Why credit cards desperately need innovation despite bumper global growth

Photo:Sean MacEntee

Credit card usage is on the rise in markets across the world. But the positives are offset by the rise of digital payment solutions, especially in the Asia-Pacific region.

By Preetam Kaushik

The year 2020 will mark the 70th anniversary of the issuing of the first ever modern credit card. Over the last seven decades, these square sheets of plastic have become ubiquitous in most developed economies as the primary means of cashless transactions.

The popularity of credit cards seems to have peaked in the US, one of the biggest global markets. According to data released by TransUnion – a consumer credit reporting agency, card usage and debt are at historic highs in the US.

But the situation in the West only tells half the story. For the full credit-card narrative and a glimpse into their future, one must look to the East, at the Indian, Chinese, and ASEAN markets.

Credit Cards find few takers in the Asia-Pacific region

Cards generally require a well-developed banking sector to penetrate a consumer market. Most Asian economies lack this key requirement.

Major markets in China, India, and Southeast Asia are marked by the low penetration of banking services. Credit cards, with their strict rules and credit check requirements, have found few takers in the region.

According to World Bank figures from 2017, credit card ownership still languishes at single-digit percentages in countries like Indonesia, the Philippines, Thailand, and Vietnam. The only ones bucking the ASEAN trend are Singapore (48%) and Malaysia (21%).

Sources: The Asian Banker (I), (II), CEIC

In the bigger Asian markets of India and China, the story is similar – credit card penetration in India is at 2% while China fares slightly better at 25%. That is still lower than in developed markets like Japan and the UK, where more than 60% of consumers carry plastic, and the US, where penetration sits close to the 70% mark.

In China, this could be about to change. Recent trends indicate that credit card usage is on the upswing. With a combined annual growth rate (CAGR) of above 20%, credit card penetration is expected to hit historic highs in the coming years. 

Mobile payments offer a better user experience

With low levels of market penetration in the Asia-Pacific region, credit cards have room for growth. But with the rise of mobile payments, that space Is rapidly shrinking.

In the early days of e-commerce, credit cards and online shopping seemed destined for each other. They were the most convenient cashless, wireless payment option around.   

But now, with the growth of mobile technologies and apps, alternate payment solutions are coming thick and fast. Thanks to faster checkouts and the option of in-app payments, they promise a more convenient shopping experience. And as a clincher, they are also far more accessible than credit cards, with fewer barriers to entry.

Credit cards are losing customers and revenue to new payment methods

Digital payments are starting to play a key role in the global economy. In 2017, they were worth around US$ 3.1 trillion, or 13% of all commercial transactions. Fast forward to 2019 and they have risen to US$4.1 trillion.

Source: Asian Banking and Finance

More than 3.7 billion people will use digital payment methods across the world in 2019. According to Reuters, more than half of them (2.1 billion) will use a mobile wallet. At this rate, alternate payment solutions could overtake cards on e-commerce platforms by the end of this year.

According to a Financial Times Confidential Research report, in ASEAN markets like Indonesia, consumers are skipping credit cards in favour of more accessible options like Go-Pay, Grab-Pay, and Mandiri.  

In China, the clear global leader when it comes to mobile payments, giants like AliPay and WePay are bringing the market closer to a cashless economy.

Credit cards need to bank on their strengths and innovate to survive

There is no doubt that credit cards have to evolve with the changing times. Consumers demand speed and convenience, and mobile is the future of payments.

At the moment, credit card integration with digital wallets and other payment solutions offers a stop-gap solution. Most digital wallets still use existing bank accounts and cards as the initial source of funds. But as the digital markets across the world mature, there will be increased competition between banks, wallets, and other payment providers.

With advances being made in biometrics and AI, we could see a future where plastic cards become obsolete, fully migrating to the digital sphere and functioning more like digital wallets with credit access. 

Credit cards and digital payment solutions both stand to benefit from proposals being put forward by regulators in countries like Malaysia and Indonesia. Both have plans to create a unified platform for all payment networks and gateways as a solution to the fragmentation of the existing payment system.

In the current model vendors and merchants are unable to accept more than one or two different payment methods. When forced to choose between credit cards and digital solutions, credit cards suffer, as relatively few people in the region use them.

Having a common platform will make it easier for merchants to accept all payments, including credit cards, which can only mean good news for card users in the Southeast Asian markets. Even if they cannot grow at the same pace as e-wallets, such initiatives will ensure that credit cards still have a viable market here. 

On a global scale, the outlook is slightly more positive for credit cards. With established user bases, card companies just need to embrace new technologies to keep their competitive edge. The early signs indicate that it is already happening.