Demystifying Cards
Monetising your card programme
Overnight successes rarely happen in financial services, so be realistic. Building your brand, reputation, and cardholder numbers takes time. The key is to have a strong card proposition, a deep understanding of your prospective cardholders, and a firm grip of the commercials. Get these right and you can be on the path to profitability.
“Good fortune is what happens when opportunity meets with planning” – Thomas Edison
Active not passive A common mistake when launching a card programme is to focus too heavily on cardholder numbers. Of course, the more the better, but only if they’re active and using your card regularly. Which would you prefer, 1000 cardholders and 25 regular users, or 75 cardholders and 40 regular users?
The anatomy of a winning proposition In our experience, a successful card proposition has three key things:
It solves a real-world problem – that could be in the way the card works, what it offers, or how it’s used when compared to its competitors – any of these, alone or combined, could create a unique selling proposition (USP) that elevates a card in the eyes of your audience. Functionally, it could make life more convenient for cardholders, or give them a perceived benefit none of its rivals has, such as an enhanced loyalty programme. Here’s a great article by Amna Ahsan for Thorgate that highlights five key problems that Fintechs are working to solve. (Think about generalised experiences that are not tailored to your needs as a consumer, costs that your transactions attract when moving funds across borders and not having access to data in real-time as some examples.)
It offers an emotional value – one that goes beyond its basic function as a payment method. This could be, for example, the financial freedom it brings cardholders. The sense of belonging they feel by carrying it, or the ‘kudos’ or exclusivity it bestows on them in other’s eyes. Or even the pleasure that comes from making the very most of any and all benefits a card programme might offer. Monzo (was Mondo) did an amazing job of building a community of users who effectively became marketing evangelists for this Fintech! Everyone wanted a hot coral card and were excited about how this challenger bank was going to take on the incumbents! More on them, and others, in this article written by Judit Toth, UX designer at Dock9 here:
It draws the right crowd – developing a strong product requires a deep understanding of the audience you want to attract. Who is your ideal cardholder, and how will your proposition make their life easier, simpler, better, more enjoyable? As the market’s seen time and again, short-term gimmicks to encourage spend will only take you so far. Long-term success is about making your card the top-of-wallet (primary) choice from the outset.
In this article written by Steven Carr for User Testing.com there are some excellent tips on customer insight strategy that can help you launch a programme that delights your customers!
Route to profitability
Ultimately, every card programme needs to turn a profit to survive and there are different ways to generate revenue. Of course, your route to profitability will depend on your proposition and your commercial model. Put simply, the more outsourced components you need to run your card programme, the fewer sources of income you’ll have and the smaller the margin you’ll make. Here are the most common ways card programmes create revenue.
Interchange This is a fee the acquirer pays to the issuer for every credit or debit card transaction. Often confused with the merchant service charge (MSC) which is what retailers pay their acquirer for accepting card payments. It’s a cost redistribution (and a contentious one) that is intended to compensate issuers for the costs and risk of providing the cards. The question is: are you entitled to this interchange or a share of it?
Other factors affect interchange rates:
Capped or not? Interchange rates for Consumer cards in the EEA are capped under regulation (IFR) by the European Commission. This is as of the time of publishing a maximum of 20bp for Debit/Prepaid and 30bp for credit. Some domestic regulation has capped the Debit rates even lower. Note: these quoted rates are rumoured to be changing with the advent of Brexit.
Risk If not capped by regulation (such as commercial cards or non-EEA locations) then other aspects will influence the interchange rate.
This typically comes down to risk and complexity: a higher risk transaction such as e-commerce or signature rather than EMV+PIN would attract a higher interchange rate.
It’s worth mentioning that no modern-day card programmes rely on interchange alone to succeed and look to other ways to generate revenue. Challenger banks looking to break-even are seeking to monetise their consumer card programmes in a way that does not rely on interchange as being a material portion of their total revenues. For corporate programmes interchange remains a revenue generator with rates typically around 1.5% – 1.8%.
Monthly fees These days, many banks charge a monthly fee for having a current account, so people are used to it although in some markets like the UK, free banking is still the norm. The question is, can you build value into your proposition that cardholders are happy to pay for – for example, concierge services, rewards, or other benefits such as travel or phone insurance? Many challengers have been down this route, and not all successfully.
Cross-selling As you gain more cardholders, the chances are you can cross-sell other financial services such as insurances, savings and mortgage products, or even other types of cards. But financial services is heavily and increasingly regulated. So the trick is to take advantage of potential revenue opportunities in a compliant yet profitable way.
Referrals You likely have a proposition that is solving a real world problem (as mentioned before) and a core set of features and available products for customers. As such it won’t necessarily have every single available product available from day one. Initially it might be beneficial to offer other organisations’ products to benefit your customer base but get a referral fee for every customer who uses that partner’s product.
Network Incentives In some cases the networks (schemes) will consider offering monetary incentives for hitting certain targets like active customers, monthly transactions or international transactions. In cases where targets are reached, the networks may reward the card programme with a bonus payment or discount on fees owed. As part of your evaluation process when selecting the network (scheme) you chose to work with, a keen eye on these incentives will be vital.
Forex income In the past, income from foreign exchange (FX) transactions provided a decent extra revenue stream for many international card programmes. But in recent years, FX revenue has become a battleground as issuers have added in their own margins, plus other fees and charges. In our view, it’s only when you exceed a fixed monthly minimum that it may start generating any worthwhile revenue, which can be commercially prohibitive if you’re just launching. Alongside competition, further regulatory scrutiny has also been brought on this revenue stream by the European Commission with a requirement to provide transparency and information on FX transactions (known as “CBPR2”).
Marqeta partners with both Swissquote and Payhawk who each attract forex income as part of their card programme offering. They both add a fee at the network side that is then passed through to Marqeta in the transaction message that Marqeta receives from the network (scheme) and we simply pass this on so that Payhawk and Swissquote respectively can charge their customer.
Many card programmes have interchange as their main revenue stream. But as your card programme grows and gains more customers this doesn’t have to be your sole source of income. As you get product market fit you can look to pull on some of the other revenue generating levers detailed above to get to profitability. Maybe you decide to offer savings pots because that’s the clear customer feedback. You partner with a savings firm to offer a pot with an interest rate and have a referral fee mechanism for every pot created. Or, you notice that a section of customers are also entrepreneurs and would like business features like tax calculators and multiple spending cards for employee expenses. This could be offered as an additional account with a monthly business fee.
Which levers you pull and when will depend on your customer base and what the strategy of the business is.
