Rethinking card issuing in an age of fintech disruption

Debit and credit card issuing is a major contributor to nearly every bank's revenue stream. Over the past few years, this segment has boomed as customers have migrated from cash to card payments. The number of credit, debit, and prepaid cards in circulation worldwide has climbed from 20.5 billion in 2017 and is forecasted to reach nearly 26 billion in 2026.

An explosion in e-commerce-related transactions helped fuel debit and credit card usage. More recently, banks worldwide have profited from an increase in interest-based revenue, thanks to post-pandemic interest rate hikes. But despite this rosy picture, card divisions at traditional banks, especially mid-sized institutions, will face headwinds in the years to come.

All parties face the risk of increasing disruption from fintech innovators, including banking-as-a-service players and neobanks. While neobanks have had limited success in becoming customers' primary banks in most markets, they are winning a share of customers' card payment transactions.

In a global survey by Datos Insights (formerly Aite-Novarica), half of payments executives reported 10% or more of their payments volume has already moved to fintech providers. The BaaS players are fueling competition by making it easier for non-traditional competitors such as retailers and telecoms providers to enter the market.

The disruption doesn't end there. Competition across the board is compressing margins for traditional card products. Meanwhile, new products and services such as buy now pay later and account-to-account payments are increasingly growing at the expense of credit and debit cards.

BCG anticipates payment revenue growth will taper down and margins will be squeezed through to 2027 as cash to non-cash conversion reaches maturity and A2A eclipses card growth. An Accenture analysis suggests card-issuing banks that take a timid approach to payments innovation could lose out on 4.6% of total global card and online payments revenues by 2025.

The imperative of modernization

Against this backdrop, payments modernization has become an imperative for mid-sized banks and payments companies around the world. To preserve their margins, deliver the experiences that today's consumers are seeking and maintain payments revenue growth, these institutions will need to review legacy investments that constrain their agility.

Banks realize that they need to embrace new technology that allows them to offer more flexible services to end-customers, more easily integrate with ecosystem partners and accelerate speed to market to ensure their relevance in a changing world. Competing with cloud-native players with cutting-edge tech stacks demands nothing less.

At the same time, ripping out and replacing legacy card management systems is a daunting and expensive prospect owing to the interconnectedness and complexity of the card environment. CMS platforms are connected to core banking systems, payment networks and fraud detection systems — meaning that a change in CMS may require complex changes across the ecosystem.

These systems handle a wide range of complex operations, including card issuance, transaction processing, fraud detection and customer support. Modernizing a CMS without disrupting critical operations or compromising security is a huge undertaking and one for which banks have an limited appetite in uncertain times.

CMS gateways: Bridging legacy payments and the future

There is another approach. A CMS gateway can serve as the intermediary between a bank's legacy CMS platforms and the new fintech world. Such a gateway allows a bank to offer next-generation card features without the operational and security risks of sweeping away its existing investment in its CMS or the need for significant added investment in the CMS.

Such a solution enables banks to accelerate their speed to market with new products and features, while minimizing the risks of rapid innovation. A CMS gateway reduces the complexity of orchestrating multiple intricate system elements at high speed to deliver new services by means of application programming interfaces.

A CMS gateway can offer a robust rules engine implementation that supports user-defined actions based on contextual trigger events and thresholds. In conjunction with account, customer, card, security, and other APIs, this will enable a bank to orchestrate across multiple systems and extend the core CMS with new capabilities and features that address complex use cases.

A simple example is adding support for card e-PIN management via mobile, Internet banking or interactive voice response when it's not a capability of the existing CMS. Other use cases might be giving customers more control over their spending limits, which geographic regions their cards can be used in, limiting transactions such as gambling, or mandate management for subscriptions.

Additionally, the CMS gateway can facilitate the instant issuing of virtual cards. It can also ease compliance with Open Banking regulations. More importantly, it can support growth and innovation. With the right tech in place, banks could develop a card issuing-as-a-service business, for example, to enable fintechs or white-label partners that want to enter the card market with offerings under their own brand.

Taking the pain out of payments change

Given the pace of change in payments today, banks need a strategic approach that allows them to meet the emerging needs of a connected consumer and address competition from new market entrants. At the same time, they face high technical, organizational and budgetary hurdles when making changes to their payment architectures.