Card Not Present: A High-Stakes Game A Return to Normal, Without Returning to the Past?

By Ben Mrva, SRM

It’s no secret that the current rate environment makes it difficult for banks and other financial institutions to drive profitability. At the beginning of December, just 68 basis points separated the three-month interest rate (1.60%) and 30-year rate (2.28%). For comparison, in pre-Great Recessions days of 2005 when banks were flying high, the Net Interest Margin (NIM) was far more profitable due to wider spreads.

Do you know which card your cardholders are defaulting to for Amazon, Instacart, or UberEats? Such default or top of digital wallet status will have significant implications on issuer revenue streams.

The ongoing migration from brick-and-mortar retail spending to e-commerce channels got a forward jolt in 2020. According to an e-commerce report in The Financial Brand from November 2020, consumers who did most of their monthly spending online (>50%) almost doubled from 24% to 47%. This shift in transaction type, which favors the Card Not Present (CNP) payment category, highlights the need to recalibrate revenue, risk, and cost strategies to an entirely different set of consumer habits.

While some consumers may revert to previous behaviors after the pandemic, most of these shifts will have become second nature. Another example is “tap and go” at the physical point of sale. Payment networks have touted this capability for years in TV commercials, but it took COVID-19 to make the act of passing a piece of plastic back and forth seem unsanitary. Once adopted, there’s little reason to expect contactless behavior to reverse.

Contrarily, our experts have found that unless consumers bank with one of the megabanks, many who were issued contactless-enabled cards remain unaware of the “wave a card” possibilities. Research from both the Fed and PSCU indicates the percentage of consumers who report possessing a contactless card is well below the percent issuers say they have distributed. Card issuers should adapt their strategies to cater to both CNP as well as contactless preferences - or risk attrition to their share-of-wallet.

The tokenization of e-commerce transactions may also carry cost implications for issuers. Although CNP interchange is currently above that of cardpresent, e-commerce transactions can come with higher costs and greater fraud risk, too. It’s also valuable to tailor strategies to the distinct segments of cardholders preferring mobile solutions to “tap and go.”

Tighter Contract Deadlines for Non-Interest Costs/Revenue

Financial institutions must also build the pandemic’s impacts into their network agreements. SRM has noted a steep rise in vendors aggressively pursuing contract renewals – particularly those governing the increasingly critical areas of non-interest income and fees.

Many of these contracts, notably with card networks, are dated and don’t necessarily align with what’s facing many card issuers. To get ahead of these changes, we recommend that banks and credit unions with agreements expiring over the next two years revisit current and projected debit and credit card trends. Then, they can strategically pursue terms to position the institution for both the near- and long-term.

Batten Down for COVID’s Second Economic Wave

One of the few things we can count on in our current crisis is that a return to the economy of late 2019 is nowhere on the horizon. Given this, community banks and credit unions need to address ongoing economic fluctuations with an array of balance sheet strategies, such as:

• Monitoring deposit account activity trends. Many are currently seeing strong inflows but this could reverse and requires ongoing attention.

• Assessing client refinancing deals against their balance sheet capacity.

• Considering the influences of government stimulus funds on lending opportunities and the associated risks.

• Pursuing opportunities to reduce costs without impacting account-holder experience. Focused negotiations with third-party vendors often provide a valuable source of such savings.

The Bottom Line: While the industry has experienced pandemic-scale changes this past year (especially related to payments preferences), we will continue to adapt to new economic realities and changes in the regulatory climate as 2021 progresses. Financial institutions that can adapt and prepare for future market fluctuations will see greater success now and long term.

About the author: Ben Mrva is EVP, Business Development with SRM. IBA Preferred Vendor