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An opportunity to transform the credit card world

It has been awhile since I last posted a blog. I am sure everyone is thinkling about potential credit losses as a result of rising unemployment rates. In the U.S. it now over 15%.

During the great mortgage recession in 2007 loan losses peaked at 10%. It took almost 10 years to get the loss rate below 5%. Just prior to the recesssion losses averaged about 5%, or about $25 billion in the U.S.. At the 10% level losses doubled to $50 billion. The individual major card banks were losing about $6 to $10 billion annually.

Today, the U.S. is at 15% unemployment which means loan losses could be 15%. There are projections unemployment will rise to 20%. The portfolios today are larger due to growth in outstandings in the past few years. Growth and high unemployment rates are a recipe for disaster.  At these staggering levels some large banks may even have to exit the card business to remain solvent. One realistically could envision some banks losing over $25 billion on their card programs annually.

It looks a u-shaped recovery for the global economy which means the impact of the pandermic will probably last longer than the mortgage crisis. Banks have been reinventing themselves via innovation and technology in the last five years. Now all strategic bets are off the table.  It is back to lots of cost cutting which hurts everyone.

For companies looking to get into the credit card business the next two years will be best opportunity in over 60 years to do so. The timing is perfect. Consumers will still need access to liquidity via lending. This has going on for thousands of years. There is also an opportunity to create a new network without the Visa and MasterCard using lower cost schemes such as Faster Payments. Is a new network in the cards? Who do you think will be the new entrants? Amazon? FaceBook? Google? 

 

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Comments: (11)

Melvin Haskins
Melvin Haskins - Haston International Limited - 11 May, 2020, 09:10Be the first to give this comment the thumbs up 0 likes

At the moment, if I have a problem with a transaction on Visa or Mastercard I can go to my bank and get it resolved. My bank issues the card and takes responsibility to resolve the issue. I would like to see more competition and Amazon, Facebook and Google and certainly probable contenders, but resolving issues with these behemoths has often been difficult in the past. They will need to establish strong, customer focussed, credit card operations if they are to succeed.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 11 May, 2020, 13:50Be the first to give this comment the thumbs up 0 likes

I thought Amazon already has a credit card for years? 

Melvin Haskins
Melvin Haskins - Haston International Limited - 11 May, 2020, 15:18Be the first to give this comment the thumbs up 0 likes

Amazon do offer a credit card, but it is a Mastercard, which does not break the duopoly who control about 90% of the issued cards in the western world.

Gerard Hergenroeder
Gerard Hergenroeder - Payments Shark - Millersvile 11 May, 2020, 17:04Be the first to give this comment the thumbs up 0 likes

Those cards are co-branded. Synchrony Bank owns the loans and gets most of the profit. I am suggesting a much bigger play here. Namely, Amazon starts their own branded Network for all merchants just like Discover's and sets up their own Amazon Bank to manage the loans.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 12 May, 2020, 09:48Be the first to give this comment the thumbs up 0 likes

Okay, so you propose Amazon to become both a Credit Card Issuer (like JPMC, BarclayCard) and Credit Card Network (like Visa, MasterCard).

Credit Card Issuer: While Amazon has a near trillion dollar market cap and nearly 300 billion dollar revenue, it's not exactly a company known for throwing out cash. According to an article I read a few years ago, Amazon is perpetually on a cashflow treadmill between when it receives money from its customers and when it pays its suppliers. Apparently, even if treadmill stops for 60 days, the company will go bust. Any idea how Amazon will find the huge amounts of money to lend for a credit card business?

Credit Card Network: So many companies have tried to create alternatives to credit card rails by using FPS and other A2A RTPs. I can't recall a single one of them going mainstream (in a market where credit card is well established like USA & UK and unlike China & India). All of them provide compelling value proposition to Merchants but don't provide any benefits to Customers, who, therefore, stay with Credit Card to continue to enjoy rewards, deferred payment and other advantages of credit card. Any idea what Amazon can do differently in order to succeed where so many other alternative payment providers have struggled? 

Also relevant in this context is Amazon's initiative to give loans to merchants on its platforms. There was a lot of brouhaha around 3 years ago when Amazon announced some numbers. As usual, many pundits predicted that Amazon will kill traditional lenders aka banks. Nothing like that has happened since then. At the time, Amazon had given just $3B loans in 6 years to 20K borrowers. If Amazon really has the money and the motivation to get into credit business, I guess it might find it easier to simply expand this existing merchant lending program than launch a new credit card program. 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 12 May, 2020, 10:49Be the first to give this comment the thumbs up 0 likes

@Melvin Haskins:

Thanks. IMO, Amazon has higher chances of breaking through the Visa / MasterCard duopoly in the Western Word by creating another credit card network than by creating an alternative payment network based on bank account, etc. The former requires Amazon to be 10X better than Visa / MasterCard. The latter requires Amazon to be (10X^3) better than credit card rails, as Stratechery highlights in this article. While the former is not easy, the latter has proven impossible despite the attempts made by so many companies over the last 10-odd years.

Gerard Hergenroeder
Gerard Hergenroeder - Payments Shark - Millersvile 12 May, 2020, 13:15Be the first to give this comment the thumbs up 0 likes

It sounds like I am getting some opposition to thinking "big". There is no better time than now to reach for the stars. Promoting the status quo using existing schmes, platforms and brands does not create new and innovative solutions that can provide much more value to consumers, merchants and supply chain providers. Yes, think about supply chain providers in this new world. Old brands and technology serve the status quo. Consumers deserve the best from society. Technology, creative marketing, capital and people can do it! I'm the guy who did it 50 years ago. Why not now again? It is time to totally revamp payments schemes.

 

Melvin Haskins
Melvin Haskins - Haston International Limited - 12 May, 2020, 14:10Be the first to give this comment the thumbs up 0 likes

Here in the UK technology has been far in advance of the US for all of the last 50 years. Variable amount direct debits, whereby utility companies & similar could take money direct from your bank account have been in operation for more than 50 years. They would send you the bill in advance and give you 14 days to verify it. Your bank would act as the intermediary to ensure that no-one took money that was not authorised. It took the US a further 40 years to catch up on this one. We now have instant transfer of funds via the internet at all banks - not just same day transfers but instant. I have not written a check in more than ten years and very few before that. The only reason that someone needs a credit card is to defer payment at high cost. Debit cards are becoming more and more popular as a means to pay in shops and on-line. The real question is whether there is a long term future in credit cards. After all, they were invented in the US so that people could pay in a different state to the one in which they banked. Cross border checks were not accepted. Today, in a global market and with the internet, the need for credit cards is not there. 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 12 May, 2020, 14:25Be the first to give this comment the thumbs up 0 likes

There is no cost to deferred payment by credit card if you pay your full balance by the end of the month. I've been using credit cards for +30 years and have not paid a penny by way of interest. Credit Card also offers rewards, fraud protection and other benefits not offered by A2A payments.

I remember somebody questioning the future of credit card in UK on these very pages of Finextra almost 5-7 years ago. I don't have the latest figures but I'm sure credit card volumes in UK are still higher than A2A volumes.

The thing is credit card is incumbent. It doesn't need to have any need. Inertia and change resistance work to its advantage. These same things work to the disadvantage of A2A payment methods.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 12 May, 2020, 14:28Be the first to give this comment the thumbs up 0 likes

Thinking big and reaching for the stars and all that are quite fine but it can't be done with the budget of a bullock cart. Question is, does Amazon have the budget of a rocket i.e. enough cashflow to do big time lending as Credit Card Issuer? I think not. But I'm open to be corrected.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 16 June, 2020, 12:35Be the first to give this comment the thumbs up 0 likes

Amazon does not seem to have the budget of a rocket. Its Seller loans so far were made against credit facility from Bank of America. More recently,

Amazon and Goldman Sachs announced a partnership to provide lines of credit up to $1 million to merchants selling on the Amazon platform.

Gerard Hergenroeder

Retired IBMer and Banking Executive

Payments Shark

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This post is from a series of posts in the group:

Futuristic Banking

Stuff that's out there in the way out and beyond in banking.


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