The Coming Convergence of Card Products

  The past decade was one of mass marketing for the credit card business-issuers taking a market ripe for increased penetration and exploiting huge opportunities to compete on price in relatively nascent acquisition channels such as direct mail and through card partnerships.
  As such, the credit card market enjoyed sustained levels of double-digit growth as widespread credit availability and consumer as well as merchant acceptance created a $600 billion market with an entirely new class of branchless, monoline competitors.
  Fast forward to 2004 and credit card issuers now face a maturing market with the sobering prospects of single-digit loan growth. Not to diminish the many innovations of the 1990s, but going forward, the prospects of a single enhancement fundamentally redefining the basis of competition are increasingly remote. Issuers now long for the winning equivalent of the balance transfer, the ingenuity or lack thereof of the AT&T Universal Card's "No Annual Fee For Life" pricing strategy, or the next GM Card.
  The next phase of industry evolution will be characterized by a much sharper focus on product development particularly as it relates to enhanced convenience and choice for customers and retailers. As such, payment products will converge in virtually every way, shape, and form. The lines will blur between private-label and bank cards, traditional cobrand cards and other rewards credit cards, non-payment loyalty cards (for example, those issued by grocery stores) and payment products, and stored-value and credit products.
  There are many forces that will accelerate this evolution. They include retailers' relentless push to lower payment acceptance costs, the need to simplify customer interactions now complicated by multiple cards for different purposes, the deployment of self-service check-out lanes, and the need for solutions for a large "unbanked" customer class. Of course, all signs still point to the need to add meaningful value to the customer no matter what the payment product or service is.
  It would not be surprising if most of the new product developments were rather basic, but highly functional. The single-purpose gift (or stored-value) card serves as a great example of how innovation can and will come in very simple forms and be wildly successful. To think that it took until the mid-1990s for the gift card to emerge as a replacement for the gift certificate is startling. Even more remarkable is how quickly the gift card transitioned from a product designed to mitigate fraud and reduce administrative costs to a legitimate stock-keeping unit garnering precious shelf space and strong integration into retail marketing strategies.
  The gift card, in the customer's view, is quite simple-no up-front fees, unique packaging, convenient, and easy to locate, even in the largest store. These basic attributes have proven to be highly defensible against general-purpose gift cards marketed by banks.
  Clearly, other forms of prepaid products fall into the sweet spot of banks, but the retail gift card is well-entrenched by simply being where customers shop-one more reminder of the importance of location, location, location.
  Looking forward, the Starbucks Duetto card issued by Bank One is an example of how products are likely to converge yet be customized for unique situations and retail formats. In the case of Starbucks, a single-purpose, stored-value card grew to capture more than 10% of sales, leading to much anticipation for Duetto's multi-functional benefits of credit and stored value with a value proposition tied to credit card usage.
  More importantly, Duetto conveniently combines card features and eliminates the rebate coupons that are so prevalent in many loyalty programs. Among other retailers, there is hope that consumers will have the option of combining non-payment loyalty cards with a payment product to address a similar need for increased convenience.
  Competing by granting consumers more choice will intensify with the potential to threaten traditional card types and partnerships. By giving customers reasonable access to mileage rewards at a competitive price and a choice of redemption partners, generic programs such as Capital One's Miles One have penetrated the airline card sector without an airline partner. American Express's Membership Rewards program, with a vast array of options, has choice at its core.
  With credit card loan growth moderating, product development will accelerate. More product convergence and customer choices are inevitable. Technology advancements will play a significant role, but will not be a substitute for the basic blocking and tackling that normally characterizes any winning product.