY) The death of plastic. Apple Pay’s launch in 2014 invited headlines touting the digital payments revolution, but in the years since, plastic has thrived. Consumers swiped, they dipped, and now they’re beginning to tap– all with a physical card. Some argue that the proliferation of tapping a physical card at checkout will increase comfort tapping one’s phone. However, a new issue of Auriemma Research’s Mobile Pay Tracker suggests that contactless cards may have some mobile-friendly consumers reverting from digital to physical payments.

Although mobile payments and contactless cards utilize the same near-field communication (NFC) technology, adoption of mobile payments is well behind contactless cards. Three plus years after its mainstream release, mobile payments have only been used by one-third of those eligible—far less than the 59% of contactless cardholders who have tapped with their contactless card.

Consumers appear amenable to contactless cards, specifically because the device (i.e., the physical card) is so familiar. Mobile payment users, however, are even more open to tapping their cards because they’ve been exposed to tapping with their phone. Three-quarters of mobile payment users have used a contactless card to make a contactless payment, compared to just four-in-ten non-users.

“Consumers have been repeatedly asked to change their payment behavior,” says Jaclyn Holmes, Director of Auriemma Research. “While adjusting to various card payments is easy, the larger switch in the physical mechanism of phone payments takes more time.”

Mobile payment users are enthusiastic about contactless technology. The majority (60%) expressed interest in using contactless cards, compared to just over one-quarter of mobile payment non-users. Mobile payment users are also more likely to believe contactless payments can improve everyday purchases. Over one-third say their experience with self-checkout lanes, grocery stores, vending machines, and public transportation would be made better if they were able to use contactless payments.

Until now, many terminals were not accepting of EMV contactless payments because of outdated technology. This has been a struggle for EMV contactless cards as well as Apple, Google, and Samsung Pay. However, with Visa now requiring all contactless terminals to support NFC contactless technology, both EMV contactless cards and mobile payments will have the space to grow.

Although these upgrades will make mobile payments an option at an increasing number of locations, that doesn’t mean mobile payment adoption will rise. Overall, consumers are uncertain about whether contactless card payments are better or worse than mobile payments—65% say they are about the same, 18% say they are better, and 17% say they are worse.

Those who believe contactless card payments are better typically say they are faster, easier, and more secure than mobile payments—three things mobile payment users often describe when asked why it is better to pay with mobile then with plastic. Those who believe contactless card payments are worse often express concerns about security (e.g., more susceptible to fraud, wouldn’t be any safer) and say they still need to take out their payment card.

“Consumers will have more options at checkout than ever before, but will they choose contactless cards or a mobile wallet?” asks Holmes. “Although upgraded terminals benefit both methods, the point-of-sale experience continues to be fragmented for mobile payment users who must pull out their physical card when things go awry.”

With contactless cards, technological barriers to tapping won’t upend the entire payment process. Consumers can still dip or swipe. This alone makes the case for contactless cards, which offer the mobile payment benefits people love without the barriers that have persisted since its rollout.

Survey Methodology

This Auriemma Research study was conducted online within the US by an independent field service provider on behalf of Auriemma Group (Auriemma) between January-February 2019, among 2,001 mobile pay eligible consumers. Respondents were screened to own an iPhone 8/8+7/7+/6/6+/6s/6s+/SE/X or Apple Watch (in combination with an iPhone 5/5C/5S) – a Samsung Galaxy S9, S9+, S8, S8 Edge/Edge+, S7, S7 Edge, S7 Active, a Samsung Galaxy S6, S6 Edge/Edge+, S6 Active or Galaxy Note 5, Note 7, or Note 8 – Gear S2 or S3 watch (in combination with an Android/iPhone smartphone) – and/or other Android phone with KitKat (4.4) OS or newer. All respondents also have a general purpose credit card in their own name.

About Auriemma Group

For more than 30 years, Auriemma’s mission has been to empower clients with authoritative data and actionable insights. Our team comprises recognized experts in four primary areas: operational effectiveness, consumer research, co-brand partnerships, and corporate finance. Our business intelligence and advisory services give clients access to the data, expertise and tools they need to navigate an increasingly complex environment and maximize their performance. Auriemma serves the consumer financial services ecosystem from our offices in New York City and London. For more information, call Jaclyn Holmes at (212) 323-7000.

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It’s Business as Usual for Most Consumers Impacted by Payment Card Fraud

In 2018, millions of consumers had their personal data compromised by breaches across a diverse set of industries—from tech to retail to hospitality and more—putting many at risk of payment card fraud. Most consumers are aware of their data’s exposure, but 91% believe their credit card issuer will cover them in the event of fraud. But this confidence causes some consumers to put themselves in harm’s way, according to Auriemma Research’s most recent issue of The Payments Report.

Fraud events have become mainstream, leading many consumers to feel numb to its consequences. According to Auriemma Roundtable’s Q4-2018 Card Fraud Benchmark Report, seven-in-ten financial institutions saw an increase in gross credit card fraud compared to the prior quarter; a similar number of issuers are forecasting gross fraud will stay the same or increase in 2019. Meanwhile, nine-in-ten consumers believe fraud has stayed the same or increased over the past year, according to Auriemma Research data.

“Many consumers have accepted fraud as a fact of life,” says Jaclyn Holmes, Director of Auriemma Research. “They know fraud happens, many are concerned it will happen to them, but they’re also confident that their issuers will take care of them.”

When asking consumers about how credit card issuers respond to fraud, Auriemma Research found over eight-in-ten say issuers react quickly and are good at monitoring. Even the one-fifth who say they’ve experienced card fraud in the past year share these positive sentiments. While a noteworthy 22% of these consumers say the experience has caused them to spend less on the impacted card, 15% spend more, and 63% don’t change their spending at all. In general, fraud events don’t appear to leave a lasting stain on payment behavior with the compromised card.

“In the court of public opinion, banks don’t appear to be to blame for fraud,” says Holmes. “But as fraud remains high industry-wide, issuers are now tasked with finding ways to further engage their customers in the fight, namely by reducing risky payment behavior and signing up for proactive protections.”

Consumers, however, are not demonstrably concerned with proactive, preventative measures. Over one-quarter of cardholders are comfortable making online purchases from unfamiliar websites, likely a direct result of the confidence consumers have in banks’ protective measures. In addition, over four-in-ten cardholders say they haven’t changed the password for their debit or credit card account in over a year. Other precautions, like fraud alerts, identity theft protection, and two-factor authentication are not overwhelming used by consumers.

“While issuers try to arm their customers with tools to defend against the impact of fraud, many aren’t taking advantage,” says Holmes. “Consumer complacency could be a challenge in 2019 and beyond, and if issuers aren’t able to enlist their cardholder’s support against fraudsters, we may see losses grow.”

Survey Methodology

This Auriemma Research study was conducted online within the US by an independent field service provider on behalf of Auriemma Consulting Group among 800 US adult debit cardholders in March 2018. The number of interviews completed for both is sufficient to allow for statistical significance testing among sub-groups at the 95% confidence level ±5%, unless otherwise noted. The purpose of the research was not disclosed, nor did respondents know the criteria for qualifying. The average interview length was 25 minutes. For more information, call Jaclyn Holmes at (212) 323-7000.

About Auriemma Fraud Control Roundtables

Auriemma runs a series of information sharing and benchmarking groups for executives in fraud strategy and operations. Spanning credit card, debit card, and consumer banking, Auriemma’s fraud control roundtables combine executive meetings, industry-leading operational benchmarking, and peer group surveys to help participants identify vulnerabilities and optimize fraud management strategies. For information on membership, contact Ira Goldman at 212-323-7000.

About Auriemma Group

For more than 30 years, Auriemma’s mission has been to empower clients with authoritative data and actionable insights. Our team comprises recognized experts in four primary areas: operational effectiveness, consumer research, co-brand partnerships, and corporate finance. Our business intelligence and advisory services give clients access to the data, expertise and tools they need to navigate an increasingly complex environment and maximize their performance. Auriemma serves the consumer financial services ecosystem from our offices in New York City and London. For more information, visit us at www.auriemma.group.

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Auriemma Group to Speak at CBA Live in April

Mindy Harris, Managing Director and General Counsel for Auriemma Group, will be a panelist at the CBA Live conference, scheduled for April 1-3, 2019 in Washington, D.C.

Harris will be a panelist for CBA Live’s “Efficiency Ratios: Right Sizing For Compliance” session, which focuses on best practices for building strong compliance risk management programs in today’s environment. Among other topics, the  panel will address ways to improve compliance management efficiency, and prevent gaps and failures to find and fix the most significant risks.

“A variety of factors, including high-profile enforcement actions and heightened regulatory expectations, have resulted in a reactive approach to compliance management,” Harris said. “For many institutions, this has resulted in fragmented controls, overlaps in testing, and other inefficiencies.”

Attendees will gain insight on how to overcome common challenges, including aligning internal functions to best optimize compliance risk structures, measuring the success of compliance risk management programs, and trends in determining  appropriate levels of compliance spend.

The session will take place Tuesday, April 2 from 9:20 a.m. to 10:20 a.m. In addition to Auriemma’s Harris,  panel participants will include Rosemary Gaidos of Citizens Bank as moderator, and Paul Noring of Navigant Consulting, Inc.

CBA Live attendees can schedule one-on-one meetings with Harris to discuss how the firm’s data and intelligence can help navigate the current environment most effectively. In addition to compliance risk management program structures, Harris is closely following recent  developments in preemption, exportation and the valid-when-made doctrine, as well as the merits and attributes of financial institution charters. CBA Live attendees may reach Harris at mindy.harris@auriemma.group.

 

About Auriemma Group

Auriemma Group’s mission is to give clients access to data and intelligence that drive decision-making. We provide information and advisory services in four areas: co-brand partnerships, consumer research, corporate finance, and operational intelligence. Founded in 1984, Auriemma serves the consumer finance industry from our offices in New York City and London. For more information, visit us at www.auriemma.group or call (212) 323-7000.

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An Announcement from Auriemma’s President

Dear friends

Our firm was founded 35 years ago, in 1984. It’s been a fantastic run, and we thank you for your support and friendship over the years.

Since then, our business has evolved to meet the changing needs of the payments and lending markets. Today, our business consists of four distinct specialty areas. The largest, by far, is our Roundtable practice. We now have 35 groups spanning seven market verticals and have become the standard bearers for operational benchmarking data. We are still quite active in developing and managing co-brand programs, which was our exclusive focus when we were founded. Our research team has established itself as a leader in providing membership-driven insights into consumer behavior relating to payments, mobile payments, and credit cards. And, our finance team is active in helping lenders manage capital requirements, and value assets.

As you can see, our current mix of business has come to rely less and less on traditional consulting services. As such, we began to feel that the word “consulting” in our moniker had outlived its usefulness and indeed put us into a competitive frame where we didn’t want to be. So, we went to the drawing board to see what new name might suit us best.

I’ll be honest and say that being eponymous has its pros and cons. But, if I could turn the clock back 35 years, I’d start fresh with a company name that didn’t include my personal name. But, as you can imagine, the Auriemma name has come to be well known, respected, and trusted in our ecosystem, thanks to the hard work of lots of people whose name is NOT Auriemma! So, getting rid of the name altogether didn’t make much sense. Nor did changing our name to the acronym ‘ACG’, which we considered… it turns out, very few of our clients refer to us that way.

In the end, we settled on simply removing the word “consulting” and will now be known as Auriemma Group.

Keeping the name Auriemma recognizes the significant brand value we’ve developed. Meanwhile, going forward, the word Group will refer not just to a group of talented individuals, but to the group of separate and inter-related sub-brands they represent.

To go along with the new name, we have a new logo and monogram, as well as new corporate colors. We also have a new website: www.auriemma.group

If you take a look (and I hope you do), I think you’ll see right away that the new site has a look, feel, and tone that really reflects the people-oriented and approachable style that you’ve come to expect from our firm. The new site also makes it easier to tap into the wealth of information we produce… whether that be our annual letters, press releases, and regulatory commentary letters or, for clients, our troves of market research and benchmarking data.

Welcome to the new Auriemma Group. We look forward to speaking to you again soon and continuing our longstanding relationship with this amazing community.

Cheers!

Michael

P.S.  Our e-mail address convention will also be changing from @acg.net to @auriemma.group – so please update your records!

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Time to clarify ‘true lenders’

John Costa, Managing Director of Auriemma Finance, has published an article in American Banker’s BankThink section. The piece describes how recent court cases have created confusion over the powers of national banks, with some findings in conflict with longstanding precedent. In the piece, Costa argues that Congress needs to clarify and reiterate certain legal principles, such as “valid when made,” in order to reaffirm the national bank regulatory model.

You can read the full story here: Dear Congress: Time to clarify ‘true lenders’

For more information, contact John Costa at john.costa@auriemma.group or 212-323-7000.

 

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Auriemma 2018 Annual Letter: Payments and Lending Retrospective

January 7, 2019

As a kid, there were only three important events on my calendar each year. The last day of school, my birthday, and Christmas. Now, it seems there are three or more important events on my calendar every week! The staccato rhythm of the days, weeks, and months and the need to keep moving from event to event gives the impression that the pace of the treadmill has been turned up.

Given the rapid tempo of our lives, it becomes increasingly important to take a moment now and then to pause and reflect on some of the events and trends that took place over the last year and consider how they will influence the future. As many of you know, I’ve tried to do that by way of this annual letter, since 1992.

As our Firm has grown, our audience has become more diverse and it has gotten increasingly difficult to write a letter that captures everyone’s attention. While I suspect a few intrepid souls will bear with me for the next three thousand words, I suspect many others might choose to glance at the headlines and decide to read sections more selectively. For those who still can’t get enough, we’ve introduced hyperlinks throughout the letter to provide quick access to relevant examples of Auriemma research. Either way, I hope you enjoy this year’s annual recap.

Over the last several years, a big focus of our annual letter has been the challenging regulatory environment. For many of our clients, regulatory activities and compliance overshadowed almost everything else. It dampened innovation and, for many, the ability to grow or pursue new strategic paths. This year, that pressure seems to have been quelled a bit. That isn’t to say that there is less regulatory burden or pressure. We are told regularly by our clients that the bar is just as high as it’s been, despite the anticipated pullback given the new regime in DC and Brexit distractions in the UK. However, the pace of change has slowed. And that, in and of itself, feels like an improvement.

Lenders now understand the environment in which they are operating and how to navigate the complexities brought about by the heightened regulatory focus. So, for a change, we won’t be spending any more time on regulation in this letter. Instead, we’ll talk primarily about how lenders are preparing for the future, which seems to be the overwhelming focus for our clients.

According to key economic indicators, 2018 was terrific: strong GDP growth, record low unemployment, and confident consumers. On top of that, tax cuts bolstered corporate profits.

But despite all the good news, everyone keeps asking: “When is the next recession? And, how bad will it be?”  It’s no wonder everyone is worried: US consumer debt was slated to hit $4 trillion by year-end, according to CNBC. Because consumers have multiple financial obligations, the risk of contagion is also of concern. Auriemma’s consumer research finds that significant numbers of credit cardholders also have a mortgage, an auto loan, a student loan, and/or other personal loans. Will one of these products reach a tipping point that sets off the next credit cycle?

Certainly, it isn’t just the passage of time that concerns folks about the next inevitable downturn. Auriemma Roundtable data show that delinquencies for some products have been on the uptick. Early in 2018, for example, we reported that delinquencies for subprime auto loans reached recession-era levels, resulting in captive auto lenders pulling back on the subprime space. In card, absolute losses were anticipated to increase 30-40 basis points—although it’s important to remember that they remain near historic lows.

Despite a lack of consensus about when the cycle will turn, many agree that the next downturn won’t be as severe as 2008 – thanks, in part, to the lessons that organizations have learned, the vigilance executives are applying when developing strategies, and the protective measures being put into place, including higher levels of capital. Card issuers, for example, have developed early warning systems and increased scrutiny on underwriting, leading to lower approval rates and average credit lines. In short, there is a heightened sense of awareness today that didn’t exist a decade ago. However, there is also a high degree of sensitivity to any uptick in losses, with investors often reacting sharply to changes in loss performance.

It’s not just US lenders anticipating potentially rockier times ahead. In the UK, GDP growth has slowed, bankruptcies and insolvency figures have increased, and Brexit has perpetuated uncertainty. UK players are conducting stress tests and analyses to measure the impact of an economic downturn. The UK’s Financial Conduct Authority is focused on persistent debt, debuting a new set of rules meant to help cardholders who aren’t able to make headway on paying down their outstanding balances. In response, issuers are hiring and training agents to manage persistent debt-related calls, as well as crafting journey maps for affected customers.

While lenders are keeping a cautious eye on the economy and their delinquency and loss curves, they are also finding ways to bolster their profitability on the operational side of the house—an area where Auriemma Roundtables play a significant role.

After years of hiring armies of compliance and risk professionals, we’re seeing increased focus on the development of, and investment in, tools and technologies to work smarter, faster, and leaner.

It’s still early, but we are seeing more automation being deployed across many use cases. AI and robotics are being used to refine and automate processes in back office functions to improve efficiencies and workflows behind the scenes. AI is also being used to mitigate card fraud and to help increase the accuracy of real-time approvals and the reduction of false declines. Lenders are investing in predictive servicing within the IVR, which can better anticipate customer call reasons by identifying where they are within the customer journey. Chatbots are being deployed everywhere – some with intricate backstories and personalities.

Meanwhile, voice analytics will be leveraged to identify customer sentiment and tag complaints. Lenders are looking to automate everything from fraud holds to decisioning counteroffer tools. And, robotics will be tested for more and more complex tasks to improve on—and eventually remove—human intervention, including in underwriting and decisioning.

Lenders are still working hard to convert customers from analog to digital platforms and are making strong headway. However, I had to laugh during a recent conversation with a senior exec who recently took over his bank’s digital migration strategy. He said, “Until now, our strategy was to treat people badly in traditional channels and hope they’d migrate to digital.” I don’t think his bank is alone! Whatever the driving force, after years of prodding, customers are availing themselves of a plethora of digital and virtual tools. According to Auriemma Roundtables benchmark data, the percentage of cardholders enrolled in digital servicing is increasing, with a 24% growth rate over the last three years.  And in the UK, e-mail topped the list as cardholders’ preferred method of communication with their issuers, according to Auriemma’s UK Cardbeat study.

Our auto lending clients are increasing their efforts in this area as well. Currently, just 43% of auto loan borrowers are enrolled in e-statements and only half of auto lenders offer online chat, according to Auriemma Roundtable data. However, things will change: The current best practices include automatically enrolling new customers in e-statements, digitizing account opening agreements, and making some features, like travel notifications, available exclusively online. A handful of auto lenders are providing self-service functionality for extensions and deferrals as well.

Despite all of this, the old maxim rings true: “Be careful what you wish for.” Digital servicing was supposed to be the holy grail of cost reduction. But while enrollment has grown tremendously, overall call volume is flat. It turns out, digital customers are more aware customers – and they are calling with complex questions or disputes, not simple balance inquiries.

2018 saw new product launches and growth from FinTechs continue at a rapid pace. Yet, many executives I speak with wish they could get odds in Vegas on the number of FinTechs that won’t survive the next credit cycle because they’ll either lose access to funding or stumble due to a lack of expertise in credit risk. Certainly, that will be the fate for some. But, increasingly, the FinTechs we talk to are savvy and chock-full of resources with deep expertise and executional experience.

In 2018, you likely received a deluge of mailers advertising unsecured personal loans. That’s because the product is now the fastest-growing consumer lending product, with unsecured personal loan originations increasing 15% between Q3 2017 and Q3 2018, according to Experian. The product’s popularity has been linked to the erosion of HELOCs as post-recession consumers grow increasingly reluctant to use their home as collateral.

In a September Auriemma Research study, we found that nearly 9-in-10 consumers are satisfied with their personal loans, driven primarily by the speed of funding, clear terms and conditions, easy application process, and lack of unexpected fees… all of which further elevate the product in the mind of the consumer relative to HELOCs.

Experian also reports that FinTechs are responsible for roughly one-third of total unsecured personal loans, while plenty of large and mid-sized banks have also joined the fray. Incumbency is a strength traditional banks can play to their advantage. When we asked consumers their reasons for choosing a lender, 19% said an existing relationship was a top driver. While that may sound low, it topped a list of 22 reasons about which we asked.

In 2019, FinTechs will have some strategic choices to make. With the OCC announcing it would accept applications for a new Special Purpose National Bank (SPNB) charter, FinTechs will have to decide if they will leverage the charter and become more traditionally regulated entities, comply with the various requirements of multiple states, or operate with the popular partnership model. Each strategy, of course, has significant consequences for their future viability, the pros and cons of which we’ve been spending a lot of time discussing recently.

In the UK, Open Banking regulation has cleared the way for third-party issuers, brands, and FinTechs to offer enhanced banking products to consumers. The potential use cases range from account aggregation to reward services, and major players in payments and retail are investing resources into developing services, including Amazon, John Lewis, HSBC, PayPal and Uber. As a result, we can expect a more level playing field for new entrants and greater competition that will extend beyond the UK, thanks to the PSD2 mandate that all EU payment account providers build APIs by July 2019.

Partnerships between incumbents and FinTechs will be crucial to success in the world of Open Banking. Any organization that opts not to partner could risk eventual disintermediation. These developments could have a major upside for co-brands to deliver innovative, money-saving rewards by using new spend data.

Regardless of whether you see FinTechs as competitors, disintermediators or potential partners to traditional institutions, your organization’s philosophy and ability to respond to a rapidly changing landscape will be critical.

In the co-brand arena, 2018 saw fewer splashy RFPs and renewals from large programs. But, in the US, several well-known brands have extended existing contracts (JCPenney, Lowe’s), changed partners (Walmart) or launched new programs or offerings (Ikea, Hyatt and American Airlines). In the UK, Virgin Atlantic Airways demonstrated that there is a strong future for co-brands, even in a post Interchange Fee Regulated environment, by launching a product with a market leading proposition.

Meanwhile, customer value propositions have continued to grow richer. This year, Hilton enhanced its sign-up bonuses for all its co-brands and Barclays announced it will refresh the value propositions for Frontier Airlines, Hawaiian Airlines, and Upromise cards. Starwood, Macy’s and LL Bean all have debuted new tiers and rewards. This heightened focus on rewards begs the question – at what point does the rewards war become too rich to sustain?

Given our comments earlier about a possible credit downturn, we believe co-brand issuers will likely hold fast or tighten existing credit criteria for co-brand programs. As a result, we expect an increased appetite for “second look” programs, which allow co-brand partners to approve more applicants, including underserved customers with lower credit scores or thin credit files. These programs are commonplace in certain types of private label programs – it will be interesting to see if they gain traction in more traditional co-brand programs.

Factors like richer rewards, credit concerns, and restrictive regulations add to the challenge of managing a successful co-brand program. At the same time, longer deal terms make “getting it right” even more important. As such, we are convinced you’ll see much more active management of relationships both by issuers and their partners. Both parties will be evaluating performance earlier and earlier in the deal cycle to ensure that the program is operating at its fullest potential. Everyone will be more conscious than ever about whether cardholders are attracted to the product and behaving in the way that was predicted. The Auriemma co-brand team is actively working with several clients to improve program performance and assist with ongoing management. This is a new area of focus for us, and one we think will become increasingly sought after by partners looking to maximize the success and longevity of their card programs.

Perhaps one of the most disappointing results of 2018 is that mobile payment usage in the US remained flat at 31% among eligible cardholders for the second consecutive year. Interestingly though, the number of mobile payment options has continued to expand, thanks to the continued launch of merchant wallets, bank wallets and other payment options. While two years ago, the dominant players were Apple Pay and Google Pay (formerly Android Pay), there are now a plethora of options, including Capital One Wallet, Kohls Wallet, ChasePay, Walmart Pay and others.

With all the new options, why is usage flat? According to Auriemma’s Mobile Pay Tracker, 55% of mobile pay users say there are too many payment options, and 53% say the options have become too complicated. Perhaps the industry is more enthusiastic about these products than are consumers.

So which wallets will be the eventual winners? Mobile pay users say they prefer open-loop wallets (55% compared to 23% who prefer closed-loop, and 22% who have no preference).

Another ingredient for success? Wallets that can be used for things other than payments – such as Apple Pay’s announcement that students can now use its wallet to carry digitized IDs that can open dorm rooms and function as library cards. Users are increasingly hungry to use wallets for non-payment purposes, with 40% of mobile payment users telling our Mobile Pay Tracker researchers they are interested in using mobile wallets for event tickets, membership cards, and boarding passes.

Meanwhile, Chase recently announced it would roll out contactless cards to its Visa and co-branded card portfolios by the first half of 2019. When combined with NYC’s debut of contactless MTA turnstiles, we are hopeful the US is on the cusp of widespread adoption, similar to what happened in the UK market when contactless debuted in 2007.

Although I admit that my experience using chip at the point of sale has improved dramatically from the initial roll out, I still find it to be a bit haphazard and less seamless than the old mag stripe used to be. And, I’m still stymied by trying to pay with my phone in the US. But after spending six weeks in the UK during 2018, I found the contactless card experience to be intuitive, easy and fast. As we look toward 2019 and beyond, what remains unknown is how quickly contactless will be embraced by consumers, and whether adoption will be stoked by merchant availability or organic cardholder enthusiasm.

As I wrap up this year’s letter, I wanted to share a few of the ways the Auriemma team is preparing for an exciting 2019.

In 2018, we partnered with noted behavioral economist Dan Ariely to develop a Behavioral Economics Initiative, which will produce exclusive, member-only research that can be applied to industry and commercial objectives, including product innovation and process design. This initiative will formally kick off in February.

This year, we will be developing new data initiatives in our Roundtable practice that will make it even easier for clients to leverage our benchmark studies to inform company strategy. These improvements will include new ways to auto-import data, resulting in an easier data submission process.  We’ll also be developing tools that offer more data visualization and are easier for executives to manipulate and interrogate.

As I noted in last year’s letter, our firm undertook a complete re-branding exercise in 2018. In the next few weeks, we will unveil an updated name and website. Our Roundtables practice now represents nearly 70% of our business. When combined with our M&A and research lines of business, traditional consulting comprises a smaller percentage of the work we perform for clients.

So, after 35 years, we are dropping the word “Consulting” from our moniker and will now be called Auriemma Group. In addition to an updated look and feel, our new website will make it easier to find and share the research and data we produce– such as the examples I have linked throughout this year’s letter.

Be on the lookout for an e-mailed announcement when our new site goes live.

In the meantime, I hope you had a happy and healthy holiday season and that 2018 treated you kindly. While none of us really know what 2019 holds in store, I’m confident that as an industry, we’ve put the right preparations and measures in place to safely navigate whatever comes to pass.

As always, if you have any questions or comments about our thoughts in this letter, or otherwise, please reach out. We’d love to hear from you!

Cheers!

Michael

 

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Apple Pay and Alipay Show How Digital Wallets Can Surpass Physical Wallets

(New York, NY):  Mobile payments may be one step closer to replacing the physical wallet.  Apple Pay and Alipay are continuing to expand their wallets to include much more than just payments—Apple Pay announced students can now carry digital student IDs that can open dorm rooms and function as library cards; Alipay’s users can now use their digital wallets to store digital marriage certificates.

And according to Auriemma Group’s Mobile Pay Tracker, product expansions like these can increase consumers’ willingness to adopt mobile payments overall. Auriemma’s research revealed that over one-third of mobile payment users would be interested in using mobile payment platforms to store identification cards. The same percentage also said they would be interested in using mobile payment platforms for government documents. This could create major lift in demand for these platforms beyond simply point-of-sale payments.

Apple announced in October 2018 that its wallet will support student IDs at three universities, allowing students to use their phone while doing laundry, going to the gym and taking out library books. While overall mobile payment usage is consistent compared to two years (31% of eligible consumers), developing the habit of using a mobile wallet on campus could have a profound impact on mobile payment usage going forward.

This is especially impactful considering mobile payment users are predominantly millennial (45%) and college-educated (69%). But over the last two years the average age of mobile payment users increased from 37 to 39 years old. The university market represents an opportunity to promote mobile payments to younger consumers, who are most likely to adopt the payment method.

The same month as Apple’s announcement, China’s Alipay joined forces with the Jiangsu province to provide digital marriage certificates for the province’s residents. The digital certificate makes it easier for users to apply for a mortgage, property transfer, or even establish a startup.

Allowing users to safely store digital versions of documents that aren’t always easily accessible— like a Social Security card, passport or birth certificate—positions mobile wallet platforms to surpass what a physical wallet can provide. To move beyond digital storage, mobile payment providers will need to partner with governmental agencies (like Alipay’s partnership with Jiangsu) to add utility, making them valid, accepted alternatives to the physical copy.

“Adding non-payment functionalities to mobile wallets is the next logical step in earning broader consumer acceptance for mobile payments,” says Jaclyn Holmes, Director of Auriemma’s Payment Insights practice. “Smartphones have already consolidated our technologies into a handheld package; using them to store keys, IDs, and government documents will only expand on that mission and push the technology forward.”

Mobile payment users show interest in using mobile wallets beyond the point-of-sale, but it will take some convincing to convert those who don’t use the mobile payment platforms already. While 40% of mobile payment users are interested in using mobile wallets for event tickets, membership cards, and boarding passes, only about 25% of non-users are interested. If mobile pay-eligible consumers had to select a single non-payment wallet addition, however, both users and non-users would pick storing government documents as the top priority.

“These product expansions point the way to how a mobile wallet can transcend the physical wallet—whether it be through providing you access to your apartment, storing documents you’d normally keep at home, or applying coupons directly to your purchase,” says Holmes. “For mobile payments to be successful, they can’t just replace the physical wallet, they need to improve upon it.”

Survey Methodology

This study was conducted online within the US by an independent field service provider on behalf of Auriemma Group (Auriemma) between July-August 2018, among 1,518 mobile pay eligible consumers. Respondents were screened to own an iPhone 8/8+7/7+/6/6+/6s/6s+/SE/X or Apple Watch (in combination with an iPhone 5/5C/5S) – a Samsung Galaxy S9, S9+, S8, S8 Edge/Edge+, S7, S7 Edge, S7 Active, a Samsung Galaxy S6, S6 Edge/Edge+, S6 Active or Galaxy Note 5, Note 7, or Note 8 – Gear S2 or S3 watch (in combination with an Android/iPhone smartphone) – and/or other Android phone with KitKat (4.4) OS or newer. All respondents also have a general purpose credit card in their own name.

 

About Auriemma Group

For more than 30 years, Auriemma’s mission has been to empower clients with authoritative data and actionable insights. Our team comprises recognized experts in four primary areas: operational effectiveness, consumer research, co-brand partnerships, and corporate finance. Our business intelligence and advisory services give clients access to the data, expertise and tools they need to navigate an increasingly complex environment and maximize their performance. Auriemma serves the consumer financial services ecosystem from our offices in New York City and London. For more information, call Jaclyn Holmes at (212) 323-7000.

 

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Auriemma to Speak on Co-Branding Sessions at Mega Event 2018

(New York, NY):  Auriemma Consulting Group will have two speaking roles at Airline Information’s Mega Event 2018, scheduled for October 31st through November 2nd in Long Beach, CA. Both of Auriemma’s speaking roles will discuss how issuers and brand partners can evolve and improve their co-brand programs in the current environment.

David Edwards, a director in Auriemma’s International practice, will speak on the panel “Driving Additional Revenue Streams from Co-Brands: Lessons from Non-US Markets,” scheduled for November 1st at 11:10 a.m.

The panel will focus on how co-brand programs have or will be impacted by new payment regulation, as well as key learnings from post-interchange markets. Edwards, in addition to the panelists from KLM Royal Dutch Airlines and Kobie Marketing, will share how co-brands can thrive amid regulation by adopting collaborative approaches, embracing change and designing innovative solutions that are both desirable and relevant to customers.

“All markets around the world have or will be impacted by new payment regulation,” Edwards said. “But consumer desire for rewards and benefits is greater than ever – they will choose co-branded products over and above new alternatives.”

Jaclyn Holmes, director of Auriemma’s Payments Insights practice, will share proprietary consumer research in the presentation “Which Rewards Set Co-Brand Programs Apart – A Consumer Perspective,” scheduled for November 1st at 2:25 p.m.

The presentation will detail how consumers’ usage and perceived value of card benefits vary drastically, depending on the benefit offered.  Issuers and brand partners alike are designing increasingly attractive credit card programs to capture the attention of young, affluent cardholders. Session attendees will learn which benefits best capture the attention of prospective cardholders, as well as which benefits drive increased card usage and retention.

“Rewards card value propositions have grown increasingly complex, with issuers offering robust benefits ranging from comprehensive protections and warranties to elite experiences,” Holmes said. “In this evolving landscape, it’s critical to understand your customers and their motivations for card selection.”

Attendees can schedule a one-on-one meeting with Auriemma’s team to discuss how the firm’s research and advisory work can help navigate the current environment most effectively.

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Card Benefits May Sweeten Program Offering, But Few Drive Usage

(New York, NY):  With the rewards war in full swing, the sustainability of some benefits has come into question, causing issuers to think critically about what they offer. Recent research from Auriemma Group’s Cardbeat® report identified the most and least important card acquisition drivers, highlighted the benefits that most impact usage, and revealed a general lack of consumer awareness for ancillary benefits. The study discovered that while card benefits may play a key role in acquisition, there is an untapped opportunity to have them more greatly impact card usage.

Glitzy benefits—contactless pay, VIP experiences, cards made from heavier metals—may pique a credit cardholder’s interest, but they are ranked[1] as least important when applying for a new credit card. Pragmatic factors, like no annual fee, rewards that never expire, and ID theft protection, on the other hand, hold the highest importance.

“Nonessential factors should be scrutinized heavily, especially if they are costly to maintain,” says Jaclyn Holmes, Director of Payment Insights at Auriemma. “Benefits that aren’t driving the desired cardholder behavior could be replaced by those that have a greater impact on spend, satisfaction, acquisition, and retention.”

Issuers must balance between benefits cardholders find important at acquisition and those that just sweeten the deal. While the most important benefits could be considered essential to a card program, less important benefits are still nice-to-have. And these nice-to-have benefits should be selected strategically—with an issuer’s target audience in mind.

Card benefits, however, are more than just acquisition drivers; they are an untapped opportunity to complement rewards offerings and can further drive usage. For all 37 benefits tested in the study—including general, experiential, monetary, protection, and travel—most respondents offered them say losing respective benefits would have little to no impact on their card usage. As an example, 65% of respondents said losing VIP experiences would have little to no impact on their card usage; 63% say the same for airport lounge access; and 61% for vacation package discounts.

“Rewards earned for spending on a card, like cashback or points, and redemption options are a key driver to usage,” says Holmes. “Additional program benefits can fortify a card’s value, but losing them would only nominally impact usage.”

And what’s more—as many as 55% of rewards cardholders didn’t know if any of their cards offer one of the benefits tested. So, while benefits may influence card acquisition, the lack of benefit awareness limits the card’s overall value potential and hinders the impact on usage, especially for those who don’t know they have them.

“Issuers should reinforce key card benefits valued by cardholders, especially those with the greatest likelihood to increase spend and loyalty, such as accelerated points earned on spend categories, waived fees on ancillary benefits, statement credits, and no blackout dates for using points,” says Holmes. “By communicating timely reminders in a way that demonstrates how a specific card feature can enhance a cardholder’s experience, issuers can capitalize on the acquisition, usage, and retention gains that its program benefits can provide.”

Survey Methodology

This study was conducted online within the US by an independent field service provider on behalf of Auriemma Consulting Group (Auriemma) in June 2018, among 800 US adults credit cardholders. Respondents were recruited from an independent web panel. The purpose of the research was not disclosed nor did respondents know the criteria for qualifying. The average interview length was 20 minutes.

[1] Cardbeat included maximum differential scaling exercise where 15 benefits were compared to determine the most and least influential factors when applying for a credit card.

 

About Auriemma 

For more than 30 years, Auriemma’s mission has been to empower clients with authoritative data and actionable insights. Our team comprises recognized experts in four primary areas: operational effectiveness, consumer research, co-brand partnerships, and corporate finance. Our business intelligence and advisory services give clients access to the data, expertise and tools they need to navigate an increasingly complex environment and maximize their performance. Auriemma serves the consumer financial services ecosystem from our offices in New York City and London. For more information, call Jaclyn Holmes at (212) 323-7000.

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Four Things for FinTechs to Consider Before Filing a Bank Charter Application

(New York, NY):  All eyes are on FinTech following the announcements last month from the Office of the Comptroller of the Currency (OCC) and the U.S. Treasury Department supporting financial services innovation. The OCC’s decision to start taking applications for a new Special Purpose National Bank (SPNB) charter for FinTech companies is particularly intriguing. While the new OCC charter represents an opportunity for FinTechs to gain national bank powers, there is a long path ahead for any organization wishing to explore this option. Potential challenges include understanding the legal underpinnings of interest rate exportation, weighing the relative value of taking deposits, understanding the impact, if any, of the Bank Holding Company Act, and evaluating the advantages and disadvantages of a bank partner model.  For those FinTechs that elect to pursue a bank charter there is the prospect of a lengthy regulatory review process and the challenge of integrating a complex compliance framework into a technology platform.

While the OCC SPNB charter may be the newest way to facilitate FinTech lending, it isn’t the only option. Other choices include the “State Finance Company” model, in which companies must comply with the usury laws and regulations of each state in which they operate, the “Bank Partner” model, as well as the recent reemergence of the Industrial Loan Company (ILC).

Each FinTech now finds itself at a regulatory Rubicon: To either take control of its destiny by embracing one of the available bank charters, with all of the attendant compliance and regulatory challenges; or to remain a non-bank technology company, dependent on a bank partner or subject to multi-state laws.

Here are four of the most important factors for FinTechs to consider now:

  1. Determine the importance of interest rate exportation to your business.

All models with the exception of the State Finance Company model enable the exportation of interest rates, to some extent. FinTechs need to compare the strengths and weaknesses of the exportation rights available through the OCC SPNB model, the Bank Partner model, and the ILC charter model.

In recent years, there have been challenges to the legal framework that supports the Bank Partner model. The claims raised in recent lawsuits allege that when a non-bank entity purchases or funds a loan, the originating bank in fact is not the lender, but that rather, the non-bank entity is the “true” lender, notwithstanding that the bank did in fact underwrite and originate the loan in question. Courts are reaching conflicting conclusions in these cases: Some have identified the originating bank as the true lender while others have ruled that the non-bank is the true lender.

If rate exportation is important to a FinTech, thinking through the advantages of all models and charter options in detail will be paramount.

  1. Consider the need for deposit funding.

The FinTech models for lending, including “peer to peer” and “marketplace” lending, do not require deposit funding.  This type of pass-through model, which has the benefit of a much lower capital requirement, needs only a “warehouse” type of funding which can be supplied by other banks or capital market participants.  But some FinTechs have concluded that building a large portfolio of on-balance sheet loans in an aggregation facility may allow them to access even lower-cost securitization funding. For such FinTechs, deposit funding could be very advantageous.

FinTechs will need to decide if FDIC-insured deposit-taking ability is a critical need. The bank charter options vary – for example, the ILC model provides deposit taking, but the SPNB does not.

  1. Consider the requirements of equity investors – now and in the future.

In the US, there has been a longstanding concern over mixing commerce and banking. Under the Bank Holding Company Act (BHCA), a private equity firm that holds a controlling interest in a bank may be deemed a bank holding company, which may result in restrictions on other business investments. For a FinTech with private equity or venture capital investors, the BHCA restrictions may be a deal killer.

Having an ability to export interest rates or to take deposits may be hugely beneficial, but if it comes at the expense of raising equity capital it may be a non-starter. ILCs operate under an exception to the Bank Holding Company Act and have been established by some of the major US industrial businesses, such as General Motors, Ford, GE Capital and others.

Obviously, the Bank Partner model does not impose BHCA restrictions on investors in a FinTech business. With regard to the SPNB charter, the US Treasury Department has encouraged reconsideration of the definition of “control” under the BHCA.  If properly addressed, this could free some SPNB investors from the constraints of the BHCA.

  1. Weigh the risk represented by a Bank Partner.

The Bank Partner model has a long and successful track record, but a FinTech that relies upon a Bank Partner is always at risk of exogenous events impacting the Bank Partner and curtailing the FinTech business.  Some FinTechs may choose to address this by having more than one Bank Partner. Ultimately, a FinTech must decide how much control over its own destiny it requires.

How Auriemma Can Help

For FinTechs weighing the options, there are numerous considerations on the road ahead. Auriemma executives have experience working with regulators to successfully obtain necessary approvals with respect to various types of bank charters. Auriemma is actively exploring the nuances of these charter options to assist FinTechs in making the best possible strategic decisions.

In addition to identifying whether to pursue a charter and pinpointing the advantages and disadvantages of each model, FinTechs must also develop policies and procedures and operational infrastructure that align with their chosen direction and strategy. As a result of our decades long industry roundtable practice, we have extensive benchmarking data and “best in class” operational know how which can help new lenders.

About Auriemma Group

For more than 30 years, Auriemma’s mission has been to empower clients with authoritative data and actionable insights. Our team comprises recognized experts in four primary areas: operational effectiveness, consumer research, co-brand partnerships, and corporate finance. Our business intelligence and advisory services give clients access to the data, expertise and tools they need to navigate an increasingly complex environment and maximize their performance. Auriemma serves the consumer financial services ecosystem from our offices in New York City and London. For more information, call John Costa at (212) 323-7000.

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