Rodeos and Knife Fights: Bankers Try to Navigate the Card Industry's Frontiers

ORLANDO — Banks want to strike gold again in payments, but they are still struggling to figure out which river to pan.

Card executives have absorbed some big hits in recent years — the recession, the Credit Card Act, the Dodd-Frank Act's debit card swipe fees and the establishment of the Consumer Financial Protection Bureau. Though ripples are still being felt through the industry, most bankers at an industry conference last week agreed that the worst of the changes are over.

Now if they could only figure out what's next. Banks are trying to place their bets on future growth by investing in a patchwork of new technologies, from prepaid cards to mobile payments, without any guarantees that they will pick the right one. The uncertainty has created a Wild West atmosphere somewhere between a "rodeo" and a "knife fight," in the words of two conference attendees.

"It's hard being an issuer in today's market," Gary Marino, a senior vice president of global financial services at eBay's PayPal (EBAY), told attendees of the annual CardForum and Expo last week.

Discover Financial Services' (DFS) Mike Boush echoed the sentiment a few minutes later, agreeing that "it is hard out there for a bank." Part of the problem, he added, is that the traditional financial services industry has not been very successful at developing and adopting new technology.

"I don't think much innovation is occurring in the payment industry," Boush, Discover's vice president of e-business, said during a panel discussion, adding that most payments innovation is driven more by Internet-based or technology companies.

Even card executives that are actively in charge of some industry innovation acknowledged the pitfalls facing them.

"You have to make choices in terms of which of those projects you're going to prioritize, which means you're taking things off the table that could have been opportunities. Any company has to do that, particularly one navigating through a really important shift like this one," Timothy Murphy, chief product officer at MasterCard (MA), told American Banker in an interview.

"If you get too scattered, you'll get nothing done. And that's a risk because there's a demand coming from so many different places," Murphy added. "Execution around things that can drive scale is the most important thing: it's our biggest challenge."

But Dan O'Malley, a former Capital One (COF) executive who founded and runs the online banking startup PerkStreet Financial, warned bankers that they have to be willing to stomach some bad investments.

"You have to be prepared to fail a lot, and get comfortable with the fact that you're going to have to be investing in technology and products that are not going to work," he said during a panel discussion. "You need to be comfortable with the idea that technology is almost an R&D expense that's going to yield some successes but it's going to yield some failures too."

Banks have less control than they used to over what technology will succeed or fail, according to Mark Lenhard, who leads PayPal's global financial services strategy.

"In the past, largely things have been pushed out to the market by the industry. But really today consumers are adopting what they want to adopt and are really driving the pace of change," he said during the panel discussion with O'Malley.

Some bankers are choosing to go back to the basics while the future remains uncertain. Eduardo Tobon, head of U.S. cards and payments for Banco Santander's Sovereign Bank, described his company's efforts to launch a new credit card after it bought back its portfolio last year from Bank of America (BAC).

"We happen to be one of the largest credit cards in the world, but we are not yet" big in the United States, Tobon told conference attendees, later joking that one of the most difficult parts about launching a new product is that "most names are taken."

But there are also more serious hurdles for bankers trying to revive their traditional credit card businesses. Banks are increasingly competing to lend to wealthy, high-spending, low-risk customers — and the costs of competition are mounting.

"It's such a knife fight to acquire customers right now," O'Malley said.

Citigroup's (NYSE: C) Bill Johnson, meanwhile, took a relatively sober view of some of the much buzzed-about mobile payments that many bankers — including some of his colleagues at Citigroup — have touted.

"Literally every day, there are dozens of new entrants [into the payments market] … and they are challenging the customers, the retailers, and us as facilitators," Johnson, the head of Citigroup's retail services unit, told the audience.

Campbell Edlund, president of EMI Strategic Marketing, described the current payments industry era as "a rodeo. All will suffer bumps and bruises. Not everyone will survive, but anyone can win."

More than 650 bankers, card executives, analysts and vendors roamed the sunny halls of Orlando's Omni Resort last week, sometimes escaping to the golf course or the poolside cabanas. The annual conference was sponsored by American Banker and its publisher, SourceMedia.

The mood was generally upbeat compared to recent years, and fewer conversations were dominated by regulatory worries. But new regulations, and especially the CFPB, still cast a shadow over some of the discussions.

The banking industry should blame some of its own practices for the increased regulatory scrutiny it is now facing, according to Scott Feinstein, a senior vice president and legal counsel at Sovereign.

"We just have done it to ourselves," Feinstein, whose bank had its first CFPB exam within the past month, told attendees during a panel.

Regulatory questions are also hanging over some of the areas where card executives are looking for growth, including the relatively nascent prepaid industry. Last week JPMorgan Chase (JPM) became the latest big bank to roll out a reloadable prepaid card, largely geared for unbanked consumers who don't have or don't regularly use a bank account.

There's "opportunity everywhere," Brett Adams, head of MasterCard's prepaid division, told American Banker in an interview, adding that the company hasn't "cracked" more than a quarter of the 60 million underbanked Americans in the U.S.

But adoption remains low, in part because many consumers aren't familiar with the product. Nor were all of the conference attendees.

During a panel discussion on Wednesday, prepaid executives on stage frequently used the industry term "GPR," referring to the general-purpose reloadable prepaid cards that companies from JPMorgan Chase to Wal-Mart (WMT) and Green Dot (GDOT) now sell. But that term was still too obscure for some of the audience members, two of whom leaned over to a reporter and asked, "What's 'GPR'?"

As Laura Kelly, a senior vice president of global product and marketing at American Express (AXP), put it: "The first hurdle is, what is prepaid, and how does it make my life better?"